UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014.
or
| o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to .
Commission File Number 000-1357459
NEURALSTEM, INC.
(Exact name of registrant
as specified in its charter)
Delaware |
|
52-2007292 |
State or other jurisdiction of
incorporation or organization |
|
(I.R.S. Employer
Identification No.) |
|
|
|
20271 Goldenrod Lane
Germantown, Maryland |
|
20876 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including
area code (301)-366-4841
Securities registered pursuant to Section 12(b)
of the Act:
Title
of each class |
|
Name
of each exchange on which registered |
Common stock, $0.01 par
value |
|
NYSE MKT |
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o
Yes x No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o
Yes x No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. x Yes
o No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x
Yes o No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer x |
|
|
|
Non-accelerated filer o (Do not
check if a smaller reporting company) |
|
Smaller reporting company o |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). o Yes x
No
The aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the Company’s common equity
was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter based upon the
closing price of the common stock as reported by the NYSE MKT on such date, was $352,404,574.
The number of shares outstanding of Registrant’s
common stock, $0.01 par value at February 28, 2015 was 89,703,392.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement
relating to its 2015 annual meeting of shareholders (the “2015 Proxy Statement”) are incorporated by reference into
Part III of this Annual Report on Form 10-K where indicated. The 2015 Proxy Statement will be filed with the U.S. Securities and
Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
NEURALSTEM, INC
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
INDEX
PART I
We urge you to read this
entire Annual Report on Form 10-K, including the “Risk Factors” section, the financial statements and related notes
included herein. As used in this Annual Report, unless context otherwise requires, the words “we,” “us,”“our,”
“the Company,” “Neuralstem” and “Registrant” refer to Neuralstem, Inc. and its subsidiary
Also, any reference to “common share” or “common stock,” refers to our $.01 par value common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Statements in this annual
report that are not strictly historical are forward-looking statements and include statements made pursuant to “safe
harbor” provisions of the Private Securities Litigation Reform Act of 1995 about products in development, results and
analyses of pre-clinical studies, clinical trials and studies, research and development expenses, cash expenditures,
regulatory applications and approvals, and third party relationships, among other matters. You can identify these
forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or
other characterizations of future events or circumstances and may often be identified by words such as “expect,”
“anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” These
forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause
actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These forward-looking statements by their nature address matters that are, to different degrees, uncertain.
Specific risks and uncertainties that could cause our actual results to differ materially from those expressed in our forward-looking
statements include risks inherent in our ability to conduct and obtain successful results from our
clinical trials, our ability to commercialize our technology, our ability to obtain regulatory approval for our product
candidates, our ability to contract with third parties to adequately test and manufacture our proposed products, our ability
to protect our intellectual property rights and our ability to obtain additional financing to continue development efforts.
These forward-looking statements are based on current expectations and assumptions that are subject to risks and
uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in
this Annual Report, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those
discussed in other documents we file with the Securities and Exchange Commission (SEC). We undertake no obligation to revise
or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these
risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The information
contained herein is current as of the date of this Annual Report (December 31, 2014), unless another date is specified.
Overview
We are focused on the development
and commercialization of regenerative medicine treatments based on our human neuronal stem cells and our small molecule
compounds. We are headquartered in Germantown, Maryland and have a wholly-owned subsidiary in China, Suzhou Sun-Now
Biopharmaceutical Co. Ltd., or Neuralstem, China.
We have developed and maintain a portfolio
of patents and patent applications that form the proprietary base for our research and development efforts. We own or exclusively
license ninety-five (95) U.S. and foreign issued patents and fifty-one (51) U.S. and foreign patent applications in the field
of regenerative medicine, related to our stem cell technologies as well as our small molecule compounds. At times we have licensed
the use of our intellectual property to third parties.
We believe our technology base, in combination
with our know-how, and collaborative projects with major research institutions, will facilitate the development and commercialization
of products for use in the treatment of a wide array of neurodegenerative conditions and in regenerative repair of acute disease.
Regenerative medicine is still an emerging
field. Regenerative medicine is the process of creating living, functional tissues to repair or replace tissue or organ function
lost due to age, disease, damage, or congenital defects. There can be no assurances that we will ultimately produce any viable
commercialized products and processes. Even if we are able to produce a commercially viable product, there are strong competitors
in this field and our products may not be able to successfully compete against them.
All of our research efforts to date are
at the pre-clinical or clinical stage of development. We are focused on leveraging our key assets, including our intellectual
property, our scientific team and our facilities, to advance our technologies. In addition, we are pursuing strategic collaborations
with members of academia and industry.
Clinical Programs
We have devoted substantially all our
efforts to the development of our stem cell therapeutics and our small molecule compounds and their pre-clinical and clinical
development. Below is a description of our most advanced clinical programs, their intended indication, current stage of development
and our expected future development plans:
Program |
|
Intended Indication |
|
Development Status |
|
Future
Development Plan |
NSI – 566 |
|
Amyotrophic Lateral Sclerosis (ALS) |
|
Ongoing Phase II clinical trials. |
|
Dosing in our Phase II clinical trials and a six month data
collection and observation period have been completed. We anticipate commencing a controlled Phase II trial in 2015. |
|
|
|
|
|
|
|
NSI – 566 |
|
Chronic Spinal Cord Injury |
|
Ongoing Phase I clinical trials. |
|
Phase I trial commenced during the third quarter of 2014. We
expect data in the fourth quarter of 2015. |
|
|
|
|
|
|
|
NSI – 566 |
|
Motor deficits due to ischemic stroke |
|
Ongoing combined Phase I/II clinical trials in China. |
|
The Phase II portion of the trial is expected to commence in
2015. |
|
|
|
|
|
|
|
NSI – 189 |
|
Major Depressive Disorder |
|
Completed Phase Ia and Ib trials. |
|
A Phase II trial is expected to commence in the second quarter
of 2015. |
|
|
|
|
|
|
|
NSI – 189 |
|
Cognitive Deficit in Schizophrenia |
|
Phase Ib preparation. |
|
Phase Ib is expected to commence in 2015. |
NSI - 566 (Stem Cells).
Amyotrophic Lateral Sclerosis (ALS)
Amyotrophic lateral sclerosis,
or ALS, is a disease of the nerve cells in the brain and spinal cord that control voluntary muscle movement. In ALS, nerve
cells (neurons) waste away or die, and can no longer send messages to muscles. This eventually leads to muscle
weakening, twitching, and an inability to move the arms, legs, and body. The condition slowly gets worse. When the muscles in
the chest area stop working, it becomes hard or impossible to breathe. NSI-566 is under development as a potential treatment
for ALS by providing cells designed to nurture and protect the patients’ remaining motor neurons; and possibly repair
some motor neurons which have not yet died but which are diseased. Neuralstem received orphan designation by the FDA for
NSI-566 in ALS.
We commenced the Phase I trial of
NSI-566 ALS at Emory University in Atlanta Georgia. The purpose of the Phase I trial was to evaluate the safety and
transplantation technique of our proposed treatment and procedure. The dosing of patients in the Phase I trial, as designed,
was completed in August of 2012. We commenced our Phase II clinical trial for ALS in September of 2013. The Phase II dose
escalation trial enrolled 15 ambulatory patients in five different dosing cohorts, under an accelerated dosing and treatment
schedule. Each patient in the final cohort had two transplants, for a total of 18 surgeries. We have now completed all of the
transplantations. The observation period of six months after the last surgery concluded in January 2015. The Phase II ALS
clinical trial met the primary safety endpoints and established what we believe to be the maximum safe tolerated dose of 16
million cells delivered in 40 injections. Secondary efficacy endpoints such as the Amyotrophic Lateral
Sclerosis Functional Rating Scale, or ALSFRS, and grip strength at nine months post-surgery demonstrated statistical
significance in a comparison between responders and non responders at nine months post-surgery; and as in our first
trial we once again saw disease stabilization in the responders in the trial. The company will proceed to a larger
Phase II controlled study. Although we believe the initial data from the Phase I and II trials appears promising, any future trials may ultimately be unsuccessful.
Chronic Spinal Cord Injury
A spinal cord injury or SCI generally
refers to any injury to the spinal cord that is caused by trauma instead of disease although in some cases, it can be the result
of diseases. Chronic spinal cord injury refers to the time after the initial hospitalization. Spinal cord injuries are most often
traumatic, caused by lateral bending, dislocation, rotation, axial loading, and hyperflexion or hyperextension of the cord or
cauda equina. Motor vehicle accidents are the most common cause of SCIs, while other causes include falls, work-related accidents,
sports injuries, and penetrations such as stab or gunshot wounds. In certain instances, SCIs can also be of a non-traumatic origin,
as in the case of cancer, infection, intervertebral disc disease, vertebral injury and spinal cord vascular disease. We believe
that NSI-566 may provide an effective treatment for chronic spinal cord injury by “bridging the gap” in the spinal
cord circuitry created in traumatic spinal cord injury and providing new cells to help transmit the signal from the brain to points
at or below the point of injury.
During the first quarter of 2013, we received
authorization from the United States Food and Drug Administration, or FDA, to commence our proposed Phase I clinical trial to treat chronic
spinal cord injury. The entire trial will take place at The University of California, San Diego. The trial commenced during the
third quarter of 2014 and the first patient was treated in October 2014. We expect to complete enrollment in the first half of
2015 and data is expected in the fourth quarter of 2015.
Motor Deficits Due to Ischemic Stroke
Ischemic strokes, the most common type
of stroke, occur as a result of an obstruction within a blood vessel supplying blood to the brain. Post-stroke motor deficits
include paralysis in arms and legs and can be permanent. We believe that NSI-566 may provide an effective treatment for restoring
motor deficits resulting from ischemic stroke by both creating new circuitry in the area of injury and through repairing and or
nurturing diseased cells to improve function in patients.
In September of 2012, we received
authorization from the FDA to commence a human clinical trial for treatment of motor deficits due to ischemic stroke. The
trial is being conducted by Neuralstem China, at BaYi Brain Hospital in Beijing, China utilizing our spinal cord stem cells.
The trial authorization encompasses a combined phase I/II/III design and will test direct injections of NSI-566 into the
brain, the same cell product used in our recently-completed Phase I ALS trial in the United States. The trial commenced in
the fourth quarter of 2013 and is designed to enroll up to 118 patients. The first phase of the trial is structured to
confirm the maximum safe tolerated dose and has been fully enrolled. We expect to begin the Phase II trial in 2015.
NSI - 189 (Small Molecule Pharmaceutical
Compound).
Major Depressive Disorder (MDD)
Major depressive disorder or MDD (also
known as recurrent depressive disorder, clinical depression, major depression, unipolar depression, or unipolar disorder) is a
mental disorder characterized by episodes of all-encompassing low mood accompanied by low self-esteem and loss of interest or
pleasure in normally enjoyable activities. NSI-189 is being developed for the treatment of major depressive disorder and other
psychiatric and/or cognitive impairment indications associated with hippocampal atrophy. NSI-189 is the lead compound in our neurogenic
small molecule drug platform. We believe that NSI-189 may provide an effective treatment for patients suffering from MDD by structurally
rebuilding the hippocampus.
In February of 2011, we commenced
a Phase I clinical trial (Phase Ia portion), NSI-189, at California Clinical Trials, LLC, in Glendale, California. The
purpose of the Phase Ia portion of the trial was to evaluate the safety of the drug in healthy volunteers. The Phase Ia
portion tested a single oral administration of NSI-189 in 24 healthy volunteers and was completed in October of 2011. In
December of 2011, we received authorization from the FDA to commence the Phase Ib randomized, dose-escalating, placebo
controlled clinical trial for the treatment of MDD. The purpose of the Phase Ib portion of the clinical trial was to
determine the drug safety and tolerability in three dosages in diagnosed MDD patients. The Phase Ib portion consisted of
patients with MDD receiving daily doses for 28 consecutive days with an eight week observation period. The trial was
completed. The data was presented at two conferences: the American Society of Clinical Psychopharmacology Annual Meeting in
Hollywood, Florida and at the International College of Neuropyschopharmacology Annual Meeting in Vancouver Canada. We expect
the Phase II 150 patient, multi-site clinical trial to commence in the second quarter of 2015. Although we believe data from the Phase Ia/b appears promising, any future trials may ultimately be unsuccessful.
Cognitive Deficit in Schizophrenia
We have expanded the NSI-189 program to
include a second indication for the treatment of cognitive deficit in schizophrenia. Cognitive deficit is a prominent characteristic
of schizophrenia that is correlated with the occurrence of hippocampal atrophy in this patient population. We expect the Phase
Ib trial to commence in 2015.
Markets
The table below summarizes the potential
United States patient populations by indication, for our proposed stem cell and small molecule products:
Medical Condition |
|
Estimated Number of Patients in United States |
|
Stem cells |
|
|
|
ALS |
|
30,000 |
(1) |
Alzheimer’s Disease |
|
Over 5 million |
(2) |
Spinal Cord Injury |
|
276,000 |
(3) |
Stroke |
|
7.0 million |
(4) |
Small molecule compounds |
|
|
|
Major Depressive Disorder |
|
15.7 million |
(5) |
Schizophrenia |
|
2.5 million |
(6) |
(1) The ALS Association (ALSA), website: retrieved March 2015
from www.alsa.org
(2) Alzheimer’s Association (AA), The 2014 Alzheimer’s
Disease Facts and Figures
(3) National Spinal Cord Injury Statistical Center, Facts and
Figures at a Glance. Birmingham, AL: University of Alabama at Birmingham, February 2014
(4) National Stroke Association (NSA), website: retrieved March
2015 from www.stroke.org
(5) Center for Behavioral Health Statistics and Quality. (2014).
2013 National Survey on Drug Use and Health: Mental Health Detailed Tables. Substance Abuse and Mental Health Services Administration,
Rockville, MD.
(6) National Institute of Mental Health (NIMH), website: retrieved
March 2015 from www.nimh.nih.gov
Technology
Stem Cells.
Our technology
enables the isolation and large-scale expansion of human neural stem cells from all areas of the developing human brain and spinal
cord, thus enabling the generation of physiologically relevant human neurons of all types. We believe that our stem cell technology
will assist the body in producing new cells to replace malfunctioning or dead cells as a way to treat disease and injury. Many
significant and currently untreatable human diseases arise from the loss or malfunction of specific cell types in the body. Our
focus is the development of effective methods to generate replacement cells from neural stem cells. We believe that replacing
damaged, malfunctioning or dead neural cells with fully functional ones may be a useful therapeutic strategy in treating many
diseases and conditions of the central nervous system. We own or exclusively license thirty-seven (37) U.S. and foreign issued
patents and thirty-five (35) U.S. and foreign patent applications related to our stem cell technologies.
In
the fourth quarter of 2013 we filed an investigatory new drug application, or IND, with the Ministry of Food and Drug Safety
in Korea, or MFDS, to start a trial for the treatment of acute spinal cord injury (within several weeks of the
injury) in Seoul Korea. If approved as submitted, this trial will treat complete patients, who are those who have no sensory
or motor function below the point of the injury and also progressively incomplete patients, who have varying degrees of each.
We now anticipate this trial being authorized by MFDS in 2015.
Small Molecule Pharmaceutical Compounds.
We
have developed and patented a series of small molecule compounds. We believe the low molecular weight organic compounds can
efficiently cross the blood/brain barrier. In mice, research indicated that the small molecule compounds both stimulate
neurogenesis of the hippocampus and increase its volume. Our collaborators at Massachusetts General Hospital have presented
the human data from the MDD trial which showed clinically meaningful and statistically significant improvement in depressive
and cognitive scales. We believe the small molecule compounds may assist in reversing atrophy in the human
hippocampus documented in indications such as MDD and schizophrenia.
Our small molecule compounds are covered
by fifty-eight (58) exclusively owned U.S. and foreign issued patents and sixteen (16) exclusively owned U.S. and foreign patent
applications related to our small molecule compounds.
Research
Substantial resources are devoted
to our research programs in order to isolate and develop a series of neural stem cell banks that we believe can serve as a
basis for our therapeutic product candidates. Our efforts are directed at developing therapies utilizing our stem cells and
small molecule regenerative drug candidates. This research is conducted internally, through the use of third party laboratories and
consulting companies under our direct supervision, and through collaboration with academic institutes.
Operating Strategy
We
generally employ an outsourcing strategy where we outsource our Good Laboratory Practices, or GLP, preclinical development
activities and Good Manufacturing Practices, or GMP, Good Tissue Practices, or GTP, if applicable, and clinical
development activities to contract research organizations or CROs and contract manufacturing organizations or CMOs as well as
all non-critical corporate functions. Manufacturing is also outsourced to organizations with approved facilities and
manufacturing practices. This outsource model allows us to better manage cash on hand and minimize non-vital expenditures. It
also allows for us to operate with relatively fewer employees and lower fixed costs than that required by other companies
conducting similar business.
Manufacturing
We currently manufacture our
cells both in-house and on an outsourced basis. We outsource the manufacturing of our pharmaceutical compounds to third
party manufacturers. We manufacture, in-house, cells that are not required to meet stringent FDA requirements. We use these
cells in our research and collaborative programs. During 2015, we are beginning the process of bringing the manufacturing of
our spinal cord stem cells, in-house to better assure availability as the number of patients in our trials increase. We will
also continue to outsource manufacturing and storage of our stem cells and pharmaceuticals compound to be used in clinical
and pre-clinical work studies, to Charles River Laboratories, Inc., of Wilmington, Massachusetts, or Charles River, (stem
cells) and Albany Molecular Resources, Inc., or AMRI, (small molecule). We believe both the Charles River and AMRI facilities
have the capacity to be used for manufacturing under the FDA’s cGMP and GTP standards, as applicable, in quantities
sufficient for our current and anticipated pre-trial and clinical trial needs. We have no quantity or volume commitment with
either Charles River Laboratories or AMRI and our cells and pharmaceutical compounds are ordered and manufactured on an
as needed basis. Additionally, during the first quarter of 2014, we relocated our headquarters to a facility with GMP
manufacturing capability. We anticipate the facility will be ready to commence manufacturing of our stem cells for our
clinical trials by the second quarter of 2015. Such increased manufacturing will supplement our current outsource supply of
both stem cells and pharmaceutical compounds. We believe such additional manufacturing capacity will be beneficial as our
clinical trials expand by indication, geographic region and to larger patient populations and will allow us to begin to build
the infrastructure in-house as we move towards complete internal control of our cell manufacturing needs.
Intellectual Property
Our research and development is
supported by our intellectual property. We own or exclusively license ninety-five (95) U.S. and foreign issued patents and
fifty-one (51) U.S. and foreign patent applications in the field of regenerative medicine, related to our stem cell
technologies as well as our small molecule compounds. Our issued patents have expiration dates ranging from 2016 through
2034. In our opinion the patents expiring in 2016 are not critical to our business.
Our success will likely depend upon our
ability to preserve our technologies and operate without infringing on 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.
In addition to patenting our technologies,
we also rely upon trade-secret protection for our confidential and proprietary information and take active measures to control
access to that information.
Our policy is to require our employees,
consultants and significant scientific collaborators and sponsored researchers to execute confidentiality and assignment of invention
agreements upon the commencement of an employment or consulting relationship with us. These agreements generally provide that
all confidential information developed or made known to the individual by us during the course of the individual's or entity’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 or entity 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 or USPTO, to determine priority of invention, which could
result in substantial uncertainties and costs, 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 proposed products. We cannot predict
which, if any, of such applications will issue as patents or the claims that might be allowed.
If third party patents or patent applications
contain claims infringed by our technology and such claims are ultimately determined to be valid, there can be no assurance that
we would be able to obtain licenses to these patents at a reasonable cost, if at all, or be able to develop or obtain alternative
non-infringing technology. If we are unable to obtain such licenses or develop or obtain alternative non-infringing technology
at a reasonable cost, we may not be able to develop certain products commercially. There can be no assurance that we will not
be obliged to defend ourselves in court against allegations of infringement of third party patents. Patent litigation is very
expensive and could consume substantial resources and create significant uncertainties. An adverse outcome in such a suit could
subject us to significant liabilities to third parties, require us to seek licenses from third parties, or require us to cease
using such technology.
Competition
The pharmaceutical and 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. 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.
The diseases and medical conditions
we are targeting with NSI-566, have no effective long-term therapies and for NSI-189, there are large numbers of patients who
do not respond to current therapies. Nevertheless, we expect that our technologies and product candidates, if and when approved, will
compete with a variety of therapeutic products and procedures offered by major pharmaceutical and biotechnology 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, if and when approved, will compete with these products
principally on the basis of improved and extended efficacy and safety and their overall economic benefit to the health care
system. Competition for our products may be in the form of existing and new drugs, other forms of cell transplantation,
surgical procedures, and gene therapy. We believe that some of our competitors are also trying to develop similar stem
cell-based technologies. We expect that all of these products will compete with our product candidates, if and when approved,
based on efficacy, safety, cost and intellectual property positions. We may also face competition from companies that have
filed patent applications relating to the use of genetically modified cells to treat disease, disorder or injury. In the
event our therapies should require the use of such genetically modified cells, we may be required to seek licenses from these
competitors in order to commercialize certain of our proposed products, and such licenses may not be granted or be extremely
expensive.
If we develop products that receive regulatory
approval, they would then have to compete for market acceptance and market share. For our potential products, an important success
factor will be the timing of market introduction of competitive products. This timing will be a function of the relative speed
with which we and our competitors can develop products, complete the clinical testing and approval processes, and supply commercial
quantities of a product to the market. These competitive products may also impact the timing of clinical testing and approval
processes by limiting the number of clinical investigators and patients available to test our potential products.
Government Regulation
Regulation by governmental authorities
in the United States and other countries is a significant factor in our research and development and will be a significant factor
in the manufacture and marketing of our proposed products. The nature and extent to which such regulation applies to us will vary
depending on the nature of any products we may develop. Governmental authorities, including the FDA and comparable regulatory authorities
in other countries, regulate the design, development, testing, manufacturing, safety, efficacy, labeling, storage, record-keeping,
advertising, promotion and marketing of pharmaceutical products, including drugs and biologics, under the Federal Food, Drug, and
Cosmetic Act, or FFDCA, and its implementing regulations, and, for biologics, under the Public Health Service Act, or PHSA, and
its implementing regulations. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions,
including product seizures, import restrictions, injunctive actions and criminal prosecutions of both companies and individuals.
In addition, administrative remedies can involve requests to recall violative products; the refusal of the government to enter
into supply contracts; or the refusal to approve pending product approval applications until manufacturing or other alleged deficiencies
are brought into compliance. The FDA also has the authority to cause the withdrawal of approval of a marketed product or to impose
labeling restrictions. The process of obtaining 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.
United States Product Development Process
We believe that, in the United States, our human neuronal stem
cell candidates are regulated as biologic pharmaceuticals, or biologics, and our small-molecule compounds are regulated as drugs.
The process required by the FDA before a drug or biological
product may be marketed in the United States generally involves the following:
| · | Completion of preclinical testing of new pharmaceutical or biological products, generally conducted
in the laboratory and in animal studies in accordance with GLPs, and applicable requirements for the humane use of laboratory animals
or other applicable regulations to evaluate the potential efficacy and safety of the product candidate; |
| · | Submission of the results of these studies to the FDA as part of an IND application, which must
become effective before clinical testing in humans can begin; |
| · | Performance of adequate and well-controlled human clinical trials according to cGMPs and any additional
requirements for the protection of human research patients and their health information, to establish the safety and efficacy of
the product candidate for its intended use; |
| · | Submission to the FDA of a biological license application, or BLA, for any biologic or a new drug
application, or NDA, for any drug we seek to market that includes substantive evidence of safety, purity, and potency, or safety
and effectiveness from results of nonclinical testing and clinical trials; |
| · | Satisfactory completion of an FDA inspection of the manufacturing facility or facilities where
the product is produced, to assess compliance with cGMPs, to assure that the facilities, methods and controls are adequate to preserve
the product’s identity, strength, quality and purity, and, if applicable, the FDA’s current good tissue practices,
or GTPs, for the use of human cellular and tissue products; |
| · | Potential FDA audit of the nonclinical study and clinical trial sites that generated the data in
support of the BLA or NDA; and |
| · | FDA review and approval of the NDA, or licensure, of the BLA. |
Typically, human clinical evaluation involves
a time-consuming and costly three-phase process.
| · | Phase 1. The product is initially introduced into healthy human patients and tested for safety.
In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to
ethically administer to healthy volunteers, the initial human testing is often conducted in patients. |
| · | Phase 2. The product is evaluated in a limited patient population to identify possible adverse
effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine
dosage tolerance, optimal dosage and dosing schedule. |
| · | Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy, potency,
and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended
to establish the overall risk to benefit ratio of the product and provide an adequate basis for product labeling. |
Post-approval clinical trials, sometimes
referred to as Phase IV clinical trials, may be conducted after initial marketing approval. These clinical trials are used to gain
additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety
follow-up.
During all phases of clinical development,
regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical trial investigators.
Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Clinical trials may not be completed
successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend or
terminate a clinical trial at any time on various grounds, including a finding that the research patients are being exposed to
an unacceptable health risk, including risks inferred from other unrelated similar trials. Similarly, an institutional review board,
or IRB, can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in
accordance with the IRB’s requirements or if the product has been associated with unexpected serious harm to patients.
Human
cell-based therapies in the field of regenerative medicine are relatively novel. Because this is a relatively new and expanding
area of novel therapeutic interventions, there can be no assurance as to the length of the trial period, the number of patients
the FDA will require to be enrolled in the trials in order to establish the safety, efficacy, purity and potency of such products,
or that the data generated in these trials will be acceptable to the FDA to support marketing approval.
United States Review and Approval Process
After the completion of clinical trials
of a product candidate, FDA approval of a BLA or NDA must be obtained before commercial marketing of the product. The BLA or NDA
must include results of product development, laboratory and animal studies, human trials, information on the manufacture and composition
of the product, proposed labeling and other relevant information as well as a significant user fee. The FDA may grant deferrals
for submission of data, or full or partial waivers. The testing and approval processes require substantial time and effort and
there can be no assurance that the FDA will accept the BLA or NDA for filing and, even if filed, that any approval will be granted
on a timely basis, if at all.
The FDA may refuse to file any BLA or NDA
that it deems incomplete or not properly reviewable at the time of submission, and may request additional information. Once the
submission is accepted for filing, the FDA reviews the BLA or NDA to determine, among other things, whether the proposed product
is safe, potent, and/or effective for its intended use, and has an acceptable purity profile, and whether the product is safe and
effective for its intended use, and in each case, whether the product is being manufactured in accordance with cGMP or GTP, if
applicable. During the product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy,
or REMS, is necessary to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the BLA or NDA
must submit a proposed REMS. The FDA will not approve a BLA or NDA without a REMS, if required.
Notwithstanding the submission of relevant
data and information, the FDA may ultimately decide that the BLA or NDA does not satisfy its regulatory criteria for approval and
deny approval via a letter detailing such deficiencies. Data obtained from clinical trials are not always conclusive and the FDA
may interpret data differently than we interpret the same data. If the FDA denies an application, the applicant may either resubmit
the BLA or NDA, addressing all of the deficiencies identified by the FDA, or withdraw the application.
United States Post-Approval Requirements
Any products for which we receive FDA approvals
are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse
experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution
requirements, and complying with FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer
advertising, restrictions on promoting products for uses or in patient populations that are not described in the product’s
approved uses, known as off-label use, limitations on industry-sponsored scientific and educational activities and requirements
for promotional activities involving the internet.
In addition, quality control and manufacturing
procedures must continue to conform to applicable manufacturing requirements after approval to ensure the long-term stability of
the product. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities
of our products in accordance with cGMP and GTP regulations, as applicable. Manufacturers and other entities involved in the manufacture
and distribution of approved products are required to register their establishments with the FDA and certain state agencies, and
are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP, GTP and other laws.
The FDA also may require post-marketing
testing, known as Phase 4 testing, and surveillance to monitor the effects of an approved product. Discovery of previously unknown
problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse
publicity, judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications
with doctors, and civil or criminal penalties, among others. Also, new government requirements, including those resulting from
new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of
our product candidates under development.
European, China and Other Regulatory Review and Approval
Whether or not FDA approval has been obtained,
approval of a product by comparable regulatory authorities in Europe, China and other countries will be necessary prior to commencement
of marketing the product in such countries. The regulatory authorities in each country may impose their own requirements and may
refuse to grant an approval, or may require additional data before granting it, even though the relevant product has been approved
by the FDA or another authority. As with the FDA, the regulatory authorities in the European Union, China and other developed countries
have lengthy approval processes for biological and pharmaceutical products. The process for gaining approval in particular countries
varies, but generally follows a similar sequence to that described for FDA approval.
Other Health Care Laws
In the event any of proposed products are
ever approved for marketing, we may also be subject to healthcare regulation and enforcement by the federal government and the
states and foreign governments where we may market our product candidates, if approved. These laws include, without limitation,
state and federal anti-kickback, fraud and abuse, false claims, physician sunshine and privacy and security laws and regulations.
Other Regulations
We are also subject to various U.S. federal,
state, local and international laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing
practices and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious
disease agents, used in connection with our business. We cannot accurately predict the extent of government regulation which might
result from future legislation or administrative action.
For additional information about governmental
regulations as well as risk related to our business that could affect our planned and intended business operations, see the “Risk
Factors” Section of this Annual Report.
Executive Officers
The following sets forth our current executive
officers and information concerning their age and background:
Name |
|
Position |
|
Age |
|
Position Since |
I. Richard Garr |
|
Chief Executive Officer, President, General Counsel, Chief
Financial Officer |
|
62 |
|
1996 |
|
|
|
|
|
|
|
Karl Johe, Ph.D. |
|
Chief Scientific Officer |
|
54 |
|
1996 |
Mr. I. Richard Garr, JD,
age 62, has been a director and our Chief Executive Officer 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
Trustee 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. In evaluating Mr. Garr’s specific experience, qualifications, attributes and skills in connection with his
appointment to our board, we took into account his broad experience in Neural Stem Cells. He is among the longest serving
executives in the field.
Dr. Karl Johe, Ph.D., age
54, has been a director, Chairman of the Board and our Chief Scientific Officer 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 the strategic planning and development of our therapeutic products. Dr. Johe received his Bachelor of Arts
Degree in Chemistry and a Master’s Degree from the University of Kansas. Dr. Johe received his doctorate from the Albert
Einstein College of Medicine of Yeshiva University. 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. In evaluating Dr. Johe’s
specific experience, qualifications, attributes and skills in connection with his appointment to our board, we took into account
his extensive experience in international science and business communities. Dr. Johe is also multilingual.
Employees
As of February 28, 2015, we had 21 full-time
employees and three (3) full-time independent contractors. Of these full-time employees and contractors, 17 work on research and
development and seven (7) in administration. We also use the services of numerous outside consultants in business and scientific
matters.
Our Corporate Information
We were incorporated in Delaware in 2001.
Our principal executive offices are located at 20271 Goldenrod Lane, Germantown, Maryland 20876, and our telephone number
is (301) 366-4841. Our website is located at www.neuralstem.com.
In addition to announcing material financial information through
our investor relations website, press releases, SEC filings and public conference calls and webcasts, we also intend to use the
following social media channels as a means of disclosing information about the company, its services and other matters and for
complying with our disclosure obligations under Regulation FD:
| · | Neuralstem’s
Twitter Account (https://twitter.com/Neuralstem_Inc) |
| · | Neuralstem’s
Facebook Page (https://www.facebook.com/Neuralstem) |
| · | Neuralstem’s
Company Blog (http://neuralstem.com/neuralstem-ceo-blog) |
| · | Neuralstem’s
Google+ Page (https://plus.google.com/u/0/b/104875574397171789280/104875574397171789280/posts) |
| · | Neuralstem’s
LinkedIn Company Page (http://www.linkedin.com/company/neuralstem-inc-) |
| · | Neuralstem
Asia’s Tencent Weibo Account ( http://t.qq.com/neuralstem) |
The information we post through these social media channels
may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following the company’s
press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time.
We have not incorporated by reference into this report
the information in, or that can be accessed through, our website or social media channels, and you should not consider
it to be a part of this report.
Where to Find More Information
We make our public filings with the SEC,
including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits
and amendments to these reports. Also our executive officers, directors and holders of more than 10% of our common stock, file
reports with the SEC on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available on the
SEC’s web site, http://www.sec.gov. You may also read or copy any materials we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Alternatively, you may obtain copies of these filings, including exhibits,
by writing or telephoning us at:
NEURALSTEM, INC
20271 Goldenrod Lane
Germantown, Maryland 20876
Attn: Chief Financial Officer
Tel: (301) 366-4841
Investing
in our common stock involves a high degree of risk. We have described below a number of uncertainties and risks which, in addition
to uncertainties and risks presented elsewhere in this Annual Report, may adversely affect our business, operating results and
financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this Annual Report
should be considered carefully in evaluating our company and our business and the value of our securities.
Risks Relating to Our Stage of Development and Capital Structure
We have a history of losses.
Since
inception in 1996 and through December 31, 2014, we have accumulated losses totaling approximately $151,055,000. On December
31, 2014, we had a working capital surplus of approximately $24,153,000 and stockholders’ equity of approximately
$17,719,000. Our net losses for the three most recent fiscal years have been approximately $22,629,000, $19,832,000 and
$10,122,000 for 2014, 2013 and 2012, respectively. Although from 2012 through 2014 we recognized revenue as a result of us
providing subcontractor services and the licensing of our intellectual property, we have generated no significant revenue
from the sales of our proposed products.
Our ability to
generate revenues and achieve profitability will depend upon our ability to complete the development of our proposed products,
obtain the required regulatory approvals, manufacture and market and sell our proposed products. To date, we have not generated
any revenue from the commercial sale of our proposed products. No assurances can be given as to exactly when, if at all, we will
be able to fully develop, commercialize, market, sell and/or derive any, let alone material, revenues from our proposed products.
We will need to raise additional
capital to continue operations.
Since our inception,
we have funded our operations through the sale of our securities, credit facilities, 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 December
31, 2014, we had cash, cash equivalents and short-term investments on hand of approximately $27,526,000. We cannot assure you
that we will be able to secure additional capital through financing transactions, including issuance of debt, 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 operations.
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 our operations, 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.
We will need to raise additional
capital to pay our indebtedness as it comes due.
We have
a substantial level of debt. As of December 31, 2014, we had approximately $9.5 million in aggregate principal amount
long-term indebtedness outstanding. Under our amended loan and security agreement, we are required to make monthly interest
only payments through September 2015; interest and principal payments of approximately $460,000 per month from October
2015 through March 2017 and a balloon payment for the remaining principal in April 2017. As security for such indebtedness,
we have pledged substantially all of our assets, including our intellectual property. If we are unable to make the
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 and
lead to potential foreclosure on the assets securing the debt. Any default under our indebtedness would have a material adverse
effect on our business, operating results and financial condition. Additionally, our amended loan and security agreement
governing our $10 million credit facility also 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 amended loan and security agreement 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, including 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 and our ability to raise additional capital.
Our business
is significantly dependent on our product candidates which are currently at different phases of pre-clinical and clinical development.
The process to approve our product candidates is time-consuming, involves substantial expenditures of resources, and depends upon
a number of factors, including the availability of alternative treatments, and the risks and benefits demonstrated in the clinical
trials. Our success will depend on our ability to achieve scientific and technological advances and to translate such advances
into FDA-approvable, commercially competitive products on a timely basis. Failure can occur at any stage of the process. If we
are not successful in developing our product candidates, we will have invest substantial amounts of time and money without developing
revenue-producing products. As we enter a more extensive clinical program for our product candidates, the data generated in these
studies may not be as compelling as the earlier results. This, in turn, could adversely impact our ability to raise additional
capital and pursue our business plan and planned research and development efforts.
Our proposed
products are not likely to be commercially available for at least several years, if at all. Our development schedules
for our proposed products may be affected by a variety of factors, including technological difficulties, clinical trial failures,
regulatory hurdles, competitive products, intellectual property challenges and/or changes in governmental regulation, many of
which will not be within our control. Any delay in the development, introduction or marketing of our product candidates could
result either in such products being marketed at a time when their cost and performance characteristics would not be competitive
in the marketplace or in the shortening of their commercial lives. In light of the long-term nature of our projects, the unproven
technology involved and the other factors described elsewhere in this section, there can be no assurance that we will be able
to successfully complete the development or marketing of any of our proposed product candidates.
Our business relies on technologies
that we may not be able to commercially develop and we are unable to predict when or if we will be able to earn revenues.
We have allocated
the majority of our resources to the development of our 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 if developed,
our technologies will result in commercially viable products or have any commercial utility or value. We anticipate that the commercial
sale of our proposed products and/or royalty/licensing fees related to our technologies, will be our primary sources of revenue.
We recognized revenue of approximately $19,000, $110,000 and $408,000 for the years ended December 31, 2014, 2013 and 2012, respectively
related to the licensing of certain intellectual property to third parties and certain subcontractor services that we provided.
If we are unable to develop our technologies, we may never realize any significant revenue. Additionally, given the uncertainty
of our technologies, product candidates 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 product development programs
are based on novel technologies in an emerging field 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. Regenerative medicine
is still an emerging field. There can be no assurances that we will ultimately produce any viable commercialized products and
processes. Even if we are able to produce a commercially viable product, there may be strong competitors in this field and
our products may not be able to successfully compete against them.
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.
Our proposed
products are not likely to be commercially available for at least several or more years, if ever. Accordingly, we do not foresee
generating any significant revenue during such time. As a result, we will be primarily dependent on our ability to raise capital
through the sale of our securities to fund our operations 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 most of 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 or our business would be impacted.
Additionally, as part of our business plan, we are developing in-house manufacturing capabilities but there can be no
assurance that such capabilities will be successfully developed or if developed, be sufficient to meet our demands and delays
in the development of such in-house manufacturing capabilities could adversely affect our plans.
If
we are unable to complete pre-clinical and clinical testing and trials or if clinical trials of our product candidates are prolonged,
delayed, suspended or terminated, our business and results of operations could be materially harmed.
We
are currently in clinical trials for NSI-566 and NSI-189, two of our proposed products, with regard to multiple indications. 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 may be unable to obtain regulatory approval for and commercialize
our proposed products. No assurances can be given that our clinical trials will be completed or result in successful outcomes.
A number of events, including any of the following, could delay the completion of our planned clinical trials and negatively impact
our ability to obtain regulatory approval for, and to market and sell, a particular product candidate:
| · | conditions imposed on us by the FDA or any foreign regulatory
authority regarding the scope or design of our clinical trials; |
| · | delays in obtaining, or our inability to obtain, required
approvals from institutional review boards, or IRBs, or other reviewing entities at clinical sites selected for participation in
our clinical trials; |
| · | insufficient supply or deficient quality of our product candidates
or other materials necessary to conduct our clinical trials; |
| · | delays in obtaining regulatory agency agreement for the conduct
of our clinical trials; |
| · | lower than anticipated enrollment and retention rate of subjects
in clinical trials; |
| · | serious and unexpected side effects experienced by patients
in our clinical trials which are related to the use of our product candidates; or |
| · | failure of our third-party contractors to meet their contractual
obligations to us in a timely manner. |
Clinical
trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may
be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a trial, or a data safety monitoring
board, or DSMB, overseeing the clinical trial at issue, or other regulatory authorities due to a number of factors. Additionally,
changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes.
Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the cost, timing
or successful completion of a clinical trial. We do not know whether our clinical trials will be conducted as planned, will need
to be restructured or will be completed on schedule, if at all. Delays in our clinical trials will result in increased development
costs for our drug candidates. In addition, if we experience delays in the completion of, or if we terminate, any of our clinical
trials, the commercial prospects for our drug candidates may be harmed and our ability to generate product revenues will be jeopardized.
Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also
ultimately lead to the denial of regulatory approval of a drug candidate. 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.
The results
of pre-clinical studies and clinical trials may not be predictive of the results of our later-stage clinical trials and our proposed
products may not have favorable results in later-stage 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 may experience potentially significant delays in,
or be required to abandon, development of that product candidate. Additionally, 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
current and future product candidates. Any such delays or abandonment in our development efforts of any of our product candidates
would materially impair our ability to generate revenues.
Our research and development
expenses are subject to uncertainty.
Factors affecting our research and
development expenses include, but are not limited to:
| · | competition
from companies that have substantially greater assets and financial resources than we
have; |
| · | need for acceptance
of our proposed products; |
| · | ability to
anticipate and adapt to a competitive market and rapid technological developments; |
| · | amount and
timing of operating costs and capital expenditures relating to outsourcing of manufacturing
and management of pre-clinical and clinical trials; |
| · | need to rely
on multiple levels of outside funding due to the length of drug development cycles and
governmental approved protocols associated with the pharmaceutical industry; and |
| · | dependence
upon key personnel including key independent consultants and advisors. |
There can be
no guarantee that our research and development expenses will be consistent from period to period. We may be required to accelerate
or delay incurring certain expenses depending on the results of our studies and the availability of adequate funding.
We are subject to numerous risks
inherent in conducting clinical trials.
We outsource
the management of our clinical trials to third parties. Agreements with clinical investigators and medical institutions for clinical
testing and with other third parties for data management services, place substantial responsibilities on these parties that, if
unmet, could result in delays in, or termination of, our clinical trials. For example, if any of our clinical trial sites fail
to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical
investigators, medical institutions or other third parties do not carry out their contractual duties or obligations or fail to
meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to
adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may
be unable to obtain regulatory approval for, or successfully commercialize, our proposed products. Delays in recruitment, lack
of clinical benefit or unacceptable side effects would delay or prevent the completion of our clinical trials.
We or our regulators
may suspend or terminate our clinical trials for a number of reasons. We may voluntarily suspend or terminate our clinical trials
if at any time we believe they present an unacceptable risk to the patients enrolled in our clinical trials or do not demonstrate
clinical benefit. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials
at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements
or that they present an unacceptable safety risk to the patients enrolled in our clinical trials.
Our clinical
trial operations are subject to regulatory inspections at any time. If regulatory inspectors conclude that we or our clinical
trial sites are not in compliance with applicable regulatory requirements for conducting clinical trials, we may receive reports
of observations or warning letters detailing deficiencies, and we will be required to implement corrective actions. If regulatory
agencies deem our responses to be inadequate, or are dissatisfied with the corrective actions we or our clinical trial sites have
implemented, our clinical trials may be temporarily or permanently discontinued, we may be fined, we or our investigators may
be precluded from conducting any ongoing or any future clinical trials, the government may refuse to approve our marketing applications
or allow us to manufacture or market our products, and we may be criminally prosecuted.
The lengthy approval
process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval
for our proposed products, which would materially harm our business, results of operations and prospects.
There are no assurances
that we will be able to submit a pre-market application 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 that 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
and are unable to generate sufficient revenues to attain profitability our business will be adversely effected.
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 business. Additionally, 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. The loss of one or
more of these sources would likely delay our ability to conduct planned clinical trials and otherwise 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 Annual 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 payor coverage and reimbursement.
Our ability to
successfully commercialize our product candidates, if approved, depends to a significant degree on the ability of patients to
be reimbursed for 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 our proposed 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
product candidates, 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 therapies marketed by major pharmaceutical companies. 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 Mr. Garr and Dr. 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 $1.3 million
for Mr. Garr and $2.2 million for Dr. Johe and result in the immediate vesting of all outstanding options and/or warrants
held by Mr. Garr and Dr. Johe.
Our competition
has significantly greater experience and financial resources.
The
biotechnology industry is characterized by rapid technological developments and a high degree of 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.
As
a result, our proposed products could become obsolete before we recoup any portion of our related research and development and
commercialization expenses. Competition in the biopharmaceutical industry is based significantly on scientific and technological
factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize
technological developments and the ability to obtain governmental approval for testing, manufacturing and marketing. We compete
with specialized biopharmaceutical firms in the United States, Europe and elsewhere, as well as a growing number of large pharmaceutical
companies that are applying biotechnology to their operations. Many major pharmaceutical companies have developed or acquired internal
biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as
academic institutions and governmental agencies and private research organizations, also compete with us in recruiting and retaining
highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical
field will also depend to a considerable degree on the continuing availability of capital to us.
We believe
that our proposed products under development and in pre-clinical testing and clinical trials will address unmet medical needs for
those indications for which we are focusing our development efforts. Our competition will be determined in part by the potential
indications for which our proposed products are developed and ultimately approved by regulatory authorities. Additionally, the
timing of market introduction of some of our proposed products or of competitors’ products may be an important competitive
factor. Accordingly, the relative speed with which we can develop our proposed products, complete preclinical testing, clinical
trials and approval processes and supply commercial quantities to market is expected to be important competitive factors. We expect
that competition among products approved for sale will be based on various factors, including product efficacy, safety, reliability,
availability, price and patent position.
Our
outsource model depends on third parties to assist in developing and testing our proposed products.
Our
strategy for the development, clinical and pre-clinical 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 heavily upon third party FDA-regulated manufacturers and suppliers for our products
We
currently manufacture our cells both in-house and on an outsource basis. We outsource the manufacturing of our pharmaceutical compound
to third party manufacturers. We manufacture cells in-house which are not required to meet stringent FDA requirements. We use these
cells in our research and collaborative programs. 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).
Failure by our contract manufacturer to achieve and maintain high manufacturing standards could result in patient injury or death,
product recalls or withdrawals, delays or failures in testing or delivery, cost overruns, or other problems that could seriously
hurt our business. Contract manufacturers may encounter difficulties involving production yields, quality control, and quality
assurance. These manufacturers are subject to ongoing periodic and unannounced inspections by the FDA and corresponding state and
foreign agencies to ensure strict compliance with cGMPs, GTPs and other applicable government regulations and corresponding foreign
standards; however, we do not have control over third-party manufacturers’ compliance with these regulations and standards.
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. Moreover, we do not have quantity or volume commitment orders from these manufacturers and we cannot assure
you that the manufacturers will be able to manufacture in the quantity we require on a timely basis or at all. 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 on a timely basis and at terms reasonable to us. Even if we were to locate
alternative manufacturers there may be delays before they are able to begin manufacturing. 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 reliance on these third
parties for clinical development activities results in reduced control over these activities. Furthermore, these third
parties may also have relationships with other entities, some of which may be our competitors. Our preclinical activities or
clinical trials conducted in reliance on third parties may be delayed, suspended, or terminated if:
| · | the third parties do not successfully carry out their contractual
duties; |
| · | the third parties fail to meet FDA and other
regulatory
obligations or expected deadlines; |
| · | we replace a third party for any reason; or |
| · | the quality or accuracy of the data obtained by third parties
is compromised due to their failure to adhere to clinical protocols, regulatory requirements, or for other reasons. |
Third
party performance failures may increase our development costs, delay our ability to obtain regulatory approval, and delay or prevent
the commercialization of our product candidates. While we believe that there are numerous alternative sources to provide these
services, in the event that we seek such alternative sources, we may not be able to enter into replacement arrangements without
incurring delays or additional costs.
Risks
Relating to Intellectual Property
We
may not be able to withstand challenges to our intellectual property rights.
We
rely on our intellectual property, including issued and applied-for patents, as the foundation of our business. Our intellectual
property rights may come under challenge. No assurances can be given that 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 Annual 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. 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 loan and security 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:
| · | our board of directors is divided into three classes, with
each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors
at an annual meeting; |
| · | advance notice procedures that stockholders must comply with
in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders
may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate
of directors or otherwise attempting to obtain control of our company; and |
| · | our board of directors may, without stockholder approval,
issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting
power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control. |
If
securities or industry analysts do not publish research reports, or publish unfavorable research about our business, the price
and trading volume of our common stock could decline.
The
trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish
about us and our business. We currently have limited research coverage by securities and industry analysts. In the event an analyst
downgrades our securities, the price of our securities would likely decline. If analysts cease to cover us or fails to publish
regular reports on us, interest in our securities could decrease, which could cause the price of our common stock and other securities
and their trading volume to decline.
Our
charter 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 charter 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 300,000,000 shares of common stock and 7,000,000 “blank
check” shares of preferred stock. Shares of our blank check preferred stock provide our board of directors with broad authority
to determine voting, dividend, conversion, and other rights. As of December 31, 2014 we have issued and outstanding 87,789,679
shares of common stock and we have 44,506,665 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
December 31, 2014, we had no shares of preferred stock issued and outstanding. Accordingly, we are entitled to issue up to 167,703,656
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.
The
regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable,
and our products may not receive regulatory approval.
The time
required to obtain approval by the FDA and comparable foreign authorities is inherently unpredictable but typically takes many
years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of
the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain
approval may change during the course of a drug candidate’s clinical development and may vary among jurisdictions. We have
not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any
product candidates we may seek to develop in the future will ever obtain regulatory approval.
Our drug candidates could
fail to receive regulatory approval for many reasons, including the following:
| · | the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials; |
| · | we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product
candidate is safe and effective for its proposed indication; |
| · | the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign
regulatory authorities for approval; |
| · | we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks; |
| · | the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies
or clinical trials; |
| · | the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a BLA,
NDA or other submission or to obtain regulatory approval in the United States or elsewhere; |
| · | the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; or |
| · | the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a
manner rendering our clinical data insufficient for approval. |
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.
In
addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more
limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent
on the performance of costly post-marketing clinical trials, or may approve a drug candidate with a label that does not include
the labeling claims necessary or desirable for the successful commercialization of that drug candidate. Any of the foregoing scenarios
could materially harm the commercial prospects for our drug candidates.
Development
of our product candidates 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 regulatory requirements 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 able 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 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 and other
regulatory 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.
Satisfaction of these
and other regulatory requirements is costly, time consuming, uncertain, and subject to unanticipated delays. Despite our efforts,
our drug candidates may not:
| · | offer improvement over existing comparable products; |
| · | be proven safe and effective in clinical trials; or |
| · | meet applicable regulatory standards. |
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.
Both
before and after marketing approval, our product candidates are subject to extensive and rigorous ongoing regulatory requirements
and continued regulatory review, and if we fail to comply with these continuing requirements, we could be subject to a variety
of sanctions.
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, packaging, adverse event reporting, storage, record keeping, quality systems, advertising, promotion, sale and
distribution of therapeutic products. These requirements include submissions of safety and other post-marketing information
and reports, registration, as well as continued compliance with cGMP, requirements and current good clinical practice, or cGCP,
requirements for any clinical trials that we conduct post-approval. Failure to comply with
applicable requirements could result in, among other things, one or more of the following actions: restrictions on the marketing
of our products or their manufacturing processes, notices of violation, untitled letters, warning letters, civil penalties, fines
and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate, suspension
or withdrawal of regulatory approvals, product, seizure or detention, voluntary or mandatory product recalls and related publicity
requirements, interruption of manufacturing or clinical trials, operating restrictions, injunctions, import or export bans, 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.
The FDA’s policies may change and additional
government regulations may be enacted that could prevent, limit or delay regulatory approval of our drug candidates. If we are
slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able
to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our
business, prospects and ability to achieve or sustain profitability.
If side effects are identified during the time our drug candidates
are in development or after they are approved and on the market, we may choose to or be required to perform lengthy additional
clinical trials, discontinue development of the affected drug candidate, change the labeling of any such products, or withdraw
any such products from the market, any of which would hinder or preclude our ability to generate revenues.
Undesirable side effects caused by our drug
candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive
label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. The drug-related side effects
could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability
claims. Any of these occurrences may harm our business, financial condition and prospects significantly. Even if any of our drug
candidates receives marketing approval, as greater numbers of patients use a drug following its approval, an increase in the incidence
of side effects or the incidence of other post-approval problems that were not seen or anticipated during pre-approval clinical
trials could result in a number of potentially significant negative consequences, including:
| · | regulatory authorities may withdraw their approval of the product; |
| · | regulatory authorities may require the addition of labeling statements, such as warnings or contraindications; |
| · | we may be required to change the way the product is administered, conduct additional clinical trials
or change the labeling of the product; |
| · | we could be sued and held liable for harm caused to patients; and |
| · | our reputation may suffer. |
Any of these events could substantially increase
the costs and expenses of developing, commercializing and marketing any such drug candidates or could harm or prevent sales of
any approved products.
Even if our product candidates receive
regulatory approval in the United States, we may never receive approval or commercialize our products outside of the United States.
In order to market any products outside of
the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding
safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative
review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval.
The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United
States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure
or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure
to obtain regulatory approval in other countries or any delay or setback in obtaining such approval would impair our ability to
develop foreign markets for our drug candidates.
Our
product candidates for which we intend to seek approval as biologic products may face competition sooner than anticipated.
We expect our stem cell product candidates
to be regulated by the FDA as biologic products and we intend to seek approval for these products pursuant to the BLA pathway.
The Biologics Price Competition and Innovation Act of 2009, or BPCIA, created an abbreviated pathway for the approval of biosimilar
and interchangeable biologic products. The abbreviated regulatory pathway establishes legal authority for the FDA to review and
approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its
similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA
until 12 years after the original branded product was approved under a BLA. The law is complex and is still being interpreted and
implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain
when such processes intended to implement BPCIA may be fully adopted by the FDA, any such processes could have a material adverse
effect on the future commercial prospects for our biologic products.
We believe that any of our product candidates
approved as a biologic product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that
this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our drug candidates
to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated.
Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that
is similar to traditional generic substitution for non-biologic products is not yet clear, and will depend on a number of marketplace
and regulatory factors that are still developing.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
We currently lease three facilities
located in the United States. Our executive offices and primary research facilities are located in Germantown, Maryland. We lease these facilities consisting of approximately 2,700 square feet. This lease provides for
monthly lease payments of approximately $9,000 per month with the term expiring on December 31, 2015.
In 2011, we entered into a lease, consisting
of approximately 3,000 square feet of additional research space in San Diego, California. This lease provides for current monthly
payments of approximately $7,200 and expires on August 31, 2015.
In 2014, we entered into a lease for additional
research space in San Diego, California. This lease provides for monthly payments of approximately $3,000 per month plus certain
additional monthly fees to be determined based on usage. This lease expires on August 31, 2015
We also lease a research facility in People’s
Republic of China. This lease expired on September 30, 2014 and is currently month-to-month with lease payments of approximately
$2,000 per month.
As of the date of this Annual Report,
there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party,
and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party
adverse to us or which have a material interest adverse to us, other than the following:
On May 7, 2008,
we filed suit against StemCells, Inc., StemCells California, Inc. (collectively "StemCells") and Neurospheres Holding
Ltd. in U.S. District Court for the District of Maryland, alleging that U.S. Patent No. 7,361,505 (the "'505 patent")
is invalid, not infringed, and unenforceable. See Civil Action No. 08-1173. On May 13, 2008 we filed an Amended Complaint seeking
declaratory judgment that U.S. Patent No. 7,155,418 (the "'418 patent") is invalid and not infringed and that certain
statements made by our CEO are not trade libel or do not constitute unfair competition. On September 11, 2008, StemCells filed
its answer asserting counterclaims of infringement for the '505 patent, the '418 patent, and state law claims for trade libel
and unfair competition. This case was consolidated with the 2006 litigation discussed below and it is not known when, nor on what
basis, this matter will be concluded.
On July 28,
2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the U.S. District Court in Maryland, alleging that Neuralstem
has been infringing, contributing to the infringement of, and or inducing the infringement of four patents allegedly owned by
or exclusively licensed to StemCells. See Civil Action No. 06-1877. We answered the Complaint denying infringement, asserting
that the patents are invalid, asserting that we have intervening rights based on amendments made to the patents during
reexamination proceedings, and further asserting that some of the patents are unenforceable due to inequitable conduct.
Neuralstem has also asserted counterclaims that StemCells has engaged in anticompetitive conduct in violation of antitrust
laws. On February 28, 2011, Neuralstem filed a Motion to Dismiss for lack of standing and concurrently filed a Motion for
Leave to Amend its Answer and Counterclaim to allege that StemCells is not the exclusive licensee of the patents-in-suit and
also that Neuralstem has obtained a non-exclusive license to the patents-in-suit. In addition, before the Court decided
Neuralstem's Motion to Dismiss for lack of standing, StemCells filed a motion for summary judgment on the issue standing.
Neuralstem responded to that motion and cross-moved for summary judgment on the issue of standing. The Court further issued
its Markman Order (an order ruling on the scope and meaning of disputed patent claim language regarding the patents at
issue) on August 12, 2011. On August 26, 2011, StemCells moved for reconsideration of two terms construed in the
Markman Order and that motion remains pending. On April 6, 2012 the Court granted Neuralstem's Motion for Leave to Amend to
assert lack of standing and denied Neuralstem's Motion to Dismiss and Motion for Summary Judgment without prejudice. The
Court also denied StemCells' Motion for Summary Judgment with prejudice. The Court stayed all other matters pending
resolution of the question of standing. The case was then reassigned to Judge Roger W. Titus.
Judge Titus held a bench trial on
the issue of standing and inventorship on December 9, 11, and 12, 2014. The parties filed their post-trial briefs
on January 16, 2015. Judge Titus is expected to issue an order that will either resolve the case in its entirety or will
allow the case to move forward to expert discovery.
| ITEM 4. | MINE SAFETY DISCLOSURE |
Not Applicable
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the NYSE
MKT under the symbol "CUR." The following table sets forth, for the periods indicated, the high and low sale prices for
our common stock.
| |
High | | |
Low | |
2014 | |
| | | |
| | |
First Quarter | |
$ | 4.80 | | |
$ | 2.76 | |
Second Quarter | |
$ | 4.81 | | |
$ | 2.96 | |
Third Quarter | |
$ | 4.25 | | |
$ | 2.67 | |
Fourth Quarter | |
$ | 3.39 | | |
$ | 2.12 | |
2013 | |
| | | |
| | |
First Quarter | |
$ | 1.40 | | |
$ | 1.03 | |
Second Quarter | |
$ | 1.59 | | |
$ | 1.00 | |
Third Quarter | |
$ | 3.02 | | |
$ | 1.30 | |
Fourth Quarter | |
$ | 3.04 | | |
$ | 2.07 | |
Holders
As of February 28, 2015 our common stock
was held by approximately 344 record holders. Because many of our shares of common stock are held by brokers and other institutions
on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these holders.
Dividends
We have not paid any cash dividends to
date and have no plans to do so in the immediate future. Additionally, we are prohibited from paying any cash dividends under the
terms of our loan and security agreement.
Equity Compensation Plan Information
The following table sets forth information with respect to our
equity compensation plans as of December 31, 2014.
| |
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | |
Weighted-
Average Exercise Price for Outstanding Options,
Warrants and
Rights | | |
Number of Securities
Remaining Available for
Future Issuance under
Equity compensation
Plans (Excluding
Securities Reflected in
Column (a)) | |
Plan Category | |
(a) | | |
(b) | | |
(c) | |
Equity compensation plans approved by security holders | |
| | | |
| | | |
| | |
2005 Stock Plan, as amended and restated | |
| 3,108,333 | | |
$ | 1.23 | | |
| - | |
2007 Stock Plan | |
| 6,006,319 | | |
$ | 3.17 | | |
| 18,223 | |
2010 Equity Compensation Plan | |
| 10,319,019 | | |
$ | 1.27 | | |
| 3,632,425 | |
Equity compensation plans not approved by security holders | |
| N/A | | |
| N/A | | |
| N/A | |
Total | |
| 19,433,671 | | |
$ | 1.85 | | |
| 3,650,648 | |
Performance Graph
The following graph compares total stockholder
returns of Neuralstem, Inc. for the period commencing on December 31, 2009 and ending on December 31, 2014, to two indices: (i)
The NYSE MKT Composite Index and (ii) The AMEX Biotechnology Index. The total return for our stock and for each index assumes an
initial investment of $100 and the reinvestment of dividends, although we have never declared dividends on Neuralstem stock, and
is based on the returns of the component companies weighted according to their capitalizations as of the end of each quarterly
period. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Recent Sales of Unregistered Securities
The following information is given with
regard to unregistered securities sold during the period covered by this report. The unregistered securities were issued pursuant
to section 4(2) of the Securities Act:
| · | At certain times from January through April 2014, we issued
a total of 40,077 shares of common stock upon the cashless exercise of 77,000 outstanding common stock purchase warrants. Such
warrants had an average exercise price of $1.79. |
| · | In April 2014, we issued a total of 50,000 shares of common
stock upon the exercise of certain outstanding common stock purchase warrants. The warrants had an exercise price of $2.00. We
received $100,000 of gross proceeds from the exercise. |
| · | In 2014, we issued an aggregate of 805,972 shares of
common stock
upon conversion by the lender of $1 million of principal payments due under our March 2013 long-term debt in accordance with
the terms of the amended loan and security agreement. We received no such proceeds from this conversion. |
| · | In July 2014, we issued one of our legal firms a common stock
purchase warrant to purchase 150,000 shares of our common stock at an exercise price of $4.01 per share in exchange for certain
legal work. The warrant vest monthly over one year from the grant date, has a term of 5 years and will expire on June 30, 2019.
Any vested portion of the warrant can be exercised after 6 months from the issuance date on a cashless basis at any time that the
shares underlying the warrant are not subject to a registration statement. The warrant provides for an adjustment to the purchase
price and number of shares underlying the warrant upon stock dividends and splits. The warrant does not contain any price protection
provisions with regard to subsequent financings. |
| · | In connection with the amendment to our loan and security agreement entered into in the
October 2014,
we issued a five-year warrant to purchase 75,188 shares of our common stock at an exercise price of $2.66 per share to the
lender. The warrant contains standard anti-dilution provisions but does not contain any price protection provisions with
regard to subsequent financings. In connection with the loan amendment, we also issued to an advisor 28,119 common shares
and a
three-year warrant to purchase 58,141 common shares at an exercise price of $2.66 per share. This advisory warrant has
terms substantially similar to the lender warrant. |
| · | In February 2015, we issued a total of 19,206 shares of common stock upon the cashless exercise
of 44,000 outstanding common stock purchase warrants at an exercise price of $2.13. |
| ITEM 6. | SELECTED FINANCIAL DATA |
| |
Year Ended December 31, | |
Statement of Operations Data: | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
Revenues | |
$ | 18,833 | | |
$ | 110,000 | | |
$ | 407,708 | | |
$ | 390,625 | | |
$ | 733,438 | |
Total operating expenses | |
$ | 17,454,682 | | |
$ | 12,633,941 | | |
$ | 10,564,164 | | |
$ | 13,381,095 | | |
$ | 15,918,319 | |
Operating loss | |
$ | (17,435,849 | ) | |
$ | (12,523,941 | ) | |
$ | (10,156,456 | ) | |
$ | (12,990,470 | ) | |
$ | (15,184,881 | ) |
Interest expense | |
$ | (1,620,776 | ) | |
$ | (1,394,274 | ) | |
$ | (2,699 | ) | |
$ | (821 | ) | |
$ | (2,662 | ) |
Warrant issuance and modification expense | |
$ | (3,109,850 | ) | |
$ | (5,017,156 | ) | |
$ | - | | |
$ | - | | |
$ | (1,906,800 | ) |
Gain (loss) from change in fair value adjustment of warrant obligations | |
$ | (334,133 | ) | |
$ | (965,329 | ) | |
$ | - | | |
$ | 161,809 | | |
$ | (1,352,234 | ) |
Loss on debt extinguishment | |
$ | (445,787 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Litigation settlement | |
$ | 250,000 | | |
$ | 838 | | |
$ | 3,484 | | |
$ | - | | |
$ | - | |
Net loss | |
$ | (22,628,744 | ) | |
$ | (19,831,862 | ) | |
$ | (10,121,517 | ) | |
$ | (12,518,527 | ) | |
$ | (18,387,300 | ) |
Net loss per share - basic and diluted | |
$ | (0.26 | ) | |
$ | (0.27 | ) | |
$ | (0.17 | ) | |
$ | (0.26 | ) | |
$ | (0.42 | ) |
| |
As of December 31, | |
Balance Sheet Data: | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
Cash and equivalents | |
$ | 12,518,980 | | |
$ | 16,846,052 | | |
$ | 7,443,773 | | |
$ | 2,352,013 | | |
$ | 9,261,233 | |
Short-term investments | |
$ | 15,007,478 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Working capital | |
$ | 24,153,087 | | |
$ | 11,682,987 | | |
$ | 5,896,454 | | |
$ | 590,385 | | |
$ | 7,093,237 | |
Total assets | |
$ | 29,844,075 | | |
$ | 19,413,536 | | |
$ | 8,750,079 | | |
$ | 4,086,177 | | |
$ | 10,591,360 | |
Long-term debt, net of discount | |
$ | 8,786,482 | | |
$ | 7,697,331 | | |
$ | - | | |
$ | - | | |
$ | - | |
Fair value of derivative instruments | |
$ | - | | |
$ | 1,417,527 | | |
$ | - | | |
$ | - | | |
$ | 1,250,839 | |
Total stockholders' equity | |
$ | 17,719,336 | | |
$ | 8,418,199 | | |
$ | 6,972,633 | | |
$ | 1,659,818 | | |
$ | 7,854,350 | |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Our
Management’s Discussion and Analysis of Financial Condition and Results of Operations or MD&A, is provided in addition
to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition
and cash flows. Our MD&A is organized as follows:
|
· |
Executive Overview — Overview discussion of our business in order to provide context for the remainder of MD&A. |
|
· |
Trends & Outlook — Discussion of what we view as the overall trends affecting our business and the strategy for 2015. |
|
· |
Critical Accounting Policies— Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. |
|
· |
Results of Operations— Analysis of our financial results comparing the: (i) year ended December 31, 2014 to the comparable period of 2013 and (ii) year ended December 31, 2013 to the comparable period of 2012. |
|
· |
Liquidity and Capital Resources— Analysis of cash flows and discussion of our financial condition and future liquidity needs. |
Executive
Overview
We are focused on the development and commercialization
of treatments based on human neuronal stem cells and the development and commercialization of treatments using small molecule compounds.
We are headquartered in Germantown, Maryland and have a wholly-owned subsidiary in China.
We have developed and maintain a portfolio
of patents and patent applications that form the proprietary base for our research and development efforts. We own or exclusively
license ninety-five (95) U.S. or foreign issued patents and fifty-one (51) U.S. and foreign patent applications in the field of
regenerative medicine, related to our stem cell technologies as well as our small molecule compounds. At times, including in the
third quarter 2012 and the first quarter of 2013, we have licensed the use of our intellectual property to third parties.
All of our research efforts to date are
at the pre-clinical or clinical stage of development. We are focused on leveraging our key assets, including our intellectual property,
our scientific team and our facilities, to advance our technologies. In addition, we are pursuing strategic collaborations with
members of academia and industry.
We have not derived any revenue or cash
flows from the sale or commercialization of our products. In the past, we have derived limited revenue from the licensing of certain
intellectual property to third parties and from consulting fees. As a result, we have incurred annual operating losses since inception
and expect to continue to incur substantial operating losses in the future. Therefore, we are dependent upon external financing
and revenue from collaborative research arrangements with sponsors to finance our operations. We have no such collaborative research
arrangements at this time and there can be no assurance that such financing or partnering revenue will be available when needed
or on terms acceptable to us.
Before we can derive revenue or cash inflows
from the commercialization of any of our proposed product candidates, we will need to: (i) conduct substantial testing of our
proposed products, (ii) undertake pre-clinical and clinical testing for specific disease indications; and (iii), obtain required
regulatory approvals. These steps are risky, expensive and time consuming.
Trends & Outlook
We generated
no revenues from the sale of our proposed therapies for any of the years presented. We are mainly focused on successfully managing
our current clinical trials related to our stem cell technology and small molecule compounds. We are also pursuing pre-clinical
studies on other central nervous system indications in preparation for additional clinical trials.
In the first
quarter of 2013 and the third quarter of 2012, we licensed the use of certain of our intellectual property to third parties. During
the years ended December 31, 2014, 2013 and 2012, we recognized approximately $19,000, $110,000 and $173,000 of revenue, respectively,
related to up-front payments and ongoing fees under these licenses.
On a long-term
basis, we anticipate that our revenue will be derived primarily from licensing fees and
sales of our cell based therapy and small molecule compounds. Because we are at such an early stage in the clinical trials
process, we are not yet able to accurately predict when we will have a product ready for commercialization, if ever.
Research and Development Expenses
Our research
and development expenses consist primarily of contractor and personnel expenses associated with clinical trials and regulatory
submissions; costs associated with preclinical activities such as proof of principle for new indications; toxicology studies;
costs associated with cell processing and process development; facilities-related costs
and supplies. Clinical trial expenses include payments to research organizations, contract manufacturers, clinical trial sites,
consultants and laboratories for testing clinical samples.
We
focus on the development of treatment candidates with potential uses in multiple indications, and use employee and infrastructure
resources across several projects. Accordingly, many of our costs are not attributable to a specifically identified product and
we do not account for internal research and development costs on a project-by-project basis.
For
a further description of these clinical trials, see the section of this report entitled “Clinical Programs”
contained in Item 1.
We
expect that research and development expenses, which include expenses related to our ongoing clinical trials, will increase in
the future, as funding allows and we proceed into our anticipated Phase II trials. To the extent that it is practical, we will
continue to outsource much of our efforts, including product manufacture, proof of principle and pre-clinical testing, toxicology,
tumorigenicity, dosing rationale, and development of clinical protocol and IND applications. This approach allows us to use the
best expertise available for each task and permits staging new research projects to fit available cash resources.
We have formed
a wholly owned subsidiary in the People’s Republic of China. We anticipate that this subsidiary will primarily: (i) conduct
pre-clinical research with regard to proposed stem cells therapies, and (ii) oversee our approved future clinical trials in China,
including the current trial to treat motor deficits due to ischemic stroke. Through December 31, 2014 this subsidiary has incurred
expenses of approximately $500,000.
General and Administrative Expenses
General and administrative
expenses are primarily comprised of salaries, benefits and other costs associated with our operations including, finance, human
resources, information technology, public relations, legal fees, facilities and other external general and administrative services.
Critical Accounting Policies
Our consolidated
financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Note 2 of the Notes to Consolidated Financial Statements included elsewhere herein describes
the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting
policies are considered to be critical accounting policies, as defined below.
A
critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires
management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and
results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make
assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably
have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition
or results of operations.
Estimates
and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical
experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may
change as new events occur, as additional information is obtained and as our operating environment changes. These changes have
historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment
of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management
believes that our financial statements are fairly stated in accordance with U.S. GAAP, and present a meaningful presentation of
our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial statements:
Use
of Estimates - Our financial statements prepared in accordance with U.S. GAAP require us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Specifically, we have estimated the expected economic life and value of our
patent technology, our net operating loss carryforward and related valuation allowance for tax purposes and our stock -based compensation
expenses related to employees, directors, consultants and investment banks. Actual results could differ from those estimates.
Long
Lived Intangible Assets - Our long lived intangible assets consist of our intellectual property patents including primarily
legal fees associated with the filings and in defense of our patents. The assets are amortized on a straight-line basis over the
expected useful life which we define as ending on the expiration of the patent group. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We assess this
recoverability by comparing the carrying amount of the asset to the estimated undiscounted future cash flows to be generated by
the asset. If an asset is deemed to be impaired, we estimate the impairment loss by determining the excess of the asset’s
carrying amount over the estimated fair value. These determinations use assumptions that are highly subjective and include a high
degree of uncertainty. During the years ended December 31, 2014, 2013 and 2012, no significant impairment losses were recognized.
Fair Value Measurements
- The carrying amounts of our short-term financial instruments, which primarily include cash and cash equivalents, other
short-term investments, accounts payable and accrued expenses, approximate their fair values due to their short maturities. The
fair value of our long-term indebtedness is estimated based on the quoted prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. The fair values of our derivative instruments were estimated
using Level 3 unobservable inputs.
Share-Based
Compensation - We account for share-based compensation at fair value; accordingly we expense the estimated fair
value of share-based awards over the requisite service period. Share-based compensation cost for stock options and warrants issued
to employees and board members is determined at the grant date using an option pricing model. Option pricing models require us
to make assumptions, including expected volatility and expected term of the options. If any of the assumptions we use in the model
were to significantly change, stock based compensation expense may be materially different. Share-based compensation cost for
restricted stock and restricted stock units issued to employees and board members is determined at the grant date based on the
closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense
on a straight-line basis over the requisite service period.
Comparison of Our Results of Operations for the Year Ended
December 31, 2014 and 2013
Revenue
We did not generate
any revenues from the sale of our proposed products in 2014 or 2013. During 2014 and 2013, we recognized revenue of approximately
$19,000 and $110,000, respectively related to the licensing of certain of our intellectual properties to third parties. The revenue
in 2013 included up-front fees for new licenses while the revenue recognized in 2014 consisted solely of ongoing, annual fees.
Operating Expenses
Operating expenses for 2014 and 2013 were as follows:
| |
Year Ended December 31, | | |
Increase (Decrease) | |
| |
2014 | | |
2013 | | |
$ | | |
% | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Research & development costs | |
$ | 8,134,753 | | |
$ | 7,134,301 | | |
$ | 1,000,452 | | |
| 14 | % |
General & administrative expenses | |
| 8,971,299 | | |
| 5,254,915 | | |
| 3,716,384 | | |
| 71 | % |
Depreciation and amortization | |
| 348,630 | | |
| 244,725 | | |
| 103,905 | | |
| 42 | % |
Total expense | |
$ | 17,454,682 | | |
$ | 12,633,941 | | |
$ | 4,820,741 | | |
| 38 | % |
Research and Development Expenses
Our research
and development expenses consist primarily of contractor and personnel expenses associated with clinical trials and regulatory
submissions; costs associated with preclinical activities such as proof of principle for new indications; toxicology studies;
costs associated with cell processing and process development; facilities-related costs and supplies. Clinical trial expenses
include payments to research organizations, contract manufacturers, clinical trial sites, consultants and laboratories for testing
clinical samples.
The increase
of approximately $1,000,000 or 14% in research in development expenses was primarily attributable to a $674,000 increase in payroll
and related expense due to increased salaries and headcount, a $140,000 increase in project and lab expenses and a $112,000 increase
in travel and related expense due to our clinical trial activities. These increased expenses are all related to a ramping up of
our pre-clinical and clinical trial efforts and are expected to continue into subsequent periods.
General and Administrative Expenses
General and administrative
expenses are primarily comprised of salaries, benefits and other costs associated with our operations including, finance, human
resources, information technology, public relations, legal fees, facilities and other external general and administrative services.
The
increase of approximately of approximately $3,716,000 or 71% in general and administrative expenses was primarily
attributable to a $1,953,000 increase in non-cash stock based compensation expense primarily related to a consultant
achieving a performance based milestone which resulted in a term extension of certain common stock purchase warrants, a
$1,010,000 increase in legal and professional fees related to patent, litigation and other corporate matters, a $554,00
increase in consulting fees primarily related to new business development efforts and a $236,000 increase in payroll and
related expenses due to current year headcount increases.
Depreciation and Amortization
The increase
in depreciation and amortization expenses is due to additions to our patents and property and equipment.
Other income (expense)
Other expense
totaled approximately $5,193,000 and $7,308,000 in the years ended December 31, 2014 and 2013, respectively. Other expense in
2014 consisted primarily of $3,110,000 related to our extension of certain common stock purchase warrants, $1,621,000 of interest
expense principally related to our long-term debt, a $446,000 loss on our debt amendment transaction and $334,000 related to the
change in fair value of the Company’s warrant liabilities partially offset by $250,000 of income from a milestone payment
from a legal settlement.
Other expense in 2013 consisted primarily
of a $5,017,000 expense related to the modification of certain common stock purchase warrants, $1,394,000 of interest expense
primarily related to the Company’s March 2013 long-term debt and a $965,000 expense related to the change in fair value
of the Company’s warrant liabilities partially offset by approximately $68,000 in interest income.
Comparison of Our Results of Operations for the Year Ended
December 31, 2013 and 2012
Revenue
We did not generate
any revenues from the sale of our proposed products in 2013 or 2012. During 2012, we recognized revenue of approximately $234,000,
for our services as principal subcontractor under the DOD contract; this contract was completed in the second quarter of 2012.
During 2013 and 2012, we recognized revenue of approximately $110,000 and $173,000, respectively related to the licensing of certain
of our intellectual properties to third parties.
Operating Expenses
Operating expenses for 2013 and 2012 were as follows:
| |
Year Ended December 31, | | |
Increase (Decrease) | |
| |
2013 | | |
2012 | | |
$ | | |
% | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Research & development costs | |
$ | 7,134,301 | | |
$ | 6,105,984 | | |
$ | 1,028,317 | | |
| 17 | % |
General & administrative expenses | |
| 5,254,915 | | |
| 4,247,037 | | |
| 1,007,878 | | |
| 24 | % |
Depreciation and amortization | |
| 244,725 | | |
| 211,143 | | |
| 33,582 | | |
| 16 | % |
Total expense | |
$ | 12,633,941 | | |
$ | 10,564,164 | | |
$ | 2,069,777 | | |
| 20 | % |
Research and Development Expenses
The increase
in research and development expenses was primarily attributable to an approximately $389,000 increase in project and lab expenses,
a $136,000 increase in personnel related expenses due to the hiring of additional research and development personnel, a $147,000 increase
in travel expenses all due to the ramping up of our clinical trial and research efforts coupled with a $277,000 increase in share-based
compensation.
General and Administrative Expenses
The increase
in general and administrative expenses was primarily attributable to an approximately $494,000 increase in professional services,
a $444,000 increase in share-based compensation, a $77,000 increase in insurance premiums and a $57,000 increase in charitable
donations, partially offset by a $92,000 decrease in bonus and personnel related expenses.
Depreciation and Amortization
The increase
in depreciation and amortization expenses is primarily due to depreciation over fixed assets purchased in 2013 along with amortization
of 2013 additions to our patent assets.
Other income (expense)
Other income (expense) totaled approximately
($7,308,000) and $35,000 in the years ended December 31, 2013 and 2012, respectively. Other expense in 2013 consisted primarily
of a $5,017,000 expense related to the modification of certain common stock purchase warrants, $1,394,000 of interest expense
primarily related to the Company’s March 2013 long-term debt and a $965,000 expense related to the change in fair value
of the Company’s warrant liabilities partially offset by approximately $68,000 in interest income. Other income in 2012
consisted primarily of interest income.
Liquidity and
Capital Resources
Since our inception, we have financed
our operations through the sales of our securities, issuance of long-term debt, the exercise of investor warrants, and to a lesser
degree from grants and research contracts as well as the licensing of our intellectual property to third parties. In January
2014, we received approximately $20 million of gross proceeds from the sale or our securities pursuant to a registered direct
offering and in October 2014, we raised approximately $4 million of net proceeds in our debt amendment transaction.
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 we will be able to secure
such additional financing or that the expected income will materialize. Several factors will affect our ability to raise additional
funding, including, but not limited to market conditions, interest rates and, more specifically, our progress in our exploratory,
preclinical and future clinical development programs.
Cash Flows – 2014 compared
to 2013
| |
Year Ended December 31, | | |
Increase (Decrease) | |
| |
2014 | | |
2013 | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
$ | 12,518,980 | | |
$ | 16,846,052 | | |
$ | (4,327,072 | ) | |
| -26 | % |
Short term investments | |
| 15,007,478 | | |
| - | | |
| 15,007,478 | | |
| - % | |
Total cash and short term investments | |
$ | 27,526,458 | | |
$ | 16,846,052 | | |
$ | 10,680,406 | | |
| 63 | % |
| |
| | | |
| | | |
| | | |
| | |
Net cash used in operating activities | |
$ | (11,706,688 | ) | |
$ | (10,591,617 | ) | |
$ | (1,115,071 | ) | |
| 11 | % |
Net cash used in investing activities | |
$ | (15,563,826 | ) | |
$ | (537,050 | ) | |
$ | (15,026,776 | ) | |
| 2798 | % |
Net cash provided by financing activities | |
$ | 22,944,425 | | |
$ | 20,524,702 | | |
$ | 2,419,723 | | |
| 12 | % |
The increase in our cash and short term
investments was primarily due to our raising approximately $19.5 million, net through the sale of our common stock and warrants
and $4.2 million, net in our debt amendment transaction partially offset by our cash used in operations.
Net Cash Used in Operating Activities
The increase
in cash used in operating activities during 2014 as compared to 2013 was primarily the result of a $2,797,000 increase in our
net loss partially offset by changes in our operating assets and liabilities.
Net Cash Used in Investing Activities
The increase
in our use of cash in investing activities during 2014 as compared to 2013 was primarily due to approximately $15,007,000 of purchases,
net of maturities of short term investments using the proceeds from our January 2014 registered direct offering.
Net Cash Provided by Financing
Activities
In 2014 we raised
approximately $19,468,000, net through the sale of our common stock and warrants, $4,213,000 from our debt amendment transaction
and $1,795,000 from exercises of stock purchase warrants. These were partially offset by $1,929,000 of principal payments on our
long-term debt and the $426,000 payment of taxes related to stock option exercises.
In 2013 we raised
approximately $7,048,000, net through the sale of our common stock and warrants, $7,551,000 from the issuance of long-term debt
and $6,108,000 from exercises of stock purchase warrants.
Cash Flows – 2013 compared
to 2012
| |
Year Ended December 31, | | |
Increase (Decrease) | |
| |
2013 | | |
2012 | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
$ | 16,846,052 | | |
$ | 7,443,773 | | |
$ | 9,402,279 | | |
| 126 | % |
| |
| | | |
| | | |
| | | |
| | |
Net cash used in operating activities | |
$ | (10,591,617 | ) | |
$ | (8,477,700 | ) | |
$ | (2,113,917 | ) | |
| 25 | % |
Net cash used in investing activities | |
$ | (537,050 | ) | |
$ | (254,858 | ) | |
$ | (282,192 | ) | |
| 111 | % |
Net cash provided by financing activities | |
$ | 20,524,702 | | |
$ | 13,824,318 | | |
$ | 6,700,384 | | |
| 48 | % |
The increase in our cash and cash equivalents
was primarily due to proceeds of approximately $20,708,000 from our debt and equity transactions partially offset by our cash
used to fund our operations.
Net Cash Used in Operating Activities
The increase
in cash used in operating activities during 2013 as compared to 2012 was primarily related to the ramping up of our clinical trial
and other research and development efforts.
Net Cash Used in Investing Activities
The increase
in our cash used in investing activities during 2013 as compared to 2012 was primarily attributable to an increased level of property
and equipment purchases coupled with an increase in activity related to our patents.
Net Cash Provided by Financing
Activities
In 2013 we raised
approximately $7,048,000, net through the sale of our common stock and warrants, $7,551,000 from the issuance of long-term debt
and $6,108,000 from exercises of stock purchase warrants while in 2012 we raised approximately $13,889,000 from the issuance and
sale of our common stock and warrants.
Future Liquidity
and Needs
We
have incurred significant operating losses and negative cash flows since inception. We have not achieved profitability and may
not be able to realize sufficient revenue to achieve or sustain profitability in the future. We do not expect to be profitable
in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources
and must obtain significant additional capital resources in order to sustain our product development efforts, for acquisition of
technologies and intellectual property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory
approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, for general
and administrative expenses and other working capital requirements. We rely on cash balances and the proceeds from the offering
of our securities, exercise of outstanding warrants and grants to fund our operations.
We intend to pursue opportunities to obtain additional financing in the future through the
sale of our securities and additional research grants. We currently have two shelf registration statements that are effective.
On June 19, 2014, our shelf registration statement registering the sale of up to $100 million of our securities was declared effective
by the SEC. To date, we have not sold any securities under this shelf registration statement. On September 13, 2013, our shelf
registration statement (Registration No. 333-190936) registering the sale of up to $50 million of our securities was declared effective
by the SEC. To date, through February 28, 2014 we have sold or reserved for sale upon the exercise of outstanding warrants approximately
$47.2 million of securities under this shelf registration statement. Additionally, securities sold pursuant to our At the Market
Offering Agreement (see below) are being sold pursuant to this registration statement and accordingly, we have reserved the balance
of approximately $2.8 million of securities pursuant thereto. We anticipate conducting financing in the future based on our shelf
registration statement when and if financing opportunities arise.
In October 2013,
we entered into an At the Market Offering Agreement with T.R. Winston & Company as our sales agent pursuant to which we can
sell up to $25 million of our common stock. The At the Market Offering Agreement was entered into pursuant to a takedown from our
shelf registration statement declared effective on September 13, 2013 (Registration No. 333-190936). To date through February
28, 2015 we have sold 1,931,329 shares under such agreement at an average price per share of $3.07 resulting in gross proceeds
of approximately $5,938,000 and net proceeds of approximately $5,707,000. Future sales under our agreement are limited to approximately
$2.8 million which is the amount available under our shelf registration of which the At the Market Offering Agreement is part of.
The
source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more
specifically, our progress in our exploratory, preclinical and future clinical development programs. Funding may not be available
when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale
back or eliminate some or all of our research and product development programs, planned clinical trials, and/or our capital expenditures
or to license our potential products or technologies to third parties.
Contractual Obligations
As of December 31, 2014, our contractual obligations were as
follows:
Contractual Obligations | |
Less than 1 year | | |
1 - 3 Years | | |
3 - 5 Years | | |
More than 5
Years | | |
Total | |
Operating facility leases | |
$ | 190,324 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 190,324 | |
Long-term debt | |
| 1,154,151 | | |
| 4,914,687 | | |
| 3,420,420 | | |
| - | | |
| 9,489,258 | |
Total contractual obligations | |
$ | 1,344,475 | | |
$ | 4,914,687 | | |
$ | 3,420,420 | | |
$ | - | | |
$ | 9,679,582 | |
Off-balance Sheet Arrangements
None.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK |
Financial instruments that potentially
subject us to concentrations of credit risk consist primarily of cash equivalents and short-term investments. Our investment policy,
approved by our Board of Directors, limits the amount we may invest in any one type of investment issuer, thereby reducing credit
risk concentrations. In addition, our CDs are invested through the Certificate of Deposit Account Registry Service (“CDARS”)
program which reduces or eliminates our risk related to concentrations of investments above FDIC insurance levels. We limit our
credit and liquidity risks through our investment policy and through regular reviews of our portfolio against our policy. Because
of the short-term maturities, we do not believe that a one-half percentage point increase or decrease in interest rates would have
had a material effect on our interest income.
We are subject to interest rate risk on
our long-term debt which contains a floating interest rate based on Wall Street Journal published prime rate. For the year ended
December 31, 2014 a one percentage point increase in the prime rate would have increased our interest expense by approximately
$80,000.
Our foreign operations in China subject
us to changes in foreign exchange rates. Changes in rates for the year ended December 31, 2014 would not have had a material effect
as the operations were limited. Future changes to foreign exchange rates could have a material effect on us as our clinical trial
activity increases.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Neuralstem, Inc.
Germantown, Maryland
We have audited the
accompanying consolidated balance sheets of Neuralstem, Inc. (the “Company”) as of December 31, 2014 and 2013, and
the consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2014. We also have audited the Company’s internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an
opinion on the Company’s internal control over consolidated financial reporting based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits
of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neuralstem,
Inc. as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, Neuralstem, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Stegman & Company
Baltimore, Maryland
March 16, 2015
Neuralstem, Inc.
Consolidated Balance Sheets
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash and cash equivalents | |
$ | 12,518,980 | | |
$ | 16,846,052 | |
Short term investments | |
| 15,007,478 | | |
| - | |
Trade and other receivables | |
| 225,524 | | |
| 10,000 | |
Deferred financing fees, current portion | |
| 135,694 | | |
| 507,334 | |
Prepaid expenses | |
| 274,106 | | |
| 255,733 | |
Total current assets | |
| 28,161,782 | | |
| 17,619,119 | |
| |
| | | |
| | |
Property and equipment, net | |
| 301,265 | | |
| 230,971 | |
Patents, net | |
| 1,233,172 | | |
| 1,137,701 | |
Deferred financing fees, net of current portion | |
| 89,143 | | |
| 360,848 | |
Other assets | |
| 58,713 | | |
| 64,897 | |
Total assets | |
$ | 29,844,075 | | |
$ | 19,413,536 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 2,504,978 | | |
$ | 1,196,190 | |
Accrued bonuses | |
| 646,960 | | |
| 465,868 | |
Current portion of long-term debt, net of discount | |
| 730,012 | | |
| 2,763,121 | |
Derivative instruments | |
| - | | |
| 1,417,527 | |
Other current liabilities | |
| 126,745 | | |
| 93,426 | |
Total current liabilities | |
| 4,008,695 | | |
| 5,936,132 | |
| |
| | | |
| | |
Long-term debt, net of discount and current portion | |
| 8,056,470 | | |
| 4,934,210 | |
Other long term liabilities | |
| 59,574 | | |
| 124,995 | |
Total liabilities | |
| 12,124,739 | | |
| 10,995,337 | |
| |
| | | |
| | |
Commitments and contingencies (Note 10) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY | |
| | | |
| | |
Preferred stock, 7,000,000 shares authorized, zero shares issued and outstanding | |
| - | | |
| - | |
Common stock, $0.01 par value; 300 million shares authorized, 87,789,679 and 77,886,031 shares issued and outstanding in 2014 and 2013, respectively | |
| 877,897 | | |
| 778,860 | |
Additional paid-in capital | |
| 167,890,220 | | |
| 136,058,135 | |
Accumulated other comprehensive income | |
| 6,000 | | |
| 7,241 | |
Accumulated deficit | |
| (151,054,781 | ) | |
| (128,426,037 | ) |
Total stockholders' equity | |
| 17,719,336 | | |
| 8,418,199 | |
Total liabilities and stockholders' equity | |
$ | 29,844,075 | | |
$ | 19,413,536 | |
See accompanying notes to consolidated financial statements.
Neuralstem, Inc.
Consolidated Statements of Operations and
Comprehensive Loss
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Revenues | |
$ | 18,833 | | |
$ | 110,000 | | |
$ | 407,708 | |
| |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | |
Research and development costs | |
| 8,134,753 | | |
| 7,134,301 | | |
| 6,105,984 | |
General and administrative expenses | |
| 8,971,299 | | |
| 5,254,915 | | |
| 4,247,037 | |
Depreciation and amortization | |
| 348,630 | | |
| 244,725 | | |
| 211,143 | |
Total operating expenses | |
| 17,454,682 | | |
| 12,633,941 | | |
| 10,564,164 | |
Operating loss | |
| (17,435,849 | ) | |
| (12,523,941 | ) | |
| (10,156,456 | ) |
| |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | |
Interest income | |
| 67,651 | | |
| 68,000 | | |
| 34,154 | |
Interest expense | |
| (1,620,776 | ) | |
| (1,394,274 | ) | |
| (2,699 | ) |
Warrant modification expense | |
| (3,109,850 | ) | |
| (5,017,156 | ) | |
| - | |
Loss from change in fair value of derivative instruments | |
| (334,133 | ) | |
| (965,329 | ) | |
| - | |
Loss on debt extinguishment | |
| (445,787 | ) | |
| - | | |
| - | |
Litigation settlement | |
| 250,000 | | |
| 838 | | |
| 3,484 | |
Total other income (expense) | |
| (5,192,895 | ) | |
| (7,307,921 | ) | |
| 34,939 | |
| |
| | | |
| | | |
| | |
Net loss | |
$ | (22,628,744 | ) | |
$ | (19,831,862 | ) | |
$ | (10,121,517 | ) |
| |
| | | |
| | | |
| | |
Net loss per share - basic and diluted | |
$ | (0.26 | ) | |
$ | (0.27 | ) | |
$ | (0.17 | ) |
| |
| | | |
| | | |
| | |
Weighted average common shares outstanding - basic and diluted | |
| 87,086,345 | | |
| 72,279,210 | | |
| 58,153,929 | |
| |
| | | |
| | | |
| | |
Comprehensive loss: | |
| | | |
| | | |
| | |
Net loss | |
$ | (22,628,744 | ) | |
$ | (19,831,862 | ) | |
$ | (10,121,517 | ) |
Foreign currency translation adjustment | |
| (1,241 | ) | |
| 7,241 | | |
| - | |
Comprehensive loss | |
$ | (22,629,985 | ) | |
$ | (19,824,621 | ) | |
$ | (10,121,517 | ) |
See accompanying notes to consolidated financial statements.
Neuralstem,
Inc.
Consolidated
Statements of Changes In Stockholders’ Equity
| |
Common Stock Shares | | |
Common Stock Amount | | |
Additional Paid- In Capital | | |
Accumulated
Other
Comprehensive
Loss | | |
Accumulated Deficit | | |
Total Stockholders' Equity | |
Balance at January 1, 2012 | |
| 48,682,118 | | |
$ | 486,821 | | |
$ | 99,645,655 | | |
$ | - | | |
$ | (98,472,658 | ) | |
$ | 1,659,818 | |
Share based payments | |
| - | | |
| - | | |
| 1,369,886 | | |
| - | | |
| - | | |
| 1,369,886 | |
Issuance of common stock at $1.02 from warrants exercised | |
| 200,000 | | |
| 2,000 | | |
| 202,000 | | |
| - | | |
| - | | |
| 204,000 | |
Issuance of common stock for professional services, net of returned shares for amended agreement | |
| 174,209 | | |
| 1,742 | | |
| 173,296 | | |
| - | | |
| - | | |
| 175,038 | |
Issuance of common stock and warrants from capital raises, net of issuance costs of $1,274,592 | |
| 19,100,000 | | |
| 191,000 | | |
| 13,494,408 | | |
| - | | |
| - | | |
| 13,685,408 | |
Issuance of common stock from vested restricted stock units | |
| 32,987 | | |
| 330 | | |
| (330 | ) | |
| - | | |
| - | | |
| - | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (10,121,517 | ) | |
| (10,121,517 | ) |
Balance at December 31, 2012 | |
| 68,189,314 | | |
| 681,893 | | |
| 114,884,915 | | |
| - | | |
| (108,594,175 | ) | |
| 6,972,633 | |
Share based payments | |
| - | | |
| - | | |
| 1,665,155 | | |
| - | | |
| - | | |
| 1,665,155 | |
Issuance of common stock for warrant exercises, net of fees of $113,200 | |
| 5,302,935 | | |
| 53,029 | | |
| 5,979,277 | | |
| - | | |
| - | | |
| 6,032,306 | |
Issuance of common stock and replacement warrants as inducement for warrant exercises | |
| 72,440 | | |
| 724 | | |
| 5,016,432 | | |
| - | | |
| - | | |
| 5,017,156 | |
Issuance of common stock and warrants for professional services, net of forfeited shares | |
| 332,848 | | |
| 3,329 | | |
| 1,503,419 | | |
| - | | |
| - | | |
| 1,506,748 | |
Issuance of common stock and warrants from capital raises, net of issuance costs of $534,825 | |
| 3,988,494 | | |
| 39,885 | | |
| 7,008,937 | | |
| - | | |
| - | | |
| 7,048,822 | |
Foreign currency translation adjustments | |
| - | | |
| - | | |
| - | | |
| 7,241 | | |
| - | | |
| 7,241 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (19,831,862 | ) | |
| (19,831,862 | ) |
Balance at December 31, 2013 | |
| 77,886,031 | | |
| 778,860 | | |
| 136,058,135 | | |
| 7,241 | | |
| (128,426,037 | ) | |
| 8,418,199 | |
Share based payments | |
| - | | |
| - | | |
| 4,318,994 | | |
| - | | |
| - | | |
| 4,318,994 | |
Issuance of common stock from exercise of conversion feature of long term debt | |
| 805,972 | | |
| 8,060 | | |
| 991,940 | | |
| - | | |
| - | | |
| 1,000,000 | |
Issuance of common stock from exercise of warrants, stock options and restricted stock units, net | |
| 1,947,535 | | |
| 19,476 | | |
| 1,288,515 | | |
| - | | |
| - | | |
| 1,307,991 | |
Issuance of common stock and warrants from capital raises, net | |
| 7,122,022 | | |
| 71,220 | | |
| 19,489,214 | | |
| - | | |
| - | | |
| 19,560,434 | |
Reclassification of warrant classified as derivative liability | |
| - | | |
| - | | |
| 1,704,097 | | |
| - | | |
| - | | |
| 1,704,097 | |
Modification of executive warrant | |
| - | | |
| - | | |
| 3,109,850 | | |
| - | | |
| - | | |
| 3,109,850 | |
Issuance of common stock and warrants in conjunction with debt amendment, net | |
| 28,119 | | |
| 281 | | |
| 929,475 | | |
| - | | |
| - | | |
| 929,756 | |
Foreign currency translation adjustments | |
| - | | |
| - | | |
| - | | |
| (1,241 | ) | |
| - | | |
| (1,241 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (22,628,744 | ) | |
| (22,628,744 | ) |
Balance at December 31, 2014 | |
| 87,789,679 | | |
$ | 877,897 | | |
$ | 167,890,220 | | |
$ | 6,000 | | |
$ | (151,054,781 | ) | |
$ | 17,719,336 | |
See accompanying notes to consolidated financial statements
Neuralstem, Inc.
Consolidated Statements of Cash Flows
| |
For the Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Cash flows from operating activities: | |
| | | |
| | | |
| | |
Net loss | |
$ | (22,628,744 | ) | |
$ | (19,831,862 | ) | |
$ | (10,121,517 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 348,630 | | |
| 244,725 | | |
| 211,143 | |
Share based compensation expenses | |
| 4,320,073 | | |
| 2,331,401 | | |
| 1,610,845 | |
Amortization of deferred financing fees and debt discount | |
| 829,632 | | |
| 694,175 | | |
| - | |
Warrant modification expense | |
| 3,109,850 | | |
| 5,017,156 | | |
| - | |
Loss from change in fair value of warrant obligations | |
| 334,133 | | |
| 965,329 | | |
| - | |
Loss on debt extinguishment | |
| 445,787 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | |
Trade and other receivables | |
| (215,524 | ) | |
| (6,667 | ) | |
| 231,042 | |
Prepaid expenses | |
| 191,263 | | |
| 125,470 | | |
| 164,117 | |
Other assets | |
| 6,141 | | |
| (5,183 | ) | |
| 15,826 | |
Accounts payable and accrued expenses | |
| 1,382,447 | | |
| (116,750 | ) | |
| (644,022 | ) |
Accrued bonuses | |
| 181,092 | | |
| 3 | | |
| 24,309 | |
Other current liabilities | |
| (2,206 | ) | |
| 2,469 | | |
| 30,557 | |
Other long term liabilities | |
| (9,262 | ) | |
| (11,883 | ) | |
| - | |
Net cash used in operating activities | |
| (11,706,688 | ) | |
| (10,591,617 | ) | |
| (8,477,700 | ) |
| |
| | | |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | | |
| | |
Purchases of short-term investments | |
| (25,007,478 | ) | |
| - | | |
| - | |
Maturity of short-term investments | |
| 10,000,000 | | |
| - | | |
| - | |
Patent costs | |
| (348,455 | ) | |
| (411,688 | ) | |
| (215,638 | ) |
Purchase of property and equipment | |
| (207,893 | ) | |
| (125,362 | ) | |
| (39,220 | ) |
Net cash used in investing activities | |
| (15,563,826 | ) | |
| (537,050 | ) | |
| (254,858 | ) |
| |
| | | |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | | |
| | |
Proceeds from issuance of common stock from warrants exercised, net | |
| 1,794,865 | | |
| 6,107,842 | | |
| 204,000 | |
Proceeds from sale of common stock and warrants, net of issuance costs | |
| 19,467,857 | | |
| 7,048,822 | | |
| 13,685,408 | |
Payments of taxes on stock option exercises | |
| (426,212 | ) | |
| - | | |
| - | |
Proceeds from long-term debt transactions, net of issuance costs | |
| 4,212,561 | | |
| 7,551,329 | | |
| - | |
Payments of long-term debt | |
| (1,929,449 | ) | |
| - | | |
| - | |
Payments of short term notes payable | |
| (175,197 | ) | |
| (183,291 | ) | |
| (65,090 | ) |
Net cash provided by financing activities | |
| 22,944,425 | | |
| 20,524,702 | | |
| 13,824,318 | |
Effects of exchange rates on cash | |
| (983 | ) | |
| 6,244 | | |
| - | |
Net increase (decrease) in cash and cash equivalents | |
| (4,327,072 | ) | |
| 9,402,279 | | |
| 5,091,760 | |
| |
| | | |
| | | |
| | |
Cash and cash equivalents, beginning of period | |
| 16,846,052 | | |
| 7,443,773 | | |
| 2,352,013 | |
| |
| | | |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 12,518,980 | | |
$ | 16,846,052 | | |
$ | 7,443,773 | |
See accompanying notes to consolidated financial statements.
Neuralstem, Inc.
Consolidated Statements of Cash Flows
| |
For the Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Supplemental cash flow information: | |
| | | |
| | | |
| | |
Cash paid for interest | |
$ | 762,910 | | |
$ | 624,321 | | |
$ | 2,699 | |
Cash paid for income taxes | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | |
Supplemental schedule of non cash investing and financing activities: | |
| | | |
| | | |
| | |
Issuance of common stock for cashless exercise of warrants and options | |
$ | 1,208,653 | | |
$ | 587,500 | | |
$ | - | |
Issuance of common stock for conversion of long-term debt | |
$ | 1,000,000 | | |
$ | - | | |
$ | - | |
Financing of insurance premiums through note payable | |
$ | 210,722 | | |
$ | 183,472 | | |
$ | 146,452 | |
Issuance of common stock and warrants for fees related to debt transactions | |
$ | 159,954 | | |
$ | 848,421 | | |
$ | - | |
Issuance of warrants for vendor services | |
$ | - | | |
$ | 658,326 | | |
$ | - | |
Issuance of common stock for services, net of returned shares for amended agreement | |
$ | - | | |
$ | - | | |
$ | 175,038 | |
See accompanying notes to consolidated financial statements.
NEURALSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 Organization and Business
Nature of business
Neuralstem, Inc. and its subsidiary are
referred to as “Neuralstem,” the “Company,” “us,” or “we” throughout this report.
Beginning in 2013, our investment in, and the operations of, our wholly-owned and controlled subsidiary located in China are consolidated
in our consolidated financial statements; previously, all investments in China were expensed as incurred. The impacts of this change
were not material to any period presented.
Neuralstem is a biopharmaceutical 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. The Company was founded in
1997 and currently has laboratory and office space in Germantown, Maryland and laboratory facilities in San Diego, California and
in the People’s Republic of China.
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 proposed products by the marketplace,
and approval of the Company’s proposed products by various U.S. and foreign governmental agencies.
Note 2 Significant Accounting Policies and
Basis of Presentation
Basis of Presentation and Liquidity
Our
consolidated financial statements have been prepared in accordance with U.S. GAAP. The financial statements include the accounts
of the Company and our wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated.
Our
operations currently do not generate significant cash. Our management does not know when this will change. We have spent and will
continue to spend substantial funds in the research, development, clinical and pre-clinical testing of our stem cell and small
molecule product candidates with the goal of ultimately obtaining approval from the United States Food and Drug Administration
(the “FDA”), to market and sell our products. While we believe our long-term cash position is inadequate to fund all
of the costs associated with the full range of testing and clinical trials required by the FDA for our core product candidates,
we anticipate that our available cash and expected income will be sufficient to finance our current activities at least through
December 31, 2015.
No
assurance can be given that (i) FDA approval will ever be granted for us to market and sell our product candidates, or (ii)
if FDA approval is granted, that we will ever be able to sell our proposed products or be profitable.
Use
of Estimates
The
preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The consolidated financial statements
include significant estimates for the expected economic life and value of our licensed technology, our net operating loss carry
forward and related valuation allowance for tax purposes and our stock-based compensation related to employees and directors, consultants
and advisors, including investment banks, among other things. Because of the use of estimates inherent in the financial reporting
process, actual results could differ significantly from those estimates.
Fair Value Measurements
The carrying amounts of our short-term financial
instruments, which primarily include cash and cash equivalents, other short-term investments, accounts payable and accrued expenses,
approximate their fair values due to their short maturities. The fair value of our long-term indebtedness is estimated based on
the quoted prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining
maturities. The fair values of our derivative instruments were estimated using Level 3 unobservable inputs. See Note 3 for further
details.
Foreign Currency Translation
The functional currency of our wholly owned
foreign subsidiary is its local currency. Assets and liabilities of our foreign subsidiary are translated into United
States dollars based on exchange rates at the end of the reporting period; income and expense items are translated at the weighted
average exchange rates prevailing during the reporting period. Translation adjustments for subsidiaries that have not been
sold, substantially liquidated or otherwise disposed of are accumulated in other comprehensive income or loss, a component of stockholders'
equity. Transaction gains or losses are included in the determination of net loss.
Cash, Cash Equivalents and Credit Risk
Cash equivalents consist of investments in
low risk, highly liquid money market funds and certificates of deposit with original maturities of 90 days or less. Cash deposited
with banks and other financial institutions may exceed the amount of insurance provided on such deposits. If the amount of a deposit
at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in
part, if the bank were to fail.
Short-term investments consist entirely of
fixed income certificates of deposit (“CDs”) with original maturities of greater than 90 days and not more than one
year. The Company did not have any short-term investments at December 31, 2013.
Financial instruments that potentially subject
us to concentrations of credit risk consist primarily of cash equivalents and short-term investments. Our investment policy, approved
by our Board of Directors, limits the amount we may invest in any one type of investment issuer, thereby reducing credit risk concentrations.
In addition, our CDs are invested through the Certificate of Deposit Account Registry Service (“CDARS”) program which
reduces or eliminates our risk related to concentrations of investments above FDIC insurance levels. We limit our credit and liquidity
risks through our investment policy and through regular reviews of our portfolio against our policy. To date, we have not experienced
any loss or lack of access to cash in our operating accounts or to our cash equivalents and short-term investments.
Revenue
Recognition
Historically,
our revenue has been derived primarily from (i) selling treated samples for gene expression data from stem cell experiments, (ii)
providing services under various contracts and grants and (iii) licensing the use of our intellectual property to third parties.
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery of goods and services has occurred,
the price is fixed and determinable, and collection is reasonably assured.
Research
and Development
Research
and development costs are expensed as they are incurred. Research and development expenses consist primarily of costs associated
exclusively with the pre-clinical development and clinical trials of our product candidates.
Income
(Loss) per Common Share
Basic income (loss) per common share is computed
by dividing total net income (loss) available to common stockholders by the weighted average number of common shares outstanding
during the period.
For periods of net
income when the effects are dilutive, diluted earnings per share is computed by dividing net income available to common stockholders
by the weighted average number of shares outstanding and the dilutive impact of all dilutive potential common shares. Dilutive
potential common shares consist primarily of stock options, restricted stock units and common stock purchase warrants. The dilutive
impact of potential common shares resulting from common stock equivalents is determined by applying the treasury stock method.
Our unvested restricted shares contain non-forfeitable rights to dividends, and therefore are considered to be participating securities;
the calculation of basic and diluted income per share excludes net income attributable to the unvested restricted shares from the
numerator and excludes the impact of the shares from the denominator.
For all periods of
net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common
shares is anti-dilutive due to the net losses; accordingly, diluted loss per share is the same as basic loss per share for the
years ended December 31, 2014, 2013 and 2012. A total of approximately 40.4, 38.2 and 35.0 million potential dilutive shares have
been excluded in the calculation of diluted net income per share for the years ended December 31, 2014, 2013 and 2012, respectively
as their inclusion would be anti-dilutive.
Share-Based
Compensation
We account for share-based
compensation at fair value. Share-based compensation cost for stock options and warrants granted to employees and board members
is determined at the grant date using an option pricing model that uses level 3 unobservable inputs; share-based compensation cost
for restricted stock and restricted stock units granted to employees and board members is determined at the grant date based on
the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as
expense on a straight-line basis over the requisite service period.
Intangible
and Long-Lived Assets
We
assess impairment of our long-lived assets using a "primary asset" approach to determine the cash flow estimation
period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. No significant impairment
losses were recognized during the years ended December 31, 2014, 2013 and 2012.
Income Taxes
We account for income taxes using the asset
and liability approach, which requires the recognition of future tax benefits or liabilities on the temporary differences between
the financial reporting and tax bases of our assets and liabilities. A valuation allowance is established when necessary to reduce
deferred tax assets to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if
it is “more likely than not” that the position is sustainable based on its technical merits. Our policy is to recognize
interest and penalties on uncertain tax positions as a component of income tax expense.
Significant
New Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (FASB) issued ASU 2014-09 – Revenue from Contracts with Customers. This guidance is effective
for fiscal years beginning after December 15, 2016 and early adoption is not permitted. We have not yet determined the effects
of this new guidance on our financial statements.
In August 2014, the
FASB issued ASU 2014-15 – Presentation of Financial Statements – Going Concern. This guidance requires management
to evaluate on a regular basis whether any conditions or events have arisen that could raise substantial doubt about the entity’s
ability to continue as a going concern. This guidance is effective for fiscal years beginning after December 15, 2016 and early
adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.
Note
3 Fair Value Measurements
Fair value is the
price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most
advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks
the level of observability of inputs used in measuring fair value. These levels are:
| · | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments
traded in active markets. |
| · | Level 2 – inputs are based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the
Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and
discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange
rates, and forward and spot prices for currencies and commodities. |
| · | Level 3 – inputs are generally unobservable and typically reflect management's estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques,
including option pricing models and discounted cash flow models. |
Financial Assets and Liabilities Measured
at Fair Value on a Recurring Basis
We have segregated
our financial assets and liabilities that are measured at fair value into the most appropriate levels within the fair value hierarchy
based on the inputs used to determine the fair value at the measurement date.
The inputs used in
measuring the fair value of cash and cash equivalents are considered to be Level 1 in accordance with the three-tier fair value
hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority
of the Company’s funds. The fair value of other short-term financial instruments (primarily short-term investments, accounts
payable and certain accrued expenses) approximate their carrying values because of their short-term nature. The fair value of our
long-term indebtedness approximates its carrying value.
At December 31, 2013,
we had common stock purchase warrants issued in conjunction with our March 2013 debt offering (see Note 4) that were accounted
for as derivative instruments whose fair market value was determined using Level 3 inputs. These warrants were exercised in their
entirety in the first quarter of 2014. In addition, in 2013 we issued certain stock options that were subject to shareholder approval
at issuance and which approval was received later in 2013. These options were recorded as an accrued liability carried at fair
market value using Level 3 inputs.
The following table identifies the carrying
amounts of such assets and liabilities at December 31, 2013:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Liabilities | |
| | |
| | |
| | |
| |
Derivative instruments - stock purchase warrants | |
$ | - | | |
$ | - | | |
$ | 1,417,527 | | |
$ | 1,417,527 | |
| |
$ | - | | |
$ | - | | |
$ | 1,417,527 | | |
$ | 1,417,527 | |
We had no financial assets or liabilities
measured at fair value on a recurring basis at December 31, 2014.
The following table presents the activity
for those items measured at fair value on a recurring basis using Level 3 inputs:
| |
Derivative Instruments – Stock Purchase Warrants | | |
Stock Options | |
Balance at January 1, 2013 | |
$ | - | | |
$ | - | |
Issuance | |
| 452,198 | | |
| 35,000 | |
Satisfaction of contingency | |
| - | | |
| (54,881 | ) |
Change in fair value | |
| 965,329 | | |
| 19,881 | |
Balance at December 31, 2013 | |
| 1,417,527 | | |
| - | |
Change in fair value | |
| 334,133 | | |
| - | |
Exercise of underlying warrants | |
| (1,751,660 | ) | |
| - | |
Balance at December 31, 2014 | |
$ | - | | |
$ | - | |
The (gains) losses
resulting from the changes in the fair value of the derivative instruments are classified as the “change in the fair value
of derivative instruments” in the accompanying consolidated statements of operations and comprehensive loss. The change in
fair value of the contingent stock options is classified as share-based compensation. The fair values of both the common stock
purchase warrants and the contingent stock options are determined based on the Black-Scholes option pricing model for “plain
vanilla” stock options and other option pricing models as appropriate, and includes the use of unobservable inputs such as
the expected term, anticipated volatility and expected dividends. Changes in any of the assumptions related to the unobservable
inputs identified above may change the embedded conversion options’ fair value; increases in expected term, anticipated volatility
and expected dividends generally result in increases in fair value, while decreases in these unobservable inputs generally result
in decreases in fair value.
Non-Financial
Assets and Liabilities Measure at Fair Value on a Recurring Basis
We have no non-financial assets and liabilities
that are measured at fair value on a recurring basis.
Non-Financial
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We
measure our long-lived assets, including property and equipment and patent assets, at fair value on a nonrecurring basis. These
assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. No such fair value impairment was
recognized in the years ended December 31, 2014, 2013 or 2012.
Note
4 Debt
In
March 2013, we entered into a loan and security agreement for an initial $8 million term loan with an additional $2 million of
borrowing capacity if certain conditions involving new partnerships are met. The loan is collateralized by substantially all of
our assets, including our intellectual property.
The
loan provided for interest at a variable rate based on prime with a floor of 11% and matured in June 2016. The variable rate was
11% and did not change during the period through the loan amendment. The loan provided for interest only payments through December
2013 at which time monthly principal and interest payments of approximately $300,000 were due through maturity. The loan resulted
in net proceeds of approximately $7,551,000 after origination and other cash fees and expenses related to the closing of the loan.
In
conjunction with the loan and security agreement, we issued the lender a five-year common stock purchase warrant to purchase 648,809 shares
of common stock at an exercise price of $1.0789 per share. This warrant contained non-standard anti-dilution protection and, consequently,
was being accounted for as a derivative instrument, recorded at fair market value each period (see Note 3). The allocation of proceeds
to this warrant resulted in a debt discount which was amortized as interest expense over the term of the debt using the effective
interest method. The warrant was exercised in the first quarter of 2014.
We
also incurred expenses with various third parties in connection with the debt issuance, consisting of approximately $449,000 in
cash, 350,650 shares of common stock valued at approximately $396,000, and a five-year common stock purchase warrant to purchase
648,798 shares at an exercise price of $1.07892 per share. The warrant is classified as equity. Fees related to the debt offering
are recorded as deferred financing fees and are being amortized as interest expense over the term of the debt using the effective
interest method.
The
loan and security agreement provided for a conversion feature whereby the lender or the Company could each convert up to a maximum of $1 million
in principal payments into common stock of the Company. In 2014, the lender elected to convert the maximum principal payments of
$1 million into 805,972 shares of our common stock in accordance with the terms of the loan and security agreement.
In October 2014, we
entered into an agreement with the existing lender to refinance and amend the terms of our loan and security agreement.
The amended loan provided for refinancing of approximately $5.6 million of outstanding balance of the initial loan coupled with
approximately $4.4 million of new principal for a total of $10 million in principal. The amended loan provides for a variable interest
rate based on prime with a floor of 10% and matures in April 2017. The loan provides for interest only payments through September
2015; payments of principal and interest of approximately $461,000 from October 2015 through March 2017 and a final balloon payment
of approximately $2.1 million in April 2017. The loan amendment generated approximately $4.3 million in net proceeds after fees
and expenses. The loan amendment is accounted for as a debt extinguishment in accordance with guidance provided for in ASC 470,
Debt resulting in a loss on extinguishment of approximately $446,000. In conjunction with the loan amendment we recorded a
debt discount relating to the beneficial conversion feature. Such discount is being amortized as interest expense over the term
of the debt using the effective interest method.
In
conjunction with the loan amendment, we issued the lender a five-year common stock purchase warrant to purchase 75,188 shares of
common stock at an exercise price of $2.66 per share. The warrant contains standard anti-dilution protection but does not contain
any anti-dilution protection for subsequent offerings. The value of the warrant was accounted for in calculating the loss on extinguishment.
We
also incurred expenses with various third parties in connection with the loan amendment, consisting of approximately $86,000 in
cash, 28,119 shares of common stock valued at approximately $80,000, and a three-year common stock purchase warrant to purchase
58,141 shares at an exercise price of $2.66 per share. The warrant is classified as equity and has terms substantially similar
to the lender warrant. These fees related to the loan amendment are recorded as deferred financing fees and are being amortized
as interest expense over the term of the debt using the effective interest method.
At
December 31, 2014, remaining principal payments due under this loan are approximately $1,154,000, $4,915,000 and $3,420,000 in
2015, 2016 and 2017, respectively.
Note
5 Stockholders’ Equity
We
have granted share-based compensation awards to employees, board members and service providers. Awards may consist of common stock,
restricted common stock, restricted common stock units, warrants, or stock options. Our stock options and warrants have lives of
up to ten years from the grant date. The stock options and warrants vest either upon the grant date or over varying periods of
time. The stock options we grant provide for option exercise prices equal to or greater than the fair market value of the common
stock at the date of the grant. Restricted stock units grant the holder the right to receive fully paid common shares with various
restrictions on the holder’s ability to transfer the shares. Vesting of the restricted stock units is similar to that of
stock options. As of December 31, 2014, we have approximately 44.5 million shares of common stock reserved for issuance of such
awards.
We
record share-based compensation expense on a straight-line basis over the requisite service period. Share-based compensation expense included
in the statements of operations was as follows:
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Research and development costs | |
$ | 968,326 | | |
$ | 932,200 | | |
$ | 655,303 | |
General and administrative expenses | |
| 3,351,747 | | |
| 1,399,201 | | |
| 955,542 | |
Total | |
$ | 4,320,073 | | |
$ | 2,331,401 | | |
$ | 1,610,845 | |
No
income tax benefit was recognized in the consolidated statements of operations for stock-based compensation for the years presented
due to the Company’s net loss position.
Stock
Options
A
summary of stock option activity and related information for the year ended December 31, 2014 follows:
| |
Number of Options | | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Contractual Life (in years) | | |
Aggregate Intrinsic Value | |
| |
| | |
| | |
| | |
| |
Outstanding at January 1, 2014 | |
| 18,577,207 | | |
$ | 1.79 | | |
| 5.8 | | |
$ | 24,000,710 | |
Granted | |
| 1,014,689 | | |
$ | 3.20 | | |
| | | |
| | |
Exercised | |
| (322,518 | ) | |
$ | 0.89 | | |
| | | |
$ | 1,311,191 | |
Forfeited/Expired | |
| (282,983 | ) | |
$ | 1.20 | | |
| | | |
| | |
Outstanding at December 31, 2014 | |
| 18,986,395 | | |
$ | 1.89 | | |
| 5.1 | | |
$ | 20,306,807 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at December 31, 2014 | |
| 14,414,653 | | |
$ | 2.07 | | |
| 4.3 | | |
$ | 13,902,619 | |
| |
| | | |
| | | |
| | | |
| | |
Vested and expected to vest at December 31, 2014 | |
| 18,977,853 | | |
$ | 1.89 | | |
| 5.1 | | |
$ | 20,306,479 | |
Range of Exercise Prices | |
Number of Options Outstanding | | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Contractual Life (in years) | | |
Aggregate Intrinsic Value | |
$0.50 - $1.00 | |
| 7,000,000 | | |
$ | 0.80 | | |
| 5.6 | | |
$ | 13,440,000 | |
$1.01 - $2.00 | |
| 4,171,336 | | |
$ | 1.19 | | |
| 6.7 | | |
| 6,377,415 | |
$2.01 - $3.00 | |
| 2,168,333 | | |
$ | 2.49 | | |
| 4.7 | | |
| 489,392 | |
$3.01 - $5.00 | |
| 5,646,726 | | |
$ | 3.54 | | |
| 3.6 | | |
| - | |
| |
| 18,986,395 | | |
$ | 1.89 | | |
| 5.1 | | |
$ | 20,465,807 | |
The
Company uses the Black-Scholes option pricing model for “plain vanilla” options and other pricing models as appropriate
to calculate the fair value of options. Significant assumptions used in these models include:
|
Year Ended December 31, |
|
2014 |
|
2013 |
|
2012 |
|
|
|
|
|
|
Annual dividend |
- |
|
- |
|
- |
Expected life (in years) |
4.0 - 8.5 |
|
3.0 - 6.5 |
|
2.0 - 4.0 |
Risk free interest rate |
1.12% - 2.50% |
|
0.29% - 2.43% |
|
0.24% - 0.65% |
Expected volatility |
68.8% - 100.0% |
|
65.1% - 77.5% |
|
55.5% - 77.4% |
The Company estimates
the expected term using the "simplified-method" as it does not have sufficient historical exercise data to provide a
reasonable estimate.
The
options granted in the years ended December 31, 2014, 2013 and 2012 had weighted average grant date fair values of $1.90, $1.01
and $0.49, respectively. The total fair value of the options vested during the years ended December 31, 2014, 2013 and 2012 was
approximately $1,814,000, $1,170,000 and $557,000, respectively.
Unrecognized
compensation cost for unvested stock option awards outstanding at December 31, 2014 was approximately $4,409,000 to be recognized
over approximately 2.1 years.
RSUs
We
have granted restricted stock units (RSUs) that entitle the holders to receive shares of our common stock upon vesting and subject
to certain restrictions regarding the exercise of the RSUs and the holders’ ability to transfer the shares received upon
exercise. The fair value of RSUs granted is based upon the market price of the underlying common stock as if they were vested and
issued on the date of grant.
A
summary of our RSU activity for the year ended December 31, 2014 follows:
| |
Number of RSU's | | |
Weighted- Average Grant Date Fair Value | |
| |
| | |
| |
Outstanding at January 1, 2014 | |
| 401,625 | | |
$ | 2.03 | |
Granted | |
| 50,000 | | |
$ | 3.31 | |
Vested and converted to common shares | |
| (568 | ) | |
$ | 1.19 | |
Forfeited | |
| (3,782 | ) | |
$ | 1.19 | |
Outstanding at December 31, 2014 | |
| 447,275 | | |
$ | 2.18 | |
| |
| | | |
| | |
Exercisable at December 31, 2014 | |
| 435,783 | | |
$ | 2.16 | |
The
RSUs granted in the years ended December 31, 2014, 2013 and 2012 had weighted average grant date fair values of $3.31, $1.14, and
$1.19, respectively. The total fair value of the shares vested during the years ended December 31, 2014, 2013 and 2012 was approximately
$142,000, $254,000 and $248,000, respectively.
Unrecognized
compensation cost for unvested RSUs outstanding at December 31, 2014 was approximately $22,000 to be recognized over approximately
0.3 years.
Stock
Purchase Warrants
Warrants
to purchase common stock were issued to certain officers, directors, stockholders and service providers. We have also issued warrants
in conjunction with debt offerings and equity raises and at various times replacement warrants were issued in conjunction with
warrant exercises.
A
summary of warrant activity for the year ended December 31, 2014 follows:
| |
Number of Warrants | | |
Weighted- Average Exercised Price | | |
Weighted- Average Remaining Contractual Life (in years) | | |
Aggregate
Intrinsic Value | |
| |
| | |
| | |
| | |
| |
Outstanding at January 1, 2014 | |
| 19,586,819 | | |
$ | 1.96 | | |
| 3.4 | | |
$ | 21,146,495 | |
Granted | |
| 3,719,764 | | |
$ | 3.62 | | |
| 4.0 | | |
| | |
Exercised | |
| (1,624,449 | ) | |
$ | 1.36 | | |
| | | |
| | |
Forfeited | |
| (259,788 | ) | |
$ | 1.23 | | |
| | | |
| | |
Outstanding at December 31, 2014 | |
| 21,422,346 | | |
$ | 2.30 | | |
| 3.8 | | |
$ | 15,984,739 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at December 31, 2014 | |
| 21,347,346 | | |
$ | 2.30 | | |
| 3.8 | | |
$ | 15,984,739 | |
The
stock purchase warrants granted in the years ended December 31, 2014, 2013 and 2012 had a weighted average grant date fair value
of $2.07, $0.82 and $0.47, respectively. All stock purchase warrants were classified as equity with the exception of the warrant
issued to the lender in the March 2013 debt transaction (see Note 4).
Stock
purchase warrants exercised in 2014, 2013 and 2012 had an intrinsic value of approximately $4,287,000, $3,550,000 and $30,000,
respectively.
In
2014 we modified certain warrants held by our Chief Science Officer. Such modification extended the term of the warrants by an
additional five years and resulted in an expense of approximately $3.1 million included in other expense in our statements of operations
for the year ended December 31, 2014.
Common Stock
In June 2014, the
Company’s shareholders approved a 150,000,000 increase in the authorized shares of common stock bringing the total authorized
shares of common stock to 300,000,000.
In February 2012, the Company completed
a registered direct offering of 5,200,000 shares of common stock at a price of $1.00 per share, and 5,200,000 common stock purchase
warrants, each with an exercise price of $1.02 per share and exercisable starting six months from the issuance date for a term
of five years. The Company received aggregate gross proceeds of $5,200,000, which will be used for general corporate purposes,
including ongoing U.S. clinical trials. Net proceeds were approximately $4,877,000. The warrants are classified within equity.
In March 2012, pursuant to the terms of a consulting
agreement entered into in January of 2010 and amended May 14, 2010 and February 7, 2011, we issued: (i) 180,000 common shares;
and (ii) a common stock purchase warrant entitling the holder to purchase 510,821 shares of common stock at $0.99 per share as
compensation for business advisory services. The warrant was exercisable immediately, expires on January 6, 2022, and is
freely assignable in whole or in part. We also agreed to register the shares underlying the warrant with the SEC for resale.
The warrant was valued at approximately $166,000 and is classified within equity.
In August 2012, the Company completed an underwritten
public offering of 6,900,000 shares of common stock at a price of $0.40 per share. The Company received aggregate gross proceeds
of $2,760,000, which will be used for general corporate purposes, including ongoing clinical trials. Net proceeds were approximately
$2,441,000. In connection with the offering, the Company issued the underwriter a common stock purchase warrant to purchase 300,000
shares; the warrant has an exercise price of $0.50 per share and is exercisable for five years. The warrant is classified within
equity.
In September 2012, the Company completed a registered direct offering
of 7,000,000 shares of common stock at a price of $1.00 per share. The Company received aggregate gross proceeds of $7,000,000,
which will be used for general corporate purposes, including ongoing clinical trials. Net proceeds were approximately $6,368,000.
In connection with the offering, the Company issued the placement agent a common stock purchase warrant to purchase 350,000 shares;
the warrant has an exercise price of $1.25 per share and is exercisable for five years. The warrant is classified within equity.
In October of 2012,
we entered into a consulting agreement related to the marketing of NS-189, our small molecule compound to other pharmaceutical
and drug development companies. As partial consideration for the services to be rendered, we issued an aggregate of 25,000 shares
of our common stock which vests over the initial five month term of the agreement.
In December 2012,
we issued 200,000 shares of common stock as a result of a warrant holder exercising their common stock purchase warrant. The stock
was issued at $1.02 and generated approximately $204,000 in net proceeds.
In January and February
2013, we issued 258,000 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.25 per share
and we received approximately $323,000 in net proceeds from the exercises. In conjunction with the exercises, we modified the warrants
to reduce the exercise price to $1.25 and issued 258,000 replacement warrants. The replacement warrants have an exercise price
of $1.25 and expire in March 2020. We recognized an expense for the value of the replacement warrants and the reduction of the
exercise price on the original warrants. Such expense is classified as warrant modification expense. The warrants are classified
within equity.
In March 2013, we
issued 350,650 shares of common stock and 1,297,607 common stock purchase warrants to various parties in conjunction with our debt
transaction (see Note 4).
In May 2013, we issued
440,000 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.07 per share and we received
approximately $433,000 in net proceeds from the exercises. In conjunction with the exercise, we modified the warrants to reduce
the exercise price to $1.07 and issued 440,000 replacement warrants. The replacement warrants have an exercise price of $1.25 and
expire in May 2016. We recognized expense for the value of the replacement warrants and the reduction of the exercise price on
the original warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
In May 2013, we issued
689,675 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.25 per share and we received
approximately $844,000 in net proceeds from the exercises. In conjunction with the exercises, we modified the warrants to reduce
the exercise price to $1.25 and issued 689,675 replacement warrants. The replacement warrants have an exercise price of $1.25 and
expire in March 2020. We recognized an expense for the value of the replacement warrants and the reduction of the exercise price
on the original warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
In May and June 2013,
we issued 378,809 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.25 per share and
we received approximately $474,000 in net proceeds from the exercises. In conjunction with the exercise, we issued 378,809 replacement
warrants. The replacement warrants have an exercise price of $1.25 and expire in March 2020. We recognized an expense for the value
of the replacement warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
In May and June 2013,
we issued 300,000 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.02 and we received
approximately $306,000 in net proceeds from the exercises.
In July 2013, we issued
942,520 shares of our common stock upon the exercise of outstanding warrants. The shares were issued at $1.25 per share and we
received approximately $1,178,000 in net proceeds from the exercises. In conjunction with the exercises, we modified 782,005 of
the warrants to reduce the exercise price to $1.25 and issued 942,520 replacement warrants. The replacement warrants have an exercise
price of $1.25 and expire in March 2020. We recognized an expense for the value of the replacement warrants and the reduction of
the exercise price on the original warrants; such expense is classified as warrant modification expense. The warrants are classified
within equity.
In July 2013, we issued
100,000 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.02 and we received approximately
$102,000 in net proceeds from the exercise.
In September 2013,
we issued 1,448,798 shares of common stock upon the exercise of outstanding warrants. The shares were issued at $1.25 per share
(800,000 shares) and $1.08 per share (648,798 shares) and we received approximately $1,700,000 in net proceeds from the exercises.
In conjunction with the exercise, we issued an additional 72,440 shares of our common stock as a commission for exercise. We recognized
an expense for the value of the additional common stock; such expense is classified as warrant modification expense.
In September and December
2013, we issued 344,000 shares of common stock upon the exercise of outstanding warrants. Of these shares, 340,000 shares of stock
were issued at $2.13 while 4,000 shares of stock were issued at $1.56. We received approximately $730,000 net proceeds from the
exercises.
In September 2013,
we issued 401,133 shares of our common stock as a result of the cashless exercise of 650,000 outstanding common stock purchase
warrants with an average strike price of $0.90. The exercises resulted in 248,867 warrants being forfeited and we received no proceeds.
In September 2013,
we completed a registered direct offering of 2,847,500 shares of common stock at a price of $1.60 per share. We received aggregate
gross proceeds of $4,556,000 and net proceeds of approximately $4,242,000 from the offering. In connection with the offering, we
issued common stock purchase warrants to purchase 1,423,750 shares of our common stock; the warrants have an exercise price of
$2.00 and a term of five years. Additionally, we issued a common stock purchase warrant to the placement agent to purchase up to
170,850 shares; the warrant has an exercise price of $2.00 per share and term of 19 months. The warrants are classified within
equity.
In November and December
2013, we issued 1,140,994 shares of common stock as a result of sales under our At the Market Offering Agreement. The shares were
sold at an average price of $2.64 per share and generated approximately $2,895,000 in net proceeds.
In January, 2014,
we closed a registered direct offering of 6,872,859 shares of common stock at a price of $2.91 per share. We received aggregate
gross proceeds of $20 million and net proceeds of approximately $18,630,000 from the offering. In connection with the offering,
we also issued 3,436,435 common stock purchase warrants; the warrants have an exercise price of $3.64, a term of five years and
are classified within equity. This offering was made pursuant to our $50 million shelf registration statement declared effective
by the SEC on September 13, 2013 (Registration No. 333-190936). Additionally, as a result of this transaction an advisor to the
Company met certain capital raising milestones and consequently, the term of their common stock purchase warrant was extended to
5 years.
In 2014, we issued
249,163 shares of common stock as a result of sales under our At the Market Offering Agreement. The shares were sold at an average
price of $3.55 per share and we received approximately $838,000 in net proceeds.
In 2014, we issued
a total of 1,234,428 shares of our common stock upon the exercise of outstanding common stock purchase warrants and stock options.
The warrants and options were exercised at an average exercise price of $1.44. We received approximately $1,714,000 of net proceeds
from the exercises.
In 2014, we
issued a total of 712,539 shares of our common stock upon the cashless and partial-cashless exercise of 1,194,372 outstanding common
stock purchase warrants and stock options. The warrants and options were exercised at an average price of $1.03. We received approximately
$20,000 of net proceeds from the exercises.
In 2014, we issued
568 shares of common stock upon conversion of certain outstanding RSU’s. We received no proceeds from this transaction.
In
2014, we issued 805,972 shares of common stock upon the conversion by the lender of $1 million of principal payments due under
our March 2013 long-term debt in accordance with the terms of the loan and security agreement (see Note 4). We received no such
proceeds from this conversion.
In October 2014, we issued 28,119
shares of common stock and common stock purchase warrants to purchase 133,329 to various parties in conjunction with our loan amendment
(see Note 4).
Note 6 Property and Equipment
The major classes of property and equipment consist
of the following at December 31:
| |
2014 | | |
2013 | |
Furniture and fixtures | |
$ | 22,603 | | |
$ | 21,036 | |
Computers and office equipment | |
| 100,105 | | |
| 58,741 | |
Lab equipment | |
| 661,789 | | |
| 497,328 | |
| |
| 784,497 | | |
| 577,105 | |
Less accumulated depreciation | |
| (483,232 | ) | |
| (346,134 | ) |
Property and equipment, net | |
$ | 301,265 | | |
$ | 230,971 | |
The above includes approximately $77,000 of equipment located at
our research facility in China. Property and equipment are recorded at cost and are depreciated using the straight-line method
over the estimated useful lives of the respective assets. Depreciation expense for the years ended December 31, 2014, 2013 and
2012 was approximately $137,000, $126,000 and $101,000, respectively.
Note 7 Intangible Assets
The Company holds
patents related to its stem cell and small molecule technologies. Patent costs are capitalized and are being amortized over the
life of the patents. The weighted average remaining unamortized life of issued patents was approximately 9.8, years at December
31, 2014. 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 years ended December 31, 2014, 2013 and 2012, no significant impairment losses were recognized. The Company’s
intangible assets and accumulated amortization consisted of the following at December 31, 2014 and 2013:
| |
2014 | | |
2013 | |
| |
Gross | | |
Accumulated Amortization | | |
Net | | |
Gross | | |
Accumulated Amortization | | |
Net | |
Patent asset | |
$ | 1,822,037 | | |
$ | (588,865 | ) | |
$ | 1,233,172 | | |
$ | 1,539,349 | | |
$ | (401,648 | ) | |
$ | 1,137,701 | |
Amortization expense for the years ended December 31, 2014, 2013
and 2012 was approximately $211,000, $119,000 and $110,000, respectively.
The expected average future annual amortization expense over the
next five years is approximately $139,000 based on current balances of our intangible assets.
Note 8 Income Taxes
Our provision for income taxes for 2014, 2013 and 2012 consists
of the following:
| |
2014 | | |
2013 | | |
2012 | |
Current provision: | |
| | | |
| | | |
| | |
Federal | |
$ | - | | |
$ | - | | |
$ | - | |
State | |
| - | | |
| - | | |
| - | |
Foreign | |
| - | | |
| - | | |
| - | |
Total current provision | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Deferred provision (benefit): | |
| | | |
| | | |
| | |
Federal | |
| (5,563,694 | ) | |
| (4,436,239 | ) | |
| (3,537,536 | ) |
State | |
| (61,835 | ) | |
| 502,696 | | |
| (505,362 | ) |
Foreign | |
| - | | |
| - | | |
| - | |
Total deferred provision (benefit) | |
| (5,625,529 | ) | |
| (3,933,543 | ) | |
| (4,042,898 | ) |
Change in valuation allowance | |
| 5,625,529 | | |
| 3,933,543 | | |
| 4,042,898 | |
Consolidated income tax provision | |
$ | - | | |
$ | - | | |
$ | - | |
We provide a full valuation allowance on our
net deferred tax assets 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 asset reversal periods.
The difference between income taxes computed
by applying the statutory federal income tax rate to consolidated losses before income taxes and the consolidated provision for
income taxes is attributable to the following:
| |
2014 | | |
2013 | | |
2012 | |
Federal statutory rate | |
| (34.0 | %) | |
| (34.0 | %) | |
| (34.0 | %) |
State income taxes, net of Federal benefits | |
| (4.5 | %) | |
| (5.3 | %) | |
| (5.0 | %) |
Warrant modification/inducement expense | |
| 5.3 | % | |
| 9.9 | % | |
| 0.0 | % |
Other | |
| 8.3 | % | |
| 9.5 | % | |
| (0.9 | %) |
Valuation allowance | |
| 24.9 | % | |
| 19.9 | % | |
| 39.9 | % |
Total | |
| 0.0 | % | |
| 0.0 | % | |
| 0.0 | % |
The tax effects of significant temporary
differences representing deferred tax assets as of December 31, 2014 and 2013:
| |
2014 | | |
2013 | |
Net operating loss carryforwards | |
$ | 36,008,206 | | |
$ | 31,541,018 | |
Stock based compensation expense | |
| 11,183,210 | | |
| 9,923,714 | |
Tax credit carryforwards and other | |
| 1,139,961 | | |
| 1,241,115 | |
| |
| 48,331,377 | | |
| 42,705,847 | |
| |
| | | |
| | |
Valuation allowance | |
| (48,331,377 | ) | |
| (42,705,847 | ) |
Net deferred tax assets | |
$ | - | | |
$ | - | |
The Company had Federal net operating loss
(“NOL”) carryforwards of approximately $95.4 million and $82.0 million, excluding stock-based compensation NOLs, at
December 31, 2014 and 2013, respectively, which will expire beginning in 2015. The Company also has certain Federal tax credit
carryforwards that will expire through 2034. The timing and manner in which these net operating loss carryforwards and credits
may be used in any year will be limited to the Company’s ability to generate future earnings and also may be limited by certain
provisions in the U.S. tax code. The Company has not identified any uncertain tax positions and did not recognize any adjustments
for unrecognized tax benefits. The Company remains subject to examination for income tax returns dating back to 2011.
Note 9 Selected Quarterly Data (Unaudited)
The following represents the Company’s unaudited quarterly
results for the years ended December 31:
| |
Quarter Ended | |
| |
2014 | |
| |
March 31 | | |
June 30 | | |
September 30 | | |
December 31 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | 4,167 | | |
$ | 5,000 | | |
$ | 5,000 | | |
$ | 4,666 | |
Operating loss | |
$ | (5,176,901 | ) | |
$ | (3,511,238 | ) | |
$ | (4,106,745 | ) | |
$ | (4,640,965 | ) |
Net loss | |
$ | (5,919,057 | ) | |
$ | (6,751,282 | ) | |
$ | (4,455,237 | ) | |
$ | (5,503,168 | ) |
Net loss per share - basic and diluted | |
$ | (0.07 | ) | |
$ | (0.08 | ) | |
$ | (0.05 | ) | |
$ | (0.06 | ) |
| |
Quarter Ended | |
| |
2013 | |
| |
March 31 | | |
June 30 | | |
September 30 | | |
December 31 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | 102,500 | | |
$ | 2,500 | | |
$ | 2,500 | | |
$ | 2,500 | |
Operating loss | |
$ | (2,891,780 | ) | |
$ | (3,235,602 | ) | |
$ | (3,633,986 | ) | |
$ | (2,762,573 | ) |
Net loss | |
$ | (3,590,087 | ) | |
$ | (6,251,630 | ) | |
$ | (6,686,957 | ) | |
$ | (3,303,188 | ) |
Net loss per share - basic and diluted | |
$ | (0.05 | ) | |
$ | (0.09 | ) | |
$ | (0.09 | ) | |
$ | (0.04 | ) |
The sum of the quarterly per share amounts does not equal the annual
amounts due to changes in the weighted average number of common shares outstanding during the year.
Note 10 Commitments and Contingencies
We currently lease three facilities located
in the United States. Our executive offices and primary research facilities are located at 20271 Goldenrod Lane, Germantown, Maryland.
We lease these facilities consisting of approximately 2,700 square feet. This lease provides for monthly lease payments of approximately
$9,000 per month with the term expiring on December 31, 2015.
In 2011, we entered into a lease, consisting
of approximately 3,000 square feet of additional research space in San Diego, California. This lease provides for current monthly
payments of approximately $7,200 and expires on August 31, 2015.
In 2014, we entered into a lease for additional
research space in San Diego, California. This lease provides for monthly payments of approximately $3,000 per month plus certain
additional monthly fees to be determined based on usage. This lease expires on August 31, 2015
We also lease a research facility in People’s
Republic of China. This lease expired on September 30, 2014 and is currently month-to-month with lease payments of approximately,
$2,000 per month.
Future minimum payments under all leases at
December 31, 2013 are as follows:
Year | |
Amount | |
2015 | |
$ | 190,324 | |
2016 | |
| - | |
2017 | |
| - | |
2018 | |
| - | |
2019 | |
| - | |
2020 and thereafter | |
| - | |
Total minimum payments | |
$ | 190,324 | |
The Company recognized approximately $257,000,
$277,000 and $240,000, in rent expense for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company is currently obligated under two
written employment agreements with our Chief Executive Officer (“CEO”) and Chief Scientific Officer (“CSO”).
Both agreements terminate on October 31, 2017. Pursuant to the CEOs agreement, he receives a salary of $407,000 per annum
and in the event of termination prior to the completion of the agreement the Company would pay the CEO the greater of his remaining
compensation due under the agreement or one million dollars ($1,000,000). Pursuant to the CSO’s agreement, he receives
$750,000 per annum and in the event of termination prior to the completion of the agreement the Company would pay the CSO the greater
of the remaining compensation due under the agreement or one million dollars ($1,000,000). In addition, pursuant to both
the agreements any and all stock options, warrants, restricted stock or restricted stock units granted would accelerate and vest
immediately in the event the agreements are terminated early.
On May 7, 2008, we
filed suit against StemCells, Inc., StemCells California, Inc. (collectively "StemCells") and Neurospheres Holding Ltd.
in U.S. District Court for the District of Maryland, alleging that U.S. Patent No. 7,361,505 (the "'505 patent") is invalid,
not infringed, and unenforceable. See Civil Action No. 08-1173. On May 13, 2008 we filed an Amended Complaint seeking declaratory
judgment that U.S. Patent No. 7,155,418 (the "'418 patent") is invalid and not infringed and that certain statements
made by our CEO are not trade libel or do not constitute unfair competition. On September 11, 2008, StemCells filed its answer
asserting counterclaims of infringement for the '505 patent, the '418 patent, and state law claims for trade libel and unfair competition.
This case was consolidated with the 2006 litigation discussed below and it is not known when, nor on what basis, this matter will
be concluded.
On July 28,
2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the U.S. District Court in Maryland, alleging that Neuralstem
has been infringing, contributing to the infringement of, and or inducing the infringement of four patents allegedly owned by
or exclusively licensed to StemCells. See Civil Action No. 06-1877. We answered the Complaint denying infringement, asserting
that the patents are invalid, asserting that we have intervening rights based on amendments made to the patents during
reexamination proceedings, and further asserting that some of the patents are unenforceable due to inequitable conduct.
Neuralstem has also asserted counterclaims that StemCells has engaged in anticompetitive conduct in violation of antitrust
laws. On February 28, 2011, Neuralstem filed a Motion to Dismiss for lack of standing and concurrently filed a Motion for
Leave to Amend its Answer and Counterclaim to allege that StemCells is not the exclusive licensee of the patents-in-suit and
also that Neuralstem has obtained a non-exclusive license to the patents-in-suit. In addition, before the Court decided
Neuralstem's Motion to Dismiss for lack of standing, StemCells filed a motion for summary judgment on the issue standing.
Neuralstem responded to that motion and cross-moved for summary judgment on the issue of standing. The Court further issued
its Markman Order (an order ruling on the scope and meaning of disputed patent claim language regarding the patents at issue)
on August 12, 2011. On August 26, 2011, StemCells moved for reconsideration of two terms construed in the Markman Order and
that motion remains pending. On April 6, 2012, the Court granted Neuralstem's Motion for Leave to Amend to assert lack of
standing and denied Neuralstem's Motion to Dismiss and Motion for Summary Judgment without prejudice. The Court also denied
StemCells’ Motion for Summary Judgment with prejudice. The Court stayed all other matters pending resolution of the
question of standing. The case was then reassigned to Judge Roger W. Titus.
Judge Titus held a bench trial on the
issue of standing and inventorship on December 9, 11, and 12, 2014. The parties filed their post-trial briefs on
January 16, 2015. Judge Titus is expected to issue an order that will either resolve the case in its entirety
or will allow the case to move forward to expert discovery.
Note 11 Subsequent Events
None.
ITEM 9. | CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company’s principal executive officer (who is also the
Company’s acting principal financial officer) and principal financial officer have concluded that the Company’s disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of December 31, 2014
to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under
the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive
officer (who is also the Company’s acting principal financial officer) and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Inherent Limitations Over Internal Controls
The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s
internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and
that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s
management and directors; and
(iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets
that could have a material effect on the financial statements.
Management, including the Company’s principal executive officer
(who is also the Company’s acting principal financial officer) and principal financial officer, does not expect that the
Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls
can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation
of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because
of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal
Control Over Financial Reporting
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting
based on the criteria set forth in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on the Company’s assessment, management has concluded that its internal control over financial
reporting was effective as of December 31, 2014 to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with GAAP.
The effectiveness of our internal control over
financial reporting as of December 31, 2014 has been audited by Stegman & Company, an independent registered public accounting
firm, and the Firm’s attestation report on this matter is included in Item 8 of this Annual Report on Form 10-k.
Changes in Internal Control Over Financial
Reporting
There were no changes in the Company’s
internal control over financial reporting during the fourth quarter of 2014, which were identified in connection with management’s
evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. |
OTHER INFORMATION |
None
PART III
ITEM 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is set
forth under the heading “Directors, Executive Officers and Corporate Governance” in our 2015 Proxy Statement to be
filed with the SEC in connection with the solicitation of proxies for our 2015 Annual Meeting of Shareholders (“2014 Proxy
Statement”) and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days after
the end of the fiscal year to which this report relates. The information required by this item regarding delinquent filers pursuant
to Item 405 of Regulation S-K will be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance”
in the 2015 Proxy Statement and is incorporated herein by reference.
ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this Item is set
forth under the headings “Director Compensation” and “Executive Compensation” of our 2015 Proxy Statement
and is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information required by this Item is set
forth under the headings “Beneficial Owners of Shares of Common Stock” and “Equity Compensation Plan Information”
of our 2015 Proxy Statement and is incorporated herein by reference.
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is set forth under the heading
“Certain Relationships and Related Transactions” of our 2015 Proxy Statement and is incorporated herein by reference.
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is set forth under the heading
“Independent Registered Public Accounting Firm” of our 2015 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| 1. | Financial Statements: See “Index to Financial Statements” in Part II, Item 8
of this Form 10-K. |
| 2. | Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by
reference as part of this Form 10-K. |
Certain of the agreements filed as exhibits
to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the
benefit of the parties to the agreement. These representations and warranties:
| · | may have been qualified by disclosures that were made to the other parties in connection with the
negotiation of the agreements, which disclosures are not necessarily reflected in the agreements; |
| · | may apply standards of materiality that differ from those of a reasonable investor; and |
| · | were made only as of specified dates contained in the agreements and are subject to later developments. |
Accordingly, these representations and warranties
may not describe the actual state of affairs as of the date they were made or at any other time, and investors should not rely
on them as statements of fact.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
NEURALSTEM, INC. |
|
|
|
Dated: March 16, 2015 |
By: |
/S/ I Richard Garr |
|
|
I Richard Garr
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the
dates indicated.
Name |
|
Title |
|
Date |
|
|
|
|
|
/s/ I. Richard Garr |
|
President, Chief Executive Officer, General Counsel and Director |
|
March 16, 2015 |
I. Richard Garr |
|
(Principal executive officer) |
|
|
|
|
|
|
|
/s/ I. Richard Garr |
|
Chief Financial Officer (Principal financial and accounting officer) |
|
March 16, 2015 |
I. Richard Garr |
|
|
|
|
|
|
|
|
|
/s/ Karl Johe |
|
Chairman of the Board and Directors |
|
March 16, 2015 |
Karl Johe |
|
|
|
|
|
|
|
|
|
/s/ William Oldaker |
|
Director |
|
March 16, 2015 |
William Oldaker |
|
|
|
|
|
|
|
|
|
/s/ Scott V. Ogilvie |
|
Director |
|
March 16, 2015 |
Scott V. Ogilvie |
|
|
|
|
|
|
|
|
|
/s/ Sandford D. Smith |
|
Director |
|
March 16, 2015 |
Sandford D. Smith |
|
|
|
|
|
|
|
|
|
/s/ Catherine A. Sohn |
|
Director |
|
March 16, 2015 |
Catherine A. Sohn |
|
|
|
|
|
|
|
|
|
/s/ Stanley Westreich |
|
Director |
|
March 16, 2015 |
Stanley Westreich |
|
|
|
|
INDEX TO EXHIBITS
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
Filed |
|
|
|
Exhibit |
|
|
|
|
No. |
|
Description |
|
Herewith |
|
Form |
|
No. |
|
File No. |
|
Filing Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.01(i) |
|
Amended and Restated Certificate of Incorporation of Neuralstem, Inc. filed on 7/9/14 |
|
|
|
10-Q |
|
3.01(i) |
|
001-33672 |
|
8/8/14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.02(ii) |
|
Amended and Restated Bylaws of Neuralstem, Inc. adopted on 7/16/07 |
|
|
|
10-QSB |
|
3.2(i) |
|
333-132923 |
|
8/14/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.01** |
|
Amended and Restated 2005 Stock Plan adopted on 6/28/07 |
|
|
|
10-QSB |
|
4.2(i) |
|
333-132923 |
|
8/14/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.02** |
|
Non-qualified Stock Option Agreement between Neuralstem, Inc. and Richard Garr dated 7/28/05 |
|
|
|
SB-2 |
|
4.4 |
|
333-132923 |
|
6/21/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.03** |
|
Non-qualified Stock Option Agreement between Neuralstem, Inc. and Karl Johe dated 7/28/05 |
|
|
|
SB-2 |
|
4.5 |
|
333-132923 |
|
6/21/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.04** |
|
Neuralstem, Inc. 2007 Stock Plan |
|
|
|
10-QSB |
|
4.21 |
|
333-132923 |
|
8/14/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.05 |
|
Form of Common Stock Purchase Warrant Issued to Karl Johe on 6/5/07 |
|
|
|
10-KSB |
|
4.22 |
|
333-132923 |
|
3/27/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.06 |
|
Form of Placement Agent Warrant Issued to Midtown Partners & Company on 12/18/08 |
|
|
|
8-K |
|
4.1 |
|
001-33672 |
|
12/18/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.07 |
|
Form of Consultant Common Stock Purchase Warrant issued on 1/5/09 |
|
|
|
S-3/A |
|
10.1 |
|
333-157079 |
|
02/3/09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.08 |
|
Form of Series D, E and F Warrants |
|
|
|
8-K |
|
4.01 |
|
001-33672 |
|
7/1/09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.09 |
|
Form of Placement Agent Warrant |
|
|
|
8-K |
|
4.02 |
|
001-33672 |
|
7/1/09 |
4.10 |
|
Form of Consultant Warrant Issued 1/8/10 |
|
|
|
10-K |
|
4.20 |
|
001-33672 |
|
3/31/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.11 |
|
Form of Replacement Warrant Issued 1/29/10 |
|
|
|
10-K |
|
4.21 |
|
001-33672 |
|
3/31/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.12 |
|
Form of Series C Replacement Warrant Issued March of 2010 and May, June and July of 2013 (Original Ex. Price $2.13 and $1.25) |
|
|
|
10-K |
|
4.22 |
|
001-33672 |
|
3/31/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
|
Form of employee and consultant option grant pursuant to our 2007 Stock Plan and 2010 Equity Compensation Plan |
|
|
|
10-K |
|
4.23 |
|
001-33672 |
|
3/31/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.14 |
|
Form of Warrants dated 6/29/10 |
|
|
|
8-K |
|
4.01 |
|
001-33672 |
|
6/29/10 |
4.15** |
|
Amended Neuralstem 2010 Equity Compensation Plan adopted on June 21, 2013 |
|
|
|
DEF 14A |
|
Appendix I |
|
001-33672 |
|
4/30/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.16 |
|
Form of Consultant Warrant issued 10/1/09 and 10/1/10 |
|
|
|
S-3 |
|
4.07 |
|
333-169847 |
|
10/8/10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.17** |
|
Form of Restricted Stock Award Agreement pursuant to our 2007 Stock Plan and 2010 Equity Compensation Plan |
|
|
|
S-8 |
|
4.06 |
|
333-172563 |
|
3/1/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.18** |
|
Form of Restricted Stock Unit Agreement |
|
|
|
S-8 |
|
4.08 |
|
333-172563 |
|
3/1/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.19 |
|
Form of Common Stock Purchase Warrant issued pursuant to February 2012 registered offering |
|
|
|
8-K |
|
4.01 |
|
001-33672 |
|
2/8/12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.20 |
|
Form of Common Stock Purchase Warrant issued to Consultants in June of 2012 and March 19, 2013 |
|
|
|
10-Q |
|
4.20 |
|
001-33672 |
|
8/9/12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.21 |
|
Form of Underwriter Warrant issued to Aegis Capital Corp. on 8/20/12 |
|
|
|
8-K |
|
4.1 |
|
001-33672 |
|
8/17/12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.22 |
|
Form of Placement Agent Warrant issued to Aegis Capital Corp. on 9/13/12 |
|
|
|
8-K |
|
4.1 |
|
001-33672 |
|
9/19/12 |
4.23 |
|
Form of Consulting Warrant issued January 2011 and March 2012 |
|
|
|
S-3 |
|
4.01 |
|
333-188859 |
|
5/24/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form of Replacement Warrant issued January, February and May of 2013 (Original Ex. Prices $3.17 and $2.14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.24 |
|
Form of Lender Warrant issued March 22, 2013 |
|
|
|
8-K |
|
4.01 |
|
011-33672 |
|
3/27/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25 |
|
Form of Advisor Warrant issued March 22, 2013 |
|
|
|
8-K |
|
4.02 |
|
011-33672 |
|
3/27/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.26 |
|
Form of Warrant issued June of 2013 and July of 2014 to Legal Counsel |
|
|
|
10-Q |
|
4.26 |
|
001-33672 |
|
8/8/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.27 |
|
Form of Warrant issued in September 2013 in connection with Issuer’s registered direct offering |
|
|
|
8-K |
|
4.01 |
|
011-33672 |
|
9/10/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.28 |
|
Form of Warrant issued to strategic advisor in August 2013 |
|
|
|
10-Q |
|
4.28 |
|
001-33672 |
|
11/12/13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4.29 |
|
Form of Investor Warrant issued January 2014 |
|
|
|
8-K |
|
4.01 |
|
001-33672 |
|
1/6/14 |
4.30 |
|
Form of Lender Warrant Issued October 28, 2014 |
|
|
|
8-K |
|
4.01 |
|
001-33672 |
|
10/29/14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.01** |
|
Employment Agreement with I. Richard Garr dated January 1, 2007 and amended as of November 1, 2005 |
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SB-2 |
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10.1 |
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333-132923 |
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6/21/06 |
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10.02** |
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Amended terms to the Employment Agreement of I Richard Garr dated January 1, 2008 |
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10-K |
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10.02 |
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001-33672 |
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3/31/09 |
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10.03** |
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Amended terms to the employment Agreement of I. Richard Garr dated March 1, 2015 |
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8-K |
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10.01 |
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001-33672 |
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3/2/15 |
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10.04** |
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Employment Agreement with Karl Johe dated January 1, 2007 and amended as of November 1, 2005 |
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SB-2 |
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10.2 |
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333-132923 |
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6/21/06 |
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10.05** |
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Amended terms to the Employment Agreement of Karl Johe dated January 1, 2009 |
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10-K |
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10.04 |
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001-33672 |
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3/31/09 |
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10.06** |
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Employment Agreement with Thomas Hazel, Ph.D dated August 11, 2008 |
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10-K/A |
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10.05 |
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001-33672 |
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10/5/10 |
10.07 |
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Consulting Agreement dated January 2010 between Market Development Consulting Group and the Company and amendments No. 1 and 2. |
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10-K |
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10.07 |
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001-33672 |
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3/16/11 |
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10.08** |
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Renewal of I. Richard Garr Employment Agreement dated 7/25/12 |
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8-K |
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10.01 |
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001-33672 |
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7/27/12 |
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10.09** |
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Renewal of Dr. Karl Johe Employment Agreement dated 7/25/12 |
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8-K |
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10.02 |
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001-33672 |
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7/27/12 |
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10.10** |
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Renewal of Dr. Tom Hazel Employment Agreement dated 7/25/12 |
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8-K |
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10.03 |
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001-33672 |
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7/27/12 |
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10.11 |
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Loan and Security Agreement dated March 2013 |
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8-K |
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10.01 |
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011-33672 |
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3/27/13 |
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10.12 |
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Intellectual Property and Security Agreement dated March 2013 |
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8-K |
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10.02 |
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011-33672 |
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3/27/13 |
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10.13 |
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At the Market Offering Agreement entered into on October 25, 2013 |
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8-K |
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10.01 |
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011-33672 |
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10/25/13 |
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10.14 |
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Form of Outside Director Agreement |
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10-K |
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10.13 |
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011-33672 |
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3/10/14 |
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10.15** |
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Form of Amendment to Karl Johe Employment Agreement |
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8-K |
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10.01 |
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011-33672 |
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9/18/14 |
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10.16 |
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Form of Second Amendment to Loan and Security Agreement dated March of 2013 that was entered into on October 28, 2014 |
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8-K |
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10.01 |
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011-33672 |
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10/29/14 |
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14.01 |
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Neuralstem Code of Ethics |
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SB-2 |
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14.1 |
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333-132923 |
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6/21/06 |
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14.02 |
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Neuralstem Financial Code of Profession Conduct adopted on May 16, 2007 |
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8-K |
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14.2 |
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333-132923 |
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6/6/07 |
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21.01 |
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Subsidiaries of the Registrant |
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10-K |
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21.01 |
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001-33672 |
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3/10/14 |
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23.01 |
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Consent of Stegman & Company |
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* |
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31.1 |
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Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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* |
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32.1 |
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Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. § 1350 |
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* |
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101.INS |
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XBRL Instance Document |
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* |
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101.SCH |
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XBRL Taxonomy Extension Schema |
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* |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase |
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* |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase |
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* |
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101.LAB |
|
XBRL Taxonomy Extension Label Linkbase |
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* |
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101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase |
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* |
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| ** | Management contracts or compensation plans or arrangements
in which directors or executive officers are eligible to participate. |
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We hereby consent to the incorporation by reference
in the Registration Statements filed by Neuralstem, Inc. on Forms S-3 (Nos. 333-150574, 333-157079, 333-165973, 333-169847, 333-173221,
333-188859, 333-190936 and 333-196567) and on Forms S-8 (Nos. 333-172563 and 333-194881) of our report dated March 16, 2015 relating
to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in the
Annual Report (Form 10-K) for the year ended December 31, 2014.
Baltimore, Maryland
March 16, 2015
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Richard Garr, certify that:
(1) I
have reviewed this Annual Report on Form 10-K of Neuralstem, Inc.;
(2) Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
(4) The
registrant's other certifying officer(s) and I am responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its unconsolidated investments, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
(5) The registrant's other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors:
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 16, 2015 |
By: /s/ I. Richard Garr |
|
I. Richard Garr, |
|
Chief Executive Officer and Chief Financial Officer |
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
I, I. Richard Garr, certify, as of the dates hereof, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Neuralstem,
Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the
financial condition and results of operations of Neuralstem, Inc. at the dates and for the periods indicated.
Date: March 16, 2015
|
By: |
/s/ I. Richard Garr |
|
|
I. Richard Garr |
|
|
Chief Executive Officer and Chief Financial Officer |
A signed original of this written statement required by Section
906 has been provided to Neuralstem, Inc. and will be retained by Neuralstem, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.