U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark one)





x
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934





For the Quarterly Period Ended March 31, 2011


Or





 ̈
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934





Commission File Number 000-1357459





NEURALSTEM, INC.


(Exact name of registrant as specified in its charter)


Delaware

52-2007292State or other jurisdiction of

incorporation or organization

(I.R.S. Employer

Identification No.)9700 Great Seneca Highway

Rockville, MD

20850(Address of principal executive offices)

(Zip Code)





Registrant’s telephone number, including area code(301)-366-4841





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.  xYes      ̈ 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). ̈Yes      ̈ No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer  ̈

Accelerated filer  xNon-accelerated filer   ̈  (Do not check if a small reporting company)

Smaller reporting company   ̈





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   ̈ Yesx No





As of May 4, 2011 there were 48,486,304  shares of common stock, $.01 par value, issued and outstanding.







Neuralstem, Inc.





Table of Contents


PagePART I -

FINANCIAL INFORMATIONItem 1.

Financial Statements
3Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
3Statements of Operations (Unaudited)For the three months ended March 31, 2011 and 2010
4Statements of Cash Flows (Unaudited)For the three months ended March 31, 2011 and 2010
5Statements of Changes in Stockholders’ Equity  (Unaudited)For the three months ended March 31, 2011
6Notes to Financial Statements (Unaudited)
7Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations
12Item 3.

Quantitative and Qualitative Disclosures about Market Risk
22Item 4.

Controls and Procedures
22PART II -

OTHER INFORMATIONItem 1.

Legal Proceedings
23Item 1A.

Risk Factors
24Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds
31Item 3.

Defaults Upon Senior Securities
31Item 4.

(Removed and Reserved).
31Item 5.

Other Information
31Item 6.

Exhibits
31





2




PART I


FINANCIAL INFORMATION




ITEM 1.      FINANCIAL STATEMENTS





Neuralstem, Inc.





Balance Sheets




March 31,


December 31,2011


2010(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents

$
8,546,424


$
9,261,233Prepaid expenses


192,217



246,887Other current assets


-



322,127Total current assets


8,738,641



9,830,247Property and equipment, net


232,198



200,084Intangible assets, net


537,435



500,154Other assets


201,763



60,875Total assets

$
9,710,037


$
10,591,360LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses

$
810,876


$
1,032,931Accrued bonus expense


223,097



453,240Fair value of warrant obligations


-



1,250,839Total current liabilities


1,033,973



2,737,010Total liabilities


1,033,973



2,737,010STOCKHOLDERS' EQUITYPreferred stock, 7,000,000 shares authorized, zero shares issued and outstanding


-



-Common stock, $0.01 par value; 150 million shares authorized, 48,366,304 and 46,897,529 shares outstanding in 2011 and 2010 respectively


483,663



468,975Additional paid-in capital


97,248,334



93,339,506Accumulated deficit


(89,055,933
)


(85,954,131
)Total stockholders' equity


8,676,064



7,854,350Total liabilities and stockholders' equity

$
9,710,037


$
10,591,360





See accompanying notes.




3




Statements of Operations





Three MonthsEnded March 31,2011


2010Revenues

$
-


$
-Operating expenses:Research and development costs


1,738,728



1,899,963General and administrative expenses


1,772,482



1,687,835Depreciation and amortization


25,293



29,063Total operating expenses


3,536,503



3,616,861Operating loss


(3,536,503
)


(3,616,861
)Nonoperating income (expense):Litigation settlement


250,000



-Interest income


22,892



5,811Interest expense


-



(659
)Warrant issuance and modification expense


-



(1,906,800
)Gain (loss) from change in fair value adjustment of warrant obligations


161,809



(1,248,452
)Total nonoperating income (expense)


434,701



(3,150,100
)Net loss attributable to common shareholders

$
(3,101,802
)

$
(6,766,961
)Net loss per share - basic and diluted

$
(0.07
)

$
(0.18
)Weighted average common shares outstanding - basic and diluted


47,692,878



38,539,226





See accompanying notes




4




Statements of Cash Flows


(Unaudited)





Three MonthsEnded March 31,2011


2010Cash flows from operating activities:Net loss

$
(3,101,802
)

$
(6,766,961
)Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization


25,293



29,063Share based compensation expenses


1,148,659



1,300,884Warrant issuance and modification expense


-



1,906,800(Gain)/loss from change in fair value adjustment of warrant obligations


(161,809
)


1,248,452Changes in operating assets and liabilities:Prepaid expenses


(5,330
)


12,066Other current assets


322,127



-Other assets


(140,888
)


6,307Accounts payable and accrued expenses


(144,555
)


130,887Accrued bonus expenses


(230,143
)


5,526Net cash used in operating activities


(2,288,448
)


(2,126,976
)Cash flows from investing activities:Acquisition of intangible assets


(44,519
)


(29,207
)Purchase of property and equipment


(50,169
)


(23,247
)Net cash used in investing activities


(94,688
)


(52,454
)Cash flows From financing activities:Proceeds from issuance of common stock and from warrants exercised


1,668,327



7,384,925Net cash provided by financing activities


1,668,327



7,384,925Net increase (decrease)in cash and cash equivalents


(714,809
)


5,205,495Cash and cash equivalents, beginning of period


9,261,233



2,309,774Cash and cash equivalents, end of period

$
8,546,424


$
7,515,269Supplemental disclosure of cash flows information:Cash paid for interest

$
-


$
659Cash paid for income taxes


-



-Supplemental schedule of non cash investing and financing activities:Extinguishment of warrant obligations through exercise, expiration and modification of common stock warrants


1,089,030



6,212,374Issuance of common stock for executive bonuses


77,500



-





See accompanying notes.




5




Statement of Changes in Stockholders' Equity


For the period from January 1, 2011 through March 31, 2011


(Unaudited)





Common


Common


Additional





TotalStock


Stock


Paid-In


Accumulated


Stockholders'Shares


Amount


Capital


Deficit


Equity (Deficit)Balance at January 1, 2011


46,897,529


$
468,975


$
93,339,506


$
(85,954,131
)

$
7,854,350Share based payments










1,088,659







1,088,659Issuance of common stock from warrants exercised at $1.10 and $1.25 per share, net of issuance costs of $158,020.


1,468,775



14,688



1,653,639







1,668,327Issuance of restricted common stock and restricted common stock units in payment for 2010 executive bonuses ($2.02 per share)










77,500







77,500Warrant issuances and modifications










1,089,030







1,089,030Net loss














(3,101,802
)


(3,101,802
)Balance at March 31, 2011


48,366,304


$
483,663


$
97,248,334


$
(89,055,933
)

$
8,676,064





See accompanying notes.




6




NEURALSTEM, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


THREE MONTHS ENDED MARCH 31, 2011





Note 1.  Basis of Presentation





The accompanying unaudited financial statements of Neuralstem, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”),  for interim financial information. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.





The Company is also in the process of establishing laboratory facilities in China in a wholly owned subsidiary.  At March 31, 2011, the investment in the Chinese operations was immaterial, so we did not present consolidated financial statements.





The interim financial statements are unaudited, but in the opinion of management all adjustments, consisting only of normal recurring accruals, considered necessary to present fairly the results of these interim periods have been included. The results of the Company’s operations for any interim period are not necessarily indicative of results that may be expected for any other interim period or for the full year.





Note 2.  Significant Accounting Policies and Recent Accounting Pronouncements





Use of Estimates





The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ significantly from those estimates.





The Company's business generates cash on occasion from government grants and licensing agreements. These transactions are opportunistic and small relative to Company’s total funding requirement. They should be viewed as non-recurring.  The Company's management does not know when this will change. The Company has expended and will continue to expend substantial funds in the research, development, and clinical/pre-clinical testing of the Company's stem cell technologies and products with the goal of ultimately obtaining approval from the United States Food and Drug Administration ("FDA") to market and sell our products. We believe our long-term cash position is inadequate to fund all of the costs associated with the full range of testing and clinical trials required by the FDA for our core products. Based on our current operating levels, we believe that we have sufficient levels of cash and cash equivalents to fund operations into the first quarter of 2012.





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




Revenue Recognition





Our revenue recognition policies are in accordance with guidance issued by the SEC and Financial Accounting Standards Board (FASB).  Historically, our revenue has been derived primarily from providing treated samples for gene expression data from stem cell experiments, from providing services under various grant programs and through the licensing of the use of our intellectual property.  Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery of goods and services has occurred, the price is fixed and determinable, and collection is reasonably assured.




7




Research and Development





Research and development expenses consist primarily of costs associated exclusively in the development of treatments for central nervous system diseases, and the Company is in clinical trials for both pharmaceutical and stem cell based treatments.  These expenses represent both pre-clinical development costs and costs associated with non-clinical support activities such as quality control and regulatory processes as well as the cost of our stem cell and pharmaceutical clinical trials. Research and development costs are expensed as they are incurred.





Loss per Common Share





Basic and diluted loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period.





For The Three MonthsEnded March 31,2011


2010Basic:Net loss attributable to common shareholders

$
(3,101,802
)

$
(6,766,961
)Weighted average common shares outstanding


47,692,878



38,539,226Basic and diluted loss per common share

$
(0.07
)

$
(0.18
)





Share Based Payments





We have granted stock-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.  The stock options or warrants vest either upon the grant date or over varying periods of time. The stock options we grant provide for option exercise prices equal to or greater than the fair market value of the common stock at the date of the grant.  The restricted stock units grant the right to fully paid common shares with various restrictions on the holder’s ability to transfer the shares.  Vesting of the restricted stock units is the same as the options.





We granted 10,000 options during the three months ended March 31, 2011.  No options were granted for the three months ended March 31, 2010.   We recorded related compensation expenses as our options vest in accordance with guidance issued by the FASB related to share based payments.  We recognized $1,148,659 and $1,300,884 in share-based compensation expense during the three months ended March 31, 2011 and 2010, respectively.  Included in the expense for the three months ended March 31, 2011, is $60,000 in expense related to the amortization of prepaid consulting expense paid with the issuance of $240,000 in common stock, issued in April 2010.





8




A summary of stock option activity during the three months ended March 31, 2011and related information is included in the table below:





Number of

Options


Weighted-

Average

Exercise

Price


Weighted-

Average

Remaining

Contractual

Life (in

years)


Aggregate

Intrinsic

ValueOutstanding at January 1, 2011


9,825,621


$
2.48



6.4


$
-Granted


10,000



2.02



9.9



-Exercised


-



-



-



-Forfeited


-



-



-



-Outstanding at March 31, 2011


9,835,621


$
2.48



6.2


$
3,304,700Exercisable at March 31, 2011


7,442,950


$
2.28



5.8


$
3,304,700





Share-based compensation expense included in the statements of operations for the three months ended March 31, 2011 and 2010 was as follows:





Three Months Ended March 31,2011


2010Research and development costs

$
553,380


$
836,196General and administrative expenses


595,279



464,688Total

$
1,148,659


$
1,300,884





We have granted restricted stock units (RSUs) to certain employees that entitle the holders to receive shares of our common stock upon vesting of the RSUs, and subject to restrictions regarding the exercise of the RSUs.  The fair value of restricted stock units granted are based upon the market price of the underlying common stock as if it were vested and issued on the date of grant.





A summary of our restricted stock unit activity for the three months ended March 31, 2011 is as follows:





Weighted-average grantNumber of RSUs


date fair valueBalance at January 1, 2011


296,369


$
2.21Granted


44,802



2.02Vested and converted to common shares


-



-Cancelled


-



-Balance at March 31, 2011


341,171


$
2.18




9




Warrants to purchase common stock were issued to certain officers, directors, stockholders and service providers.





Weighted-Weighted-


AverageAverage


Remaining


AggregateNumber


Exercise


Contractual


Intrinsicof Warrants


Price


Life (in years)


ValueOutstanding at January 1, 2011


15,456,694



2.47



3.4



-Granted


596,675



2.14



9.7



-Exercised


(1,468,775
)


1.24



-



-Forfeited


(432,239
)


1.81



-



-Outstanding at March 31, 2011


14,152,355


$
2.60



3.9


$
1,236,864Exercisable at March 31, 2011


12,152,355


$
2.37



3.2


$
1,236,864





Effective January 1, 2009 we adopted the provisions of recent accounting guidance, described below.  As a result of adopting this guidance, 8,547,762 of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants have the following characteristics:





Strike

Date

Date

WarrantsPrice

of Issue

of Expiration

OutstandingSeries A & B Warrants

$
1.25

February-06

February-11


4,359,605Series A & B Warrants, Placement Agent

$
1.10

February-06

February-11


782,005Series C Warrants

$
1.25

October-07

October-12


1,227,000Series C Warrants, Placement Agent

$
1.25

March-07

March-12


294,480Series C Warrants, anti-dilution awards

$
1.25

December-08

October-12


1,472,400Series C Warrants, Placement Agent, anti-dilution awards

$
1.25

December-08

March-12


412,272Total warrants no longer accounted for as equity at January 1, 2009









8,547,762





Effective January 1, 2009 we reclassified the fair value of the common stock purchase warrants, which were outstanding at January 1, 2009, and which have exercise price reset and anti-liquidation features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue.  On January 1, 2009, we reduced additional paid-in capital by $6.9 million and decreased the beginning retained deficit by $.3 million as a cumulative effect to establish a long-term warrant liability of $6.6 million to recognize the fair value of such warrants.  On February 23, 2011, all remaining common stock purchase warrants which have exercise price reset and anti-liquidation features expired, effectively eliminating the derivative liability.  In the three months ended March 31, 2011, warrant holders exercised 1,404,625 of these warrants and 32,239 expired.  This resulted in a net gain in the change in fair value of warrants of $161,809 for the period.





These common stock purchase warrants were initially issued in connection with placement of the Company’s common stock. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants did not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants were recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:





Mar. 31,


Mar. 31,2011


2010Annual dividend yield


-



-Expected life (months)


0.0-1.2



5.5Risk free interest rate


0.08-0.15
%


0.24
%Expected volatility


8%-35
%


61
%




10





Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for a group of similar companies for recent periods that correspond to the expected life of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is estimated by management based on the remaining term of the warrants. The risk-free interest rate is based on the rate for U.S. Treasury securities over the expected life.





Significant New Accounting Pronouncements




The following accounting pronouncements, if implemented, would have no effect on the financial statements of the company.




In March 2010, the FASB issued revised accounting guidance for milestone revenue recognition.  The new guidance allows for revenue recognition contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive.  It is effective on a prospective basis to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  The Company has adopted this guidance beginning with agreements entered into on or after January 1, 2011.  The adoption of this standard did not have a material impact on its financial position and results of operations.





Note 3.  Fair Value





Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.





Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, as defined by the new guidance related to fair value measurements and disclosures, and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:





Level 1 —

Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.The fair valued assets we hold that are generally included in this category are money market securities where fair value is based on publicly quoted prices and included in cash equivalents.Level 2 —

Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument's anticipated life.We carry no investments classified as Level 2.Level 3 —

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management's best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.  Our warrant obligations which expired in February 2011 were considered Level 3 items.





11




Financial assets and liabilities measured at fair value on a recurring basis are summarized below:





Fair value measurements at March 31, 2011 usingMar. 31,

2011


Quoted prices in

active markets for

identical assets

(Level 1)


Significant

other

observable

inputs (Level

2)


Significant

unobservable

inputs (Level

3)Cash and cash equivalents

$
8,546,424


$
8,546,424


$
-


$
-





Three months ended

March 31, 2011


Three months ended

March 31, 2010Fair value of warrant obligations at beginning of period

$
1,250,839


$
6,462,039Extinguishment through warrant exercises and modifications


(1,089,030
)


(6,212,374
)Extinguishment through warrant expirations


-



(254
)Net (gain) loss for change in fair value included in the statement of operations for period


(161,809
)


1,248,452Fair value of warrant obligations at end of period

$
-


$
1,497,863





The fair value of the warrant obligations was determined using the Black Scholes option pricing model with inputs which are described in Note 2.




Note 4.   Stockholders’ Equity





During the first three months ended March 31, 2011, various warrant holders exercised 1,468,775 warrants at $1.10 and $1.25 per warrant increasing equity by approximately $1.67 million, net of $158,020 in related financing costs.





ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





ADVISEMENT





We urge you to read this entire Quarterly Report on Form 10-Q, including the” Risk Factors” section, the financial statements, and related notes.  As used in this Quarterly Report, unless the context otherwise requires, the words “we,” “us,”“our,” “the Company,” “Neuralstem” and “Registrant” refers to Neuralstem, Inc.  Also, any reference to “common shares,” or “common stock,” refers to our $.01 par value common stock.   The information contained herein is current as of the date of this Quarterly Report (March 31, 2011), unless another date is specified.




12




We prepare our interim financial statements in accordance with United States generally accepted accounting principles.  Our financials and results of operations for the three month period ended March 31, 2011 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2011. The interim financial statements presented in this Quarterly Report as well as other information relating to our company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with the United States Securities and Exchange Commission (“SEC”).





NOTE REGARDING FORWARD-LOOKING STATEMENTS




This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the U.S. Securities and Exchange Commission (“SEC”) and the Financial Statements and notes thereto included elsewhere in this Form 10-Q.  The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.




Available Information




The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.neuralstem.com when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.





DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying 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:





•
Overview — Discussion of our business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of MD&A.




•
Trends & Outlook — Discussion of what we view as the overall trends affecting our business and the strategy for 2011.




•
Critical Accounting Policies— Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.




•
Results of Operations— Analysis of our financial results comparing the three months ended March 31, 2011 to the comparable period of 2010.




•
Liquidity and Capital Resources— An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and future liquidity needs.




13




The various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Overview” and “Trends & Outlook” section (see also “Risk Factors” in Part II, Item 1A of this Quarterly Report). Our actual results may differ materially.





Executive Overview





We are focused on the development and commercialization of treatments based on transplanting human neural stem cells and small molecule compounds.





We have developed and maintain a portfolio of patents and patent applications that form the proprietary base for our research and development efforts in the area of neural stem cell research.  We own or exclusively license sixteen (16) issued patents and twenty-nine (29) patent pending applications in the field of regenerative medicine, related technologies as well as our small molecule compounds. We believe our technology base, in combination with our know-how, and collaborative projects with major research institutions, provide a competitive advantage and will facilitate the development and commercialization of products for use in the treatment of a wide array of neurodegenerative conditions and in regenerative repair of acute disease.





Regenerative medicine is a young and emerging field. Regenerative medicine is the process of creating living, functional tissues to repair or replace tissue or organ function lost due to age, disease, damage, or congenital defects. There can be no assurances that our intellectual property portfolio will ultimately produce viable commercialized products and processes. Even if we are able to produce a commercially viable product, there are strong competitors in this field and our products may not be able to successfully compete against them.





All of our research efforts to date are at the pre-clinical or clinical stage of development. We are focused on leveraging our key assets, including our intellectual property, our scientific team and our facilities, to advance our technologies. In addition, we are pursuing strategic collaborations with members of academia.





Clinical Trials





Stem Cells





On December 18, 2008 we filed our first Investigational New Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”) to begin a clinical trial to treat Amyotrophic Lateral Sclerosis (“ALS” or “Lou Gehrig’s disease”).  The first patient in our study was dosed on January 21, 2010 at Emory University in Atlanta Georgia.  The trial will ultimately consist of up to 18 ALS patients, who will be examined at regular intervals post-surgery, with final review of the data to come six months after the last patient is treated.  To date, we have treated 12 patients.  With the completion of the first three patient groups (totaling 12 patients) we have reached a the planned pause in the trial while the FDA reviews the results to date. The Principal Investigator for the trial presented interim safety data on the first nine patients in April.  She reported that all nine ALS patients remain alive and that there were no unresolved serious adverse reactions related to surgery. Of the three ambulatory patients who were treated, all remain ambulatory with no serious adverse events secondary to surgery. The Company hopes to get clearance to resume the trial by the end of the summer.





On August 22, 2010, we filed our second IND in connection with our proposed Phase I clinical trials for chronic spinal cord injury.  In October of 2010, we were notified that our IND for spinal cord injury had been placed on clinical hold.  At the time, the FDA provided us with specific comments, questions and recommendations for modifications to our trial protocol as contained in our IND application.





Pharmaceutical  Compounds





The company has begun Clinical trials to evaluate the safety of its drug, NSI-189, which is being developed for the treatment of major depressive disorder and other psychiatric indications. NSI-189 is the lead compound in Neuralstem's neurogenerative small molecule drug platform.  In February of 2011, we dosed our first patient and commenced our Phase IA clinical trial.  This Phase IA trial will test a single oral administration of NSI-189 in healthy volunteers and seeks to determine the maximum tolerated single dose.  The trial has two phases, IA and IB.    The IB is also a safety study involving actual depression patients. It is still too early in the trials to make any determination as to its level of success, if any.




14




Technology





Stem Cells





Our technology enables the isolation and large-scale expansion of human neural stem cells from all areas of the developing human brain and spinal cord, thus enabling the generation of physiologically relevant human neurons of all types. Our two issued core patents entitled: (i)Isolation, Propagation, and Directed Differentiation of Stem Cells from Embryonic and Adult Central Nervous System of Mammals; and (ii)In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multipotential CNS Stem Cell  contain claims which cover the process of deriving the cells as well as the cells created from this process.





What differentiates our stem cell technology from others is that our patented processes do not require us to direct our cells towards a certain fate by adding specific growth factors. Our cells actually “become” the type of cell they are fated to be. This process and the resulting cells comprise a technology platform that allows for the efficient isolation and production, in commercially reasonable quantities, of neural stem cells from the human brain and spinal cord.





To date we have focused our efforts on applications involving spinal cord stem cells. We believe we have established “proof of principle” for two important spinal cord applications: ALS, or Lou Gehrig’s disease, and Ischemic Spastic Paraplegia (a painful form of spasticity that may arise as a complication of surgery to repair aortic aneurysms). Of these applications, we have commenced Phase I trials with regard to ALS.





We intend to treat both chronic and acute spinal cord injury with the same spinal cord stem cells, utilizing the same injection devices we are using for ALS.  The treatment for spinal cord injury will, however, likely only involve a few injections as opposed to the fifteen injection dosage that is ultimately planned for the ALS trial.  We, therefore, add to our knowledge about the surgical route of entry for both the ALS patients and the spinal cord injury patients with each patient we treat in the ALS trial.





Pharmaceutical Compounds





The Company has developed and patented a series of small molecule compounds (low molecular weight organic compounds which can efficiently cross the blood/brain barrier).   We believe that these small molecule compounds will stimulate the growth of new neurons in the hippocampus and provide a treatment for depression, and possibly other cognitive impact diseases.   In July of 2009, the U.S. Patent and Trademark Office issued the patent covered by patent application 12/049,922, entitled “Use of Fused Nicotinamides to Promote Neurogenesis,” which claims four chemical entities and any pharmaceutical composition included in them.





NS-189 is the first in a class of compounds that Neuralstem plans to develop into orally administered drugs for MDD and other psychiatric disorders.





In mice, NSI-189 both stimulated neurogenesis of the hippocampus and increased its volume.  Additionally, NSI-189 stimulated neurogenesis of human hippocampus-derived neural stem cells in vitro. We believe NSI-189 may reverse the human hippocampal atrophy seen in major depression and other disorders.


The Neuralstem small molecule platform results from discoveries made through Neuralstem's ability to generate stable human neural stem cell lines suitable for screening large chemical libraries. The platform complements our cell therapy platform, in which brain and spinal cord stem cells are transplanted directly into diseased areas to repair and/or replace diseased or dead cells.





Research





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





Operating Strategy





We employ an outsourcing strategy where we outsource all of our Good Laboratory Practices (“GLP”) preclinical development activities and GMP manufacturing and clinical development activities to contract research organizations (“CRO”) and contract manufacturing organizations (“CMO”) as well as all non-critical corporate functions.  Manufacturing is also outsourced to organizations with approved facilities and manufacturing practices.  This outsource model allows us to better manage cash on hand and eliminates non-vital expenditures.  It also allows for us to operate with relatively fewer employees and lower fixed costs than that required by our competitors.




15




Employees





As of March 31, 2011, we had 13 full-time employees and 4 full time independent contractors.  Of these employees, 7 work on research and development and 6 in administration. We also use the services of numerous outside consultants in business and scientific matters.





Our Corporate Information





We were incorporated in Delaware. Our principal executive offices are located at 9700 Great Seneca Highway, Rockville, Maryland 20850, and our telephone number is (301) 366-4841. Our website is located at www.neuralstem.com. We have not incorporated by reference into this prospectus the information in, or that can be accessed through, our website, and you should not consider it to be a part of this prospectus.





Trends & Outlook





Revenue





We generated no revenues from the sale of our products for the year ended December 31, 2010 or for the three months ended March 31, 2011. On February 2, 2011, we received $250,000 from a settlement with ReNeuron, Ltd., ending litigation between the parties.  In addition to the settlement, ReNeuron agreed to make future milestone payments to Neuralstem based on ReNeuron's development of certain products which were at issue in the case. We are mainly focused on: (i) successfully managing our two (2) sponsored clinical trials, and (ii) preparing for the initiation of our IND relating to Chronic Spinal Cord injury. We are also pursuing pre-clinical studies on other central nervous system indications in preparation for additional clinical trials. We are not focused at this time on generating revenues.





Long-term, we anticipate 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 & Development Expenses





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





We focus on the development of treatment candidates with potential uses in multiple indications, and use employee and infrastructure resources across several projects. Accordingly, many of our costs are not attributable to a specifically identified product and we do not account for internal research and development costs on a project-by-project basis.





We expect that research and development expenses will increase in the future, as funding allows. To the extent that it is practical, we will continue to outsource much of our efforts, including product manufacture, proof of principle and preclinical testing, toxicology, tumorigenicity, dosing rationale, and development of clinical protocol and IND 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  This subsidiary will primarily conduct research with regard to stem cells.  Our investment to date is considered immaterial.





Clinical Trials





Stem Cells





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




16




On August 22, 2010, we filed our second IND with the FDA. The IND is being filed in connection with our proposed Phase I clinical trials for Chronic Spinal Cord injury.  As of the date of this report, the FDA has not approved our IND.





Small Molecule Compounds





In December of 2010, the FDA approved our IND application to initiate a Phase I(a) safety trial to test NSI-189, our first small molecule compound, for the treatment of major depression.  In February of 2011, we dosed our first patient and commenced our Phase IA clinical trial of our lead small molecule compound to treat major depression.  It is still too early in the trials to make any determination as to its level of success, .





General and Administrative Expenses





Our general and administrative (“G&A”) expenses consist of the general costs, expenses and salaries for the operation and maintenance of our business. We anticipate that general and administrative expenses will increase as we progress from a pre-clinical to clinical phase of development.  Additionally, we have now transitioned to accelerated filer status with the SEC and will no longer be able to use the scaled disclosure afforded to smaller reporting companies.   As a result, we will incur additional costs and expenses with regard to our legal and financial compliance, including compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002.





We anticipate that as a result of our outsource model, our G&A expenses related to our core business will increase at a slower rate than that of similar companies.





Critical Accounting Policies





Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of the Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.





A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.





Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:





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





17




Revenue Recognition— In November2010,we were awarded three federal grants, totaling $733,438 through the Patient Protection and Affordable Care Act.  We had no revenues from the sale of our products for the years ended December 31, 2010 or 2009, or for the three month periods ended March 31, 2011 or 2010.  On February 2, 2011, we received $250,000 from a settlement with ReNeuron, Ltd., ending litigation between the parties.  In addition to the settlement, ReNeuron agreed to make future milestone payments to Neuralstem based on ReNeuron's development of certain products which were at issue in the case. Our revenues, to date, have been derived primarily from providing treated samples for gene expression data from stem cell experiments and from providing services as a subcontractor under federal grant programs. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery of goods and services has occurred, the price is fixed and determinable, and collection is reasonably assured and will be affected by particular transactions we may enter into in the future.  To date, we have only had revenue from government grants and licensing agreements.





Intangible and Long-Lived Assets—We follow FASB guidelines related to the accounting for impairment of long-lived assets, which established a "primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. During the three month periods ended March 31, 2011 and 2010, no impairment losses were recognized.





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





Research and Development Costs—Research and development costs consist of expenditures for the research and development of patents and technology, which are not capitalizable and charged to operations when incurred. Our research and development costs consist mainly of payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants.





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





Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities.  Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure in the accompanying financial statements.  The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.





Stock Based Compensation—The Company accounts for equity instruments issued to non-employees in accordance with guidance issued by FASB.  Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed.





We adopted the guidance issued by the FASB related to share based payments.  This guidance requires compensation costs related to share-based payment transactions to be recognized in the financial statements.  For the three months ended March 31, 2011 and 2010, we recognized stock-based compensation expense of $1,148,659 and $1,300,884 respectively.




18





RESULTS OF OPERATIONS




First Quarter of 2011 Compared to the first Quarter of 2010




Revenue





In November2010,we were awarded three federal grants, totaling $733,438 through the Patient Protection and Affordable Care Act, which supports investments in qualifying therapeutic discovery projects.   During 2010, we have received $575,406 of the grant.  During the three months ended March 31, 2011, we received the balance of $158,032 which was recorded as a receivable at December 31, 2010.  These are one-time grants. On February 2, 2011, we received $250,000 from a settlement with ReNeuron, Ltd. ending litigation between the parties.  In addition to the settlement, ReNeuron agreed to make future milestone  payments to Neuralstem based on ReNeuron's development of certain products which were at issue in the case.  The success of ReNeuron’s development of these products is uncertain.  We did not generate any revenues from the sale of our products in 2010 or the first quarter of 2011.





Operating Expenses





Operating expenses totaled $3,536,504 and $3,616,861 for the three months ended March 31, 2011 and 2010, respectively.





Change in2011Three Months Ended Mar. 31,

Versus 20102011

2010

$


%Operating ExpensesResearch & development


$
1,738,728


$
1,899,963


$
(161,235
)


(8
)%General & administrative expense



1,772,482



1,687,835



84,647



5
%Depreciation and amortization



25,293



29,063



(3,770
)


(13
)%Total expense


$
3,536,503


$
3,616,861


$
(80,358
)


(2
)%





Research and Development Expenses





Our R&D expenses consist primarily of  contractors charges and personnel expenses  associated with clinical trials and regulatory submissions; costs associated with preclinical activities such as proof of principle for new indications; toxicology studies; costs associated with cell processing and process development; facilities-related costs and supplies. Clinical trial expenses include payments to  research organizations, contract manufacturers, clinical trial sites, laboratories for testing clinical samples and consultants.




Research and development expenses totaled $1,738,728 and $1,899,963 for the three months ended March 31, 2011 and 2010, respectively.   The decrease of $161,235 or 8.5%, for the three months ended March 31, 2011 compared to the same period in 2010 was primarily attributable to $121,581 of increased spending the first quarter of 2011 relating to beginning of our small molecule clinical trials offset by a $282,818 reduction in non-cash stock based compensation expense in the first quarter of 2011.





General and Administrative Expenses





General and administrative (G&A) expenses are primarily comprised of legal fees, salaries, benefits and other costs associated with, finance, legal, human resources, information technology, public relations, facilities and other external general and administrative services.




G&A expenses totaled $1,772,482 and $1,687,835 for the three months ended March 31, 2011 and 2010, respectively.   The increase of $84,647 or 5.0% for the three months ended March 31, 2011 compared to the same period in 2010 was primarily attributable to a overall $45,944 decrease in cash expenses, offset by a $130,591 increase in non-cash stock based compensation expense.




19





Depreciation and Amortization





Depreciation and amortization expenses totaled $25,293 and $29,063 for the three months ended March 31, 2011 and 2010, respectively.   The decrease of $3,770 or 13% for the three months ended March 31, 2011 compared to the same period in 2010 was primarily attributable to fixed assets added in prior years becoming fully depreciated.





Nonoperating income (expense)





Nonoperating  income (expense)  totaled $434,701 and ($3,150,100) for the three months ended March 31, 2011 and 2010, respectively.  The nonoperating income or expense is discussed below.





Three Months Ended March 31,2011


2010Nonoperating income (expense):Litigation settlement

$
250,000


$
-Interest income


22,892



5,811Interest expense


-



(659
)Warrant issuance and modification expense


-



(1,906,800
)Gain (loss) from change in fair value adjustment of warrant obligations


161,809



(1,248,452
)Total nonoperating income (expense)

$
434,701


$
(3,150,100
)





Settlement of Lawsuit





On February 2, 2011, we received $250,000 from a settlement with ReNeuron, Ltd., ending litigation between the parties.  In addition to the settlement, ReNeuron agreed to make future milestone payments to Neuralstem based on ReNeuron's development of certain products which were at issue in the case.  The success of Reneuron’s development of these products is uncertain.





Interest Income/(Expense)





Interest income totaled $22,892 and $5,811for the three months ended March 31, 2011 and 2010, respectively.   The increase of $17,081for the three months ended March 31, 2011 compared to the comparable period in 2010 was attributable to slightly higher average cash balances.





There was no interest expense for the three months ended March 31, 2011, compared with $659 for the three months ended March 31, 2010.   The decrease of $659 for the three months ended March 31, 2011 compared to the comparable period in 2010 was attributable to a payoff of loans related to insurance costs in 2010.





Warrant Expenses





The Company had a warrant modification expense that totaled $0 and $1,906,800 for the three months ended March 31, 2011 and 2010, respectively.   Details of the transaction are in Note 2 to the financial statements.





On January 1, 2009 we reclassified the fair value of common stock purchase warrants, which have exercise price reset and anti-liquidation features, from equity to liability status, as if these warrants were treated as a derivative liability since their date of issue.  We established a warrant liability of $6.6 million to recognize the fair value of such warrants. During the three months ended March 31, 2011, the fair value of these common stock purchase warrants decreased to $0 as a result of the warrants expiring or being exercised for cash.




20




Liquidity and Capital Resources





Since our inception, we have financed our operations through the private placement of our securities, the exercise of investor warrants, and to a lesser degree from grants. Currently, our monthly cash burn rate is approximately $900,000.   In the event our IND for Chronic Spinal Cord injury is accepted by the FDA and we elect to commence the trials, we expect our monthly cash burn rate will increase to approximately $1,300,000  We estimate that we will have sufficient cash and cash equivalents to finance our current operations, pre-clinical and clinical work into the first quarter of 2012, assuming we do not commence our IND for Chronic Spinal Cord injury.  We cannot assure you that we will be able to secure additional financing after such time.  Several factors will affect our ability to raise additional funding, including, but not limited to, the volatility of our common shares and general market conditions.





Change in 2011Three Months Ended March 31,


Versus 20102011


2010


$


%Cash and cash equivalents

$
8,546,424


$
7,515,269



1,031,155



14
%Net cash used in operating activities

$
(2,288,448
)

$
(2,126,976
)


161,472



8
%Net cash used in investing activities

$
(94,688
)

$
(52,454
)


42,234



81
%Net cash provided by financing activities

$
1,668,327


$
7,384,925



(5,716,598
)


(77
)%





Total cash and cash equivalents was $8,546,424 at March 31, 2011, compared with $7,515,269 at March 31, 2010.  The increase in our cash and cash equivalents of $1,031,155 or 14%, for the three months ended March 31, 2011 was primarily attributable to conversions of warrants into common shares in the first quarter of 2011.





Net Cash Used in Operating Activities





We used $2,288,448 and $2,126,976 of cash in our operating activities for the three months ended March 31, 2011 and 2010, respectively.  The increase in our cash used of $161,472 or 8% for the three months ended March 31, 2011 compared to the same period in 2010 was primarily attributed to the cost of starting our small molecule clinical trials.





Net Cash Used in Investing Activities





We used $94,688 and $52,454 of cash in connection with investment activities for the three months ended March 31, 2011 and 2010, respectively.  The increase in our use of cash of $42,234 or 81% for the three months ended March 31, 2011 compared to the same period in 2010 was attributed to fixed asset additions and patent filing fees over the quarter.





Net Cash Provided by Financing Activities





We raised $1,668,327 and $7,384,925 in net proceeds from the issuance of our securities during the three months ended March 31, 2011 and 2010, respectively.





Listed below are key financing transactions entered into by us during 2010 and for the three months ended March 31, 2011:





·
On January 29, 2010, we received gross proceeds of $1,000,000 as a result of the exercise of 800,000 $1.25 Series D warrant exercises. We issued the holder of the D warrants 400,000 additional warrants with an exercise price of $1.85 in conjunction with the exercise. The new warrants have a life of one year.





·
In February of 2010, we called our $1.25 Series B Warrants. Gross exercise proceeds totaled $2,492,345.





·
In March of 2010, holders of 2,699,400 Series C warrants exercised their option to purchase our common stock for 1.25 per share.  Gross proceeds totaled $3,374,250.  We issued the holders of the exercised C Warrants 2,699,400 additional warrants with an exercise price of $2.13 and a life of 5 years in conjunction with the exercise.





·
The holder of 782,005 $1.10 placement agent warrants exercised them in March of 2010.  Gross consideration totaled $860,205. We issued the holder of the exercised placement agent warrants 782,005 additional warrants with an exercise price of $2.13 and a life of 5 years in conjunction with the exercise.




21




·
In June of 2010, we sold approximately 3,571,436 units, through a registered direct offering.  Each unit consists of one common share and 0.75 common share purchase warrant.   Each unit was sold for $2.80.  Each warrant has an exercise price of $3.25 per share, and is exercisable for a period of three years.  As a result of the offering, we received gross proceeds of approximately $10 million, and net proceeds of $9,271,519.





·
In the period January through December 2010, Series A warrant holders exercised an aggregate of 583,005 warrants.  The exercise price of the Series A warrants is $1.25 per share.  As a result of the exercises, we received gross proceeds of $728,756.





·
In November 2010, we filed a prospectus supplement that relates to the issuance and sale of up to $20,000,000 of our common stock, from time to time through a sales agreement with our sales agent Stifel, Nicolaus & Company, Incorporated.     We have had no sales of our common stock under this sales agreement with Stifel, Nicolaus & Company, Incorporated. Stifel, Nicolaus & Company, Incorporated will be paid compensation equal to 3.5% of the gross proceeds pursuant to the terms of the agreement.





·
During the first quarter of 2011, we issued an aggregate of 1,468,775 common shares as a result of warrant exercises.  As a result of the exercises, we received gross proceeds of $1,668,327.





Future Liquidity & Needs





We have incurred significant operating losses and negative cash flows since inception. We have not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain profitability in the future. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, for general and administrative expenses and other working capital requirements. We rely on cash balances and the proceeds from the offering of our securities, exercise of outstanding warrants and grants to fund our operations.





We intend to pursue opportunities to obtain additional financing in the future through the sale of our securities and additional research grants.  On October 8, 2010 we filed a shelf registration statement registering the sale of up to $50 million of our securities from time to time.  The registration statement was declared effective on October 14, 2010.  We anticipate conducting financing in the future based on our shelf registration statement when and if financing opportunities arise.





In November 2010, we filed a prospectus supplement that relates to the issuance and sale of up to $20,000,000 of our common stock, from time to time through a sales agreement with our sales agent Stifel, Nicolaus & Company, Incorporated.  Pursuant to this sales agreement, we may sell common shares directly into the market through our sales agent from time to time.    We have had no sales of our common stock under this sales agreement with Stifel, Nicolaus & Company, Incorporated. Stifel, Nicolaus & Company, Incorporated will be paid compensation equal to 3.5% of the gross proceeds pursuant to the terms of the agreement.





The source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, on our progress in our exploratory, preclinical and future clinical development programs. Funding may not be available when needed — at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back or eliminate some or all of our research and product development programs, planned clinical trials, and/or our capital expenditures or to license our potential products or technologies to third parties.




ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





We are not required to provide the information required by this items in our quarterly reports until the first quarter of 2012.





ITEM 4.         CONTROLS AND PROCEDURES.




22




Evaluation of Disclosure Controls and Procedures





Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.





Based on management’s evaluation (with the participation of our CEO and CFO), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.





Changes in Internal Control over Financial Reporting





There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II


OTHER INFORMATION




ITEM 1.      LEGAL PROCEEDINGS





As of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us, other than the following:





*
On May 7, 2008, we filed suit against StemCells, Inc., StemCells California, Inc. (collectively "StemCells") and Neurospheres Holding Ltd., (collectively StemCells and Neurospheres Holding Ltd are referred to as "Plaintiffs") in U.S. District Court for the District of Maryland, alleging that U.S. Patent No. 7,361,505 (the "'505 patent"), alleging that the '505 patent was exclusively licensed to the Plaintiffs, is invalid, not infringed, and unenforceable.   See Civil Action No. 08-1173.   On May 13, we filed an Amended Complaint seeking declaratory judgment that U.S. Patent No. 7,155,418 (the "'418 patent") is invalid and not infringed and that certain statements made by our CEO are not trade libel or do not constitute unfair competition as alleged by the Plaintiffs.  On July 15, 2008, the Plaintiffs filed a Motion to Dismiss for Lack of Subject Matter Jurisdiction, Lack of Personal Jurisdiction, and Improper Venue or in the Alternative to Transfer to the Northern District of California.  On August 27, 2008, Judge Alexander Williams, Jr. of the District of Maryland denied StemCells' Motion to Dismiss, but granted Neurospheres' motion to dismiss. On September 11, 2008, StemCells filed its answer asserting counterclaims of infringement for the '505 patent, the 418 patent, and state law claims for trade libel and unfair competition. This case was consolidated with the 2006 litigation discussed below and it is not known when, nor on what basis, this matter will be concluded.





*
On July 28, 2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the U.S. District Court in Maryland, alleging that Neuralstem has been infringing, contributing to the infringement of, and or inducing the infringement of four patents owned by or exclusively licensed to StemCells relating to stem cell culture compositions, genetically modified stem cell cultures, and methods of using such cultures.  See Civil Action No. 06-1877.  We answered the Complaint denying infringement, asserting that the patents are invalid, asserting that we have intervening rights based on amendments made to the patents during reexamination proceedings, and further asserting that some of the patents are unenforceable due to inequitable conduct.  Neuralstem has also asserted counterclaims that StemCells has engaged in anticompetitive conduct in violation of antitrust laws.    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.   Both motions are fully briefed, apply to the patents at issue in Civil Action No. 08-1173 and remain pending before the Court.  In addition, a Markman Hearing was held on April 8, 2011.





23




ITEM 1A.        RISK FACTORS





Investing in our common stock involves a high degree of risk. We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Quarterly Report, may adversely affect our business, operating results and financial condition.  The uncertainties and risks enumerated below as well as those presented elsewhere in this Quarterly Report should be considered carefully in evaluating our company and our business and the value of our securities.





Risks Relating to Our Stage of Development





We have a limited operating history and a history of losses.





Since inception in 1996 and through March 31, 2011, we have raised $97,731,997 of capital and recorded accumulated losses totaling $89,055,933.  On March 31, 2011, we had a working capital surplus of $7,704,668 and stockholders’ equity of $8,676,064.  Our net losses for the two most recent fiscal years have been $18,387,300 and $10,364,363 for 2010 and 2009 respectively.    We had no revenue from the sales of our products during 2010 and 2009.  On February 2, 2011, we received $250,000 from a settlement with ReNeuron, Ltd. ending litigation between the parties   In addition to the settlement, ReNeuron agreed to make future milestone  payments to Neuralstem based on ReNeuron's development of certain products at issue in the case. For the three months ended March 31, 2011, we had a net loss of $3,101,802.We do not anticipate generating any revenue from the sales of our products during 2011.





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.  Although we have generated some revenue in prior years, we have not generated any revenue from the commercial sale of our proposed products. Since inception, we have engaged in several related lines of business and have discontinued operations in certain areas.  This limited and changing history may not be adequate to enable you to fully assess our future prospects. No assurances can be given as to exactly when, if at all, we will be able to fully develop, commercialize, market, sell and/or derive material revenues from our proposed products





We will need to raise additional capital to continue operations.





Since inception, we have relied almost entirely on external financing to fund operations. Such financing has come primarily from the sale of our securities.  As of March 31, 2011, we had cash and cash equivalents on hand of $8,546,424.   Presently, we have a monthly cash burn rate of approximately $900,000.  We will need to raise additional capital to fund anticipated operating expenses and future expansion. Among other things, external financing will be required to further develop our technologies and products, as well as to pay general operating costs.   We currently have two ongoing Phase I clinical trials and are seeking the approval of a third.  As a result of our ongoing, as well as proposed trials, we will need additional capital in order to pay for expenses associated with these trials as well as fund our general operations.





We have expended and expect to continue to expend substantial cash in the research, development, clinical and pre-clinical testing of our stem cell technologies with the goal of ultimately obtaining FDA approval to market our proposed products. We will require additional capital to conduct research and development, establish and conduct clinical and pre-clinical trials, enter into commercial-scale manufacturing arrangements and to provide for marketing and distribution of our products.  We cannot assure you that financing will be available if needed. If additional financing is not available, we may not be able to fund operations and planned growth, develop or enhance our technologies, take advantage of business opportunities or respond to our competitive market pressures.  If we exhaust our cash reserves and are unable to realize adequate additional financing, we may be unable to meet operating obligations which could result in us initiating bankruptcy proceedings or delaying, or eliminating some or all of our research and product development programs.





Additional financing requirements will result in dilution to existing stockholders.





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





24




Risks Relating to Our Business





Our business is dependent on the successful development of our product candidates.





At present our ability to progress as a company is significantly dependent on our two (2) product candidates currently in Phase I trials.  Any clinical, regulatory or other development that significantly delays or prevents us from completing any of our trials, any material safety issue or adverse side effect to any study participant in these trials, or the failure of these trials to show the results expected would likely depress our stock price significantly and could prevent us from raising the additional capital we will need to further develop our cellular technologies. Moreover, any material adverse occurrence in our clinical trials could substantially impair our ability to initiate clinical trials to test our product candidates in other potential indications. This, in turn, could adversely impact our ability to raise additional capital and pursue our planned research and development efforts.





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





We have concentrated the majority of our research on stem cell technologies.  Our ability to generate revenue and operate profitably will depend on being able to develop these technologies for human applications. These are emerging technologies and have limited human applications. We cannot guarantee that we will be able to develop our technologies or that such development will result in products with any commercial utility or value. We anticipate that the commercial sale of such products and royalty/licensing fees related to the technology, will be our primary sources of revenues. If we are unable to develop our technologies, we may never realize any revenue.





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





We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of these therapies creates significant challenges in regard to product development and optimization, manufacturing, government regulation, third party reimbursement, and market acceptance. For example, the pathway to regulatory approval for cell-based therapies, including our product candidates, may be more complex and lengthy than the pathway for conventional drugs. These challenges may prevent us from developing and commercializing products on a timely or profitable basis or at all.





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





We are currently undertaking two (2) sponsored Phase I clinical trials.  Although we have commenced the trials, the outcome of the trials is uncertain, and if we are unable to satisfactorily complete such trials, or if such trials yield unsatisfactory results, we will be unable to commercialize our proposed products. No assurances can be given that the clinical trials will be completed or result in a successful outcome.  If regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable to commercialize our therapeutic products, and our business and results of operations would be materially harmed.





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





Positive results from pre-clinical studies should not be relied upon as evidence that our clinical trials will succeed. Even if our product candidates achieve positive results in pre-clinical studies, we will be required to demonstrate through clinical trials that the product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. There is typically an extremely high rate of attrition from the failure of product candidates as they proceed through clinical trials. If any product candidate fails to demonstrate sufficient safety and efficacy in any clinical trial, then we would experience potentially significant delays in, or be required to abandon, development of that product candidate. If we delay or abandon our development efforts of any of our product candidates, then we may not be able to generate sufficient revenues to become profitable, and our operations could be materially harmed.





There are no assurances that we will be able to submit or obtain FDA approval of a biologics license application in order to market and sell our products.





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





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The manufacturing of stem cell-based therapeutic products is novel and dependent upon specialized key materials.





The manufacturing of stem cell-based therapeutic products is a complicated and difficult process, dependent upon substantial know-how and subject to the need for continual process improvements.  We depend almost exclusively on third party manufacturers to supply our cells.  In addition, our suppliers’ ability to scale-up manufacturing to satisfy the various requirements of our planned clinical trials is uncertain.  Manufacturing irregularities or lapses in quality control could have a material adverse effect on our reputation and business, which could cause a significant loss of stockholder value. Many of the materials that we use to prepare our cell-based products are highly specialized, complex and available from only a limited number of suppliers. At present, some of our material requirements are single sourced, and the loss of one or more of these sources may adversely affect our business





Our business is subject to ethical and social concerns.





The use of stem cells for research and therapy has been the subject of debate regarding ethical, legal and social issues.  Negative public attitudes toward stem cell therapy could result in greater governmental regulation of stem cell therapies, which could harm our business. For example, concerns regarding such possible regulation could impact our ability to attract collaborators and investors.  Existing and potential U.S. government regulation of human tissue may lead researchers to leave the field of stem cell research or the country altogether, in order to assure that their careers will not be impeded by restrictions on their work. Similarly, these factors may induce graduate students to choose other fields less vulnerable to changes in regulatory oversight, thus exacerbating the risk that we may not be able to attract and retain the scientific personnel we need in the face of competition among pharmaceutical, biotechnology and health care companies, universities and research institutions for what may become a shrinking class of qualified individuals





We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.





Our business may bring us into conflict with licensees, licensors, or others with whom we have contractual or other business relationships or with our competitors or others whose interests differs from ours. If we are unable to resolve these conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against it. Any litigation is likely to be expensive and may require a significant amount of management's time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us which could have a materially adverse effect on our business.  By way of example, in May of 2008, we filed a complaint against StemCells Inc., alleging that U.S. Patent No. 7,361,505 (the “‘505 patent”), allegedly exclusively licensed to StemCells, Inc., is invalid, not infringed and unenforceable. On the same day, StemCells, Inc. filed a complaint alleging that we had infringed, contributed to the infringement of, and or induced the infringement of two patents owned by or exclusively licensed to StemCells relating to stem cell culture compositions. At present, the litigation is in its initial stages and any likely outcome is difficult to predict.





We may not be able to obtain necessary licenses to third-party patents and other rights.





A number of companies, universities and research institutions have filed patent applications or have received patents relating to technologies in our field. We cannot predict which, if any, of these applications will issue as patents or how many of these issued patents will be found valid and enforceable. There may also be existing issued patents on which we would be infringed by the commercialization of our product candidates. If so, we may be prevented from commercializing these products unless the third party is willing to grant a license to us. We may be unable to obtain licenses to the relevant patents at a reasonable cost, if at all, and may also be unable to develop or obtain alternative non-infringing technology. If we are unable to obtain such licenses or develop non-infringing technology at a reasonable cost, our business could be significantly harmed. Also, any infringement lawsuits commenced against us may result in significant costs, divert our management’s attention and result in an award against us for substantial damages, or potentially prevent us from continuing certain operations.





We may not be able to obtain third-party patient reimbursement or favorable product pricing.





Our ability to successfully commercialize our proposed products in the human therapeutic field depends to a significant degree on patient reimbursement of the costs of such products and related treatments. We cannot assure you that reimbursement in the United States or foreign countries will be available for any products developed, or, if available, will not decrease in the future, or that reimbursement amounts will not reduce the demand for, or the price of, our products.  We cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such regulation or legislation may have on our business. If additional regulations are overly onerous or expensive or if health care related legislation makes our business more expensive or burdensome than originally anticipated, we may be forced to significantly downsize our business plans or completely abandon the current business model.




26




Our products may not be profitable due to manufacturing costs.





Our products may be significantly more expensive to manufacture than other drugs or therapies currently on the market today due to a fewer number of potential manufacturers, greater level of needed expertise and other general market conditions affecting manufacturers of stem cell based products.  Accordingly, we may not be able to charge a high enough price for us to make a profit from the sale of our cell therapy products.





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





Our proposed products, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community in general may decide not to accept and utilize these products. The products that we are attempting to develop represent substantial departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance will depend on a number of factors, including:





·
the clinical efficacy and safety of our proposed products;





·
the superiority of our products to alternatives currently on the market;





·
the potential advantages of our products over alternative treatment methods; and





·
the reimbursement policies of government and third-party payors.





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





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





We are highly dependent on our chief executive officer, chief scientific officer and outside consultants.  Although we have entered into employment and consulting agreements with these parties, these agreements can be terminated at any time.  The loss of any of these key employee or consultant could adversely affect our opportunities and materially harm our future prospects.  In addition, we anticipate growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing.  We anticipate the need for additional management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our present and planned activities, and there can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development our business.





The employment contracts of key employees contain significant anti-termination provisions which could make changes in management difficult or expensive.





We have entered into employment agreements with Messrs. Garr and Johe which expire on November 1, 2012.  In the event either individual is terminated prior to the full term of their respective contracts, for any reason other than a voluntary resignation, all compensation due to such employee under the terms of the respective agreement shall become due and payable immediately. These provisions will make the replacement of either of these employees very costly and could cause difficulty in effecting a change in control. Termination prior to the full term of these contracts would cost us as much as $1,000,000 per contract and the immediate vesting of all outstanding options and/or warrants held by Messrs. Garr and Johe.





Our competition has significantly greater experience and financial resources.





The biotechnology industry is characterized by intense competition. We compete against numerous companies, many of which have substantially greater resources. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases which we target. Although not necessarily direct competitors, companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Advanced Cell Technology, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, may have substantially greater resources and experience in our fields which put us at a competitive disadvantage.




27




Our outsource model depends on third parties to assist in developing and testing our proposed products.





Our strategy for the development, clinical and preclinical testing and commercialization of our proposed products is based on an outsource model. This model requires us to engage third parties in order to further develop our technology and products as well as for the day to day operations of our business. In the event we are not able to enter into such relationships in the future, our ability to operate and develop products may be seriously hindered or we would be required to expend considerable resources to bring such functions in-house. Either outcome could result in our inability to develop a commercially feasible product or in the need for substantially more working capital to complete the research in-house.





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





By developing and, ultimately, commercializing medical products, we are exposed to the risk of product liability claims. Product liability claims against us could result in substantial litigation costs and damage awards against us. We have obtained liability insurance that covers our clinical trials.  If and when we begin commercializing products, we will need to increase our insurance coverage.  We may not be able to obtain insurance on acceptable terms, if at all, and the policy limits on our insurance policies may be insufficient to cover our liability.





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





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





Our corporate documents and Delaware law contain provisions that could make it difficult for us to be acquired in a transaction that might be beneficial to our stockholders.





Our board of directors has the authority to issue shares of preferred stock and to fix the rights, preferences, privileges, and restrictions of these shares without stockholder approval.  Additionally, our Bylaws provide for a staggered board.  These provisions in our corporate documents, along with certain provisions under Delaware law, may make it more difficult for a third party to acquire us or discourage a third party from attempting to acquire us, even if the acquisition might be beneficial to our stockholders.





Risks Relating to Our Common Stock





Our common shares are “thinly” traded.





Our common shares have historically been “thinly” traded, meaning that the number of persons interested in purchasing our common shares at or near the asking price at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the facts that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community.  Even if we came to the attention of such persons, they tend to be risk-adverse and would be reluctant to follow an unproven development stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without a material reduction in share price. We cannot give you any assurance that a broader or more active trading market for our common shares will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, you may not be able to sell your shares if you need money or otherwise desire to liquidate your investment.





The market price for our common shares is particularly volatile.





The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable to a number of factors. First, there is limited liquidity in the market for our common shares. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand.  Secondly, we are a speculative or “risky” investment due to our limited operating history, lack of significant revenues to date and the uncertainty of future market acceptance for our products if successfully developed. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.




28




The following factors may add to the volatility in the price of our common shares:  actual or anticipated variations in our quarterly or annual operating results; government regulations; announcements of significant acquisitions, strategic partnerships or joint ventures; our capital commitments; and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.





We face risks related to compliance with corporate governance laws and financial reporting standard.





The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company's legal and financial compliance costs and make some activities more time-consuming, burdensome and expensive.  Since the enactment the Sarbanes-Oxley Act, we have been classified as a smaller reporting company and as a result, we have been exempt from Section 404(b).  As of June 30, 2010, the market value of our securities exceeded the threshold for a smaller reporting company.  As a result, commencing with our annual report for the year ended December 31, 2010, we became subject to Section 404(b).  We anticipate this will further increase the costs associated with our compliance with the Sarbanes-Oxley Act of 2002.





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





We have never paid a cash dividend and do not intend to pay cash dividends on our common stock in the foreseeable future.





We have never paid cash dividends nor do we anticipate paying cash dividends in the foreseeable future.  Accordingly, any return on your investment will be as a result of stock appreciation.





Issuance of additional securities could dilute your proportionate ownership and voting rights.





We are entitled under our amended and restated certificate of incorporation to issue up to 150,000,000 common and 7,000,000 “blank check” preferred shares. As of March 31, 2011, we have issued and outstanding 48,366,304 common shares, 24,357,712 common shares reserved for issuance upon the exercise of current outstanding options, warrants, restricted stock units, restricted stock awards and convertible securities, and an aggregate of 6,773,874 common shares reserved for issuance pursuant to future awards under our incentive stock plans.  Accordingly, we will be entitled to issue up to 70,502,110 additional common shares and 7,000,000 additional preferred shares. Our board may generally issue those common and preferred shares, or options or warrants to purchase those shares, or securities convertible into those shares, without further approval by our shareholders based upon such factors as our board of directors may deem relevant at that time.  Any preferred shares we may issue shall have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.  It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development and marketing plans.  It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock option plans, in order to attract and retain qualified personnel. In the event of issuance, your proportionate ownership and voting rights may be significantly decreased and the value of your investment impacted.




29




Risks Relating to Intellectual Property and Government Regulation





We may not be able to withstand challenges to our intellectual property rights.





We rely on our intellectual property, including issued and applied-for patents, as the foundation of our business. Our intellectual property rights may come under challenge.  No assurances can be given that, even though issued, our current and potential future patents will survive such challenges. For example, in 2005 our neural stem cell technology was challenged in the USPTO. Although we prevailed in this particular matter upon re-examination by the patent office, these cases are complex, lengthy, expensive, and could potentially be adjudicated adversely to our interests, removing the protection afforded by an issued patent. The viability of our business would suffer if such patent protection were limited or eliminated. Moreover, the costs associated with defending or settling intellectual property claims would likely have a material adverse effect on our business and future prospects. At present, there is litigation with StemCells, Inc. which is in its initial stages and any likely outcome is difficult to predict.





We may not be able to adequately protect against the piracy of the intellectual property in foreign jurisdictions.





We anticipate conducting research in countries outside of the United States 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.





Our products may not receive regulatory approval.





The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacturing and marketing of pharmaceutical products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and vary substantially based upon the type, complexity and novelty of the proposed product.  We are currently undertaking two (2) sponsored Phase I clinical trials.  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 for FDA approval or whether any such product license application will be granted on a timely basis, if at all.  Moreover, we cannot assure you that FDA approvals for any products developed by us will be granted on a timely basis, if at all. Any delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue.





Development of our technologies is subject to extensive government regulation.





Our research and development efforts, as well as any future clinical trials, and the manufacturing and marketing of any products we may develop, will be subject to, and restricted by, extensive regulation by governmental authorities in the United States and other countries. The process of obtaining FDA and other necessary regulatory approvals is lengthy, expensive and uncertain.  FDA and other legal and regulatory requirements applicable to the development and manufacture of the cells and cell lines required for our preclinical and clinical products could substantially delay or prevent us from producing the cells needed to initiate additional clinical trials. We may fail to obtain the necessary approvals to commence clinical testing or to manufacture or market our potential products in reasonable time frames, if at all.  In addition, the U.S. Congress and other legislative bodies may enact regulatory reforms or restrictions on the development of new therapies that could adversely affect the regulatory environment in which we operate or the development of any products we may develop.





We base our research and development on the use of human stem cells obtained from human tissue.  The U.S. federal and state governments and other jurisdictions impose restrictions on the acquisition and use of human tissue, including those incorporated in federal Good Tissue Practice, or “GTP,” regulations. These regulatory and other constraints could prevent us from obtaining cells and other components of our products in the quantity or of the quality needed for their development or commercialization. These restrictions change from time to time and may become more onerous. Additionally, we may not be able to identify or develop reliable sources for the cells necessary for our potential products — that is, sources that follow all state and federal laws and guidelines for cell procurement. Certain components used to manufacture our stem and progenitor cell product candidates will need to be manufactured in compliance with the FDA’s GMP. Accordingly, we will need to enter into supply agreements with companies that manufacture these components to GMP standards.  There is no assurance that we will be able to enter into any such agreements.





Noncompliance with applicable requirements both before and after approval, if any, can subject us, our third party suppliers and manufacturers and our other collaborators to administrative and judicial sanctions, such as, among other things, warning letters, fines and other monetary payments, recall or seizure of products, criminal proceedings, suspension or withdrawal of regulatory approvals, interruption or cessation of clinical trials, total or partial suspension of production or distribution, injunctions, limitations on or the elimination of claims we can make for our products, refusal of the government to enter into supply contracts or fund research, or government delay in approving or refusal to approve new drug applications.




30




We cannot predict if or when we will be permitted to commercialize our products due to regulatory constraints.





Federal, state and local governments and agencies in the United States (including the FDA) and governments in other countries have significant regulations in place that govern many of our activities.  We are, or may become, subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with its research and development work. The preclinical testing and clinical trials of our proposed products are subject to extensive government regulation that may prevent us from creating commercially viable products. In addition, our sale of any commercially viable product will be subject to government regulation from several standpoints, including manufacturing, advertising, marketing, promoting, selling, labeling and distributing.  If, and to the extent that, we are unable to comply with these regulations, our ability to earn revenues, if any, will be materially and negatively impacted.





ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





The following information is given with regard to unregistered securities sold during the three months ended March 31, 2011.  The unregistered securities were issued pursuant to section 4(2) of the Securities Act:





·
On January 6, 2011, pursuant to the terms of the consulting agreement entered into with Market Development Consulting Group, Inc. in January of 2010 and amended May 14, 2010 and February 7, 2011, we issued: (i) 120,000 common shares; and (ii) a common stock purchase warrant entitling the holder to purchase 596,675 shares of common stock at $2.14 per share.  The common stock is deliverable on April 1, 2011.  The warrant is exercisable immediately, shall expire on January 6, 2021, and is freely assignable in whole or in part.   We also agreed to register the shares underlying the warrant with the SEC for resale.





ITEM 3.           DEFAULT UPON SENIOR SECURITIES





None





ITEM 4.           (REMOVED AND RESERVED)





None





ITEM 5.           OTHER INFORMATION





None





ITEM 6.           EXHIBITS





The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-Q.





SIGNATURES





In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.





NEURALSTEM, INC.Date:  May 10,  2011

/s/ I. Richard GarrChief Executive Officer/s/ John ConronChief Financial Officer(Principal Accounting Officer)





31


INDEX TO EXHIBITS
 
 Incorporated by ReferenceExhibit

No.

Description

Filed

Herewith

Form

Exhibit

No.

File No.

Filing Date1.01

Form of Placement Agent Agreement dated June 28, 2010



8-K

1.01

001-33672

6/29/101.02

Form of Amendment to Placement Agent Agreement dated June 28, 2010



8-K

1.02

001-33672

6/29/101.03

ATM Equity Offering Sales Agreement dated November 22, 2010, between Neuralstem, Inc. and Stifel, Nicolaus & Company , Incorporated



8-K

1.1

001-33672

11/22/103.01(i)

Amended and Restated Certificate of Incorporation of Neuralstem, Inc. filed on 9/29/05



10-K

3.01(i)

001-33672

3/31/093.02(i)

Certificate of Amendment to Certificate of Incorporation of Neuralstem, Inc. filed on 5/29/08



DEF 14A

Appendix I

001-33672

4/24/083.03(ii)

Amended and Restated Bylaws of Neuralstem, Inc. adopted on July 16, 2007



10-QSB

3.2(i)

333-132923

8/14/074.01**

Amended and Restated 2005 Stock Plan adopted on June 28, 2007



10-QSB

4.2(i)

333-132923

8/14/074.02**

Non-qualified Stock Option Agreement between Neuralstem, Inc. and Richard Garr dated July 28, 2005



SB-2

4.4

333-132923

6/21/064.03**

Non-qualified Stock Option Agreement between Neuralstem, Inc. and Karl Johe dated July 28, 2005



SB-2

4.5

333-132923

6/21/064.04

Form of Placement Agent Warrant issued in connection with the March 2006 offering



SB-2

4.13

333-132923

6/21/064.05

Form of Securities Purchase Agreement dated March 15, 2007



8-K

4.1

333-132923

3/16/074.06

Form of Common Stock Purchase Warrant dated March 15, 2007 (Series C)



8-K

4.2

333-132923

3/16/074.07

Form of Registration Rights Agreement dated March 15, 2007



8-K

4.3

333-132923

3/16/074.08**

Neuralstem, Inc. 2007 Stock Plan



10-QSB

4.21

333-132923

8/14/074.09

Form of Common Stock Purchase Warrant Issued to Karl Johe on June 5, 2007



10-KSB

4.22

333-132923

3/27/08
 
 32
 
 4.10

Form of Placement Agent Warrant Issued to Midtown Partners & Company on December 18, 2008



8-K

4.1

001-33672

12/18/084.11

Form of Consultant Common Stock Purchase Warrant issued on January 5, 2009



S-3/A

10.1

333-157079

02/3/094.12

Form of Series D, E and F Warrants



8-K

4.01

001-33672

7/1/094.13

Form of Placement Agent Warrant



8-K

4.02

001-33672

7/1/094.14

Form of Consultant Warrant Issued January 8, 2010



10-K

4.20

001-33672

3/31/104.15

Form of Replacement Warrant Issued January 29, 2010



10-K

4.21

001-33672

3/31/104.16

Form of Replacement Warrant Issued March of 2010



10-K

4.22

001-33672

3/31/104.17

Form of employee and consultant option grant pursuant to our 2007 Stock Plan and 2010 Equity Compensation Plan



10-K

4.23

001-33672

3/31/104.18

Form of Warrants dated June 29, 2010



8-K

4.01

001-33672

6/29/104.19**

Neuralstem 2010 Equity Compensation Plan



8-K

10.01

001-33672

7/14/104.20

Form of Consultant Warrant issued October 1, 2009 and 2010



S-3

4.07

333-169847

10/8/104.21**

Form of Restricted Stock Award Agreement pursuant to our 2007 Stock Plan and 2010 Equity Compensation Plan.



S-8

4.06

333-172563

3/1/114.22**

Form of Restricted Stock Unit Agreement



S-8

4.08

333-172563

3/1/1110.01**

Employment Agreement with I. Richard Garr dated January 1, 2007 and amended as of November 1, 2005



SB-2

10.1

333-132923

6/21/0610.02**

Amended terms to the Employment Agreement of I Richard Garr dated January 1, 2008



10-K

10.02

001-33672

3/31/0910.03**

Employment Agreement with Karl Johe dated January 1, 2007 and amended as of November 1, 2005



SB-2

10.2

333-132923

6/21/0610.04**

Amended terms to the Employment Agreement of Karl Johe dated January 1, 2009



10-K

10.04

001-33672

3/31/0910.05

Form of Securities Purchase Agreement dated June 29, 2010



8-K

10.01

001-33672

6/29/10
 
 33
 
 10.06

Employment Agreement with Thomas Hazel, Ph.D dated August 11, 2008



10-K/A

10.05

001-33672

10/5/1010.07

Consulting Agreement dated January 2010 between Market Development Consulting Group and the Company and amendments No. 1 and 2.



10-K

11.07

001-33672

3/16/1114.01

Neuralstem Code of Ethics



SB-2

14.1

333-132923

6/21/0614.02

Neuralstem Financial Code of Profession Conduct adopted on May 16, 2007



8-K

14.2

333-132923

6/6/0731.1

Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2

Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. § 1350

*32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350

*
 
 **Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
 
 34