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, 2010
 Or
  o
                  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     o No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).xYes     o 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 o
                    Accelerated
      filer  oNon-accelerated
      filer  o  (Do
      not check if a small reporting company)
                    Smaller
      reporting company  x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)  o Yesx No
  As of
April 13, 2010 there were 42,250,875 shares of common stock, $.01 par
value, issued and outstanding.
  
 
 Neuralstem,
Inc.
  Table of
Contents
  PagePART
      I -
                                  
                                  FINANCIAL
      INFORMATIONItem
      1.
                                  
                                  Financial
      Statements
                                  
                                  2Balance
      Sheets as of March 31, 2010 (Unaudited) and December 31,
    2009
                                  
                                  2Statements
      of Operations (Unaudited)Three
      months ended March 31, 2010 and 2009
                                  
                                  3Statements
      of Changes in Stockholders' Equity (Deficit) (Unaudited)For the three months
      ended March 31, 2010
                                  
                                  5Statements
      of Cash Flows (Unaudited)Three
      months ended March 31, 2010 and 2009
                                  
                                  4Notes
      to Financial Statements (Unaudited)
                                  
                                  6Item
      2.
                                  
                                  Management's
      Discussion and Analysis of Financial Condition and Results
      of Operations
                                  
                                  11Item
      3.
                                  
                                  Quantitative
      and Qualitative Disclosures about Market Risk
                                  
                                  19Item
      4.
                                  T
                                  Controls
      and Procedures
                                  
                                  19PART
      II -
                                  
                                  OTHER
      INFORMATIONItem
      1.
                                  
                                  Legal
      Proceedings
                                  
                                  20Item
      1A.
                                  
                                  Risk
      Factors
                                  
                                  20Item
      2.
                                  
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  
                                  28Item
      3.
                                  
                                  Defaults
      Upon Senior Securities
                                  
                                  29Item
      4.
                                  
                                  (Removed
      and Reserved).
                                  
                                  29Item
      5.
                                  
                                  Other
      Information
                                  
                                  29Item
      6.
                                  
                                  Exhibits
                                  
                                  29
  1
  PART
I
 FINANCIAL
INFORMATION
 
 ITEM
      1.
                FINANCIAL
      STATEMENTS
  Neuralstem,
Inc.
 
 Balance
Sheets
 March 31,
                                      
                                      
                                      December 31,2010
                                      
                                      
                                      2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                      
                                      $
                                      7,515,269
                                      
                                      
                                      $
                                      2,309,774Prepaid
      expenses
                                      
                                      
                                      131,534
                                      
                                      
                                      
                                      143,600Total
      current assets
                                      
                                      
                                      7,646,803
                                      
                                      
                                      
                                      2,453,374Property
      and equipment, net
                                      
                                      
                                      202,005
                                      
                                      
                                      
                                      196,755Intangible
      assets, net
                                      
                                      
                                      319,700
                                      
                                      
                                      
                                      301,560Other
      assets
                                      
                                      
                                      49,410
                                      
                                      
                                      
                                      55,716Total
      assets
                                      
                                      $
                                      8,217,918
                                      
                                      
                                      $
                                      3,007,405LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                                      
                                      $
                                      922,748
                                      
                                      
                                      $
                                      791,607Accrued
      bonus expense
                                      
                                      
                                      774,741
                                      
                                      
                                      
                                      769,215Fair
      value of warrant obligations
                                      
                                      
                                      1,497,863
                                      
                                      
                                      
                                      -Total
      current liabilities
                                      
                                      
                                      3,195,352
                                      
                                      
                                      
                                      1,560,822LONG-TERM
      LIABILITIESFair
      value of warrant obligations
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,462,039Total
      liabilities
                                      
                                      
                                      3,195,352
                                      
                                      
                                      
                                      8,022,861STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, 7,000,000 shares authorized, zero shares issued and
      outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, $0.01 par value; 150 million shares authorized, 42,250,875 and
      35,743,831 shares outstanding in 2010 and 2009
respectively
                                      
                                      
                                      422,509
                                      
                                      
                                      
                                      357,438Additional
      paid-in capital
                                      
                                      
                                      78,933,849
                                      
                                      
                                      
                                      62,193,937Accumulated
      deficit
                                      
                                      
                                      (74,333,792
                                      )
                                      
                                      
                                      (67,566,831
                                      )Total
      stockholders' equity (deficit)
                                      
                                      
                                      5,022,566
                                      
                                      
                                      
                                      (5,015,456
                                      )Total
      liabilities and stockholders' equity (deficit)
                                      
                                      $
                                      8,217,918
                                      
                                      
                                      $
                                      3,007,405
  2
  Neuralstem,
Inc.
 
 Statements
of Operations
 (Unaudited)
 Three MonthsEnded March 31,2010
                                    
                                    
                                    2009Revenues
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Operating
      expenses:Research
      and development costs
                                    
                                    
                                    1,899,963
                                    
                                    
                                    
                                    1,434,010General,
      selling and administrative expenses
                                    
                                    
                                    1,687,835
                                    
                                    
                                    
                                    1,457,238Depreciation
      and amortization
                                    
                                    
                                    29,063
                                    
                                    
                                    
                                    20,7963,616,861
                                    
                                    
                                    
                                    2,912,044Operating
      loss
                                    
                                    
                                    (3,616,861
                                    )
                                    
                                    
                                    (2,912,044
                                    )Nonoperating
      (expense) income:Interest
      income
                                    
                                    
                                    5,811
                                    
                                    
                                    
                                    2,264Interest
      expense
                                    
                                    
                                    (659
                                    )
                                    
                                    
                                    -Warrant
      issuance and modification expense
                                    
                                    
                                    (1,906,800
                                    )
                                    
                                    
                                    -(Loss)
      gain from change in fair value of warrant obligations
                                    
                                    
                                    (1,248,452
                                    )
                                    
                                    
                                    3,815,458(3,150,100
                                    )
                                    
                                    
                                    3,817,722Net
      (loss) income attributable to common shareholders
                                    
                                    $
                                    (6,766,961
                                    )
                                    
                                    $
                                    905,678Net
      (loss) income per share - basic
                                    
                                    $
                                    (0.18
                                    )
                                    
                                    $
                                    0.03Net
      (loss) income per share - diluted
                                    
                                    $
                                    (0.18
                                    )
                                    
                                    
                                    0.03Weighted
      average common shares outstanding - basic
                                    
                                    
                                    38,539,226
                                    
                                    
                                    
                                    33,751,300Weighted
      average common shares outstanding - diluted
                                    
                                    
                                    38,539,226
                                    
                                    
                                    
                                    35,643,178
 
 3
  Neuralstem,
Inc.
 
 Statements
of Cash Flows
 (Unaudited)
 Three MonthsEnded March31,2010
                                        
                                        
                                        2009Cash
      flows from operating activities:Net
      (loss) income
                                        
                                        $
                                        (6,766,961
                                        )
                                        
                                        $
                                        905,678Adjustments
      to reconcile net (loss) income to cash used in operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        29,063
                                        
                                        
                                        
                                        20,796Share
      based compensation expenses
                                        
                                        
                                        1,300,884
                                        
                                        
                                        
                                        1,198,704Warrant
      issuance and modification expense
                                        
                                        
                                        1,906,800
                                        
                                        
                                        
                                        -Loss/(gain)
      from change in fair value of warrant obligations
                                        
                                        
                                        1,248,452
                                        
                                        
                                        
                                        (3,815,458
                                        )Changes
      in operating assets and liabilities:Prepaid
      expenses
                                        
                                        
                                        12,066
                                        
                                        
                                        
                                        36,860Other
      assets
                                        
                                        
                                        6,307
                                        
                                        
                                        
                                        (8,500
                                        )Accounts
      payable and accrued expenses
                                        
                                        
                                        130,887
                                        
                                        
                                        
                                        202,262Accrued
      bonus expenses
                                        
                                        
                                        5,526
                                        
                                        
                                        
                                        162,692Net
      cash used in operating activities
                                        
                                        
                                        (2,126,976
                                        )
                                        
                                        
                                        (1,296,966
                                        )Cash
      flows from investing activities:Acquisition
      of intangible assets
                                        
                                        
                                        (29,207
                                        )
                                        
                                        
                                        (33,948
                                        )Purchase
      of property and equipment
                                        
                                        
                                        (23,247
                                        )
                                        
                                        
                                        (5,257
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (52,454
                                        )
                                        
                                        
                                        (39,205
                                        )Cash
      flows From financing activities:Issuance
      of common stock from warrants exercised
                                        
                                        
                                        7,384,925
                                        
                                        
                                        
                                        -Net
      cash provided by financing activities
                                        
                                        
                                        7,384,925
                                        
                                        
                                        
                                        -Net
      increase (decrease)in cash
                                        
                                        
                                        5,205,495
                                        
                                        
                                        
                                        (1,336,171
                                        )Cash
      and cash equivalents, beginning of period
                                        
                                        
                                        2,309,774
                                        
                                        
                                        
                                        4,903,279Cash
      and cash equivalents, end of period
                                        
                                        $
                                        7,515,269
                                        
                                        
                                        $
                                        3,567,108Supplemental
      disclosure of cash flows information:Cash
      paid for interest
                                        
                                        $
                                        659
                                        
                                        
                                        $
                                        -Cash
      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
                                        
                                        
                                        6,212,374
                                        
                                        
                                        
                                        -
 
 4
  Neuralstem,
Inc.
 STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
 For
the period from January 1, 2010 through March 31, 2010
 (Unaudited)
 Common
                                
                                
                                Common
                                
                                
                                Additional
                                
                                
                                
                                
                                
                                TotalStock
                                
                                
                                Stock
                                
                                
                                Paid-In
                                
                                
                                Accumulated
                                
                                
                                Stockholders'Shares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Deficit
                                
                                
                                Equity (Deficit)Balance
      at January 1, 2010
                                
                                
                                35,743,831
                                
                                
                                $
                                357,438
                                
                                
                                $
                                62,193,937
                                
                                
                                $
                                (67,566,831
                                )
                                
                                $
                                (5,015,456
                                )Share
      based payments
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,300,884
                                
                                
                                
                                
                                
                                
                                
                                1,300,884Issuance
      of common stock from warrants exercised ($1.25 and $1.10 per share), net
      of issuance costs of $631,579.
                                
                                
                                6,507,044
                                
                                
                                
                                65,071
                                
                                
                                
                                7,319,854
                                
                                
                                
                                
                                
                                
                                
                                7,384,925Warrant
      issuances and modifications
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                8,094,503
                                
                                
                                
                                
                                
                                
                                
                                8,094,503Extinguishment
      of fair value of warrant obligations from warrant
    expiration
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                24,671
                                
                                
                                
                                
                                
                                
                                
                                24,671Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (6,766,961
                                )
                                
                                
                                (6,766,961
                                )Balance
      at March 31, 2010
                                
                                
                                42,250,875
                                
                                
                                $
                                422,509
                                
                                
                                $
                                78,933,849
                                
                                
                                $
                                (74,333,792
                                )
                                
                                $
                                5,022,566
 
 5
  NEURALSTEM,
INC.
 NOTES
TO UNAUDITED FINANCIAL STATEMENTS
  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,
2009.
 
 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 currently does not generate cash. The Company's management
does not know when this will change. The Company has expended and will continue
to expend substantial funds in the research, development and clinical and
pre-clinical testing of the Company's stem cell technologies and products with
the goal of ultimately obtaining approval from the United States Food and Drug
Administration ("FDA") to market and sell our products. We believe our long-term
cash position is inadequate to fund all of the costs associated with the full
range of testing and clinical trials required by the FDA for our core products.
Based on our current operating levels, we believe that we have sufficient levels
of cash and cash equivalents to fund operations into the first quarter of
2011.
 
 No
assurance can be given that (i) we will be able to expand our operations
prior to FDA approval of our products, or (ii) that FDA approval will ever
be granted for our products.
 
 Revenue
Recognition
 
 Our
revenue recognition policies are in accordance with guidance issued by the SEC
and Financial Accounting Standards Board (FASB). Historically, our revenue
has been derived primarily from providing treated samples for gene expression
data from stem cell experiments, from providing services under various grant
programs and through the licensing of the use of our intellectual
property.  Revenue is recognized when there is persuasive evidence that an
arrangement exists, delivery of goods and services has occurred, the price is
fixed and determinable, and collection is reasonably assured.
 
 Research and
Development
  Research
and development expenses consist primarily of costs associated with basic and
pre-clinical research, exclusively in the field of human neural stem cell
therapies and regenerative medicine, related to our clinical cell therapy
candidates. These expenses represent both pre-clinical development costs and
costs associated with non-clinical support activities such as quality control
and regulatory processes. Research and development costs are expensed as they
are incurred.
  Lossor Incomeper Common
Share
  Basic
loss per common share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share adjusts basic loss per share for the potentially dilutive effects
of shares issuable under our stock option plan, using the treasury stock method.
For the three months ended March 31, 2010, all of the Company’s options and
warrants, which are common stock equivalents, have been excluded from the
calculation of diluted loss per share, as their effect would have been
anti-dilutive.  For the three months ended March 31, 2009, 6,500,659
options and 4,212,000 warrants have been excluded from the calculation for the
same reason.
 
 For The Three MonthsEnded March 31,2010
                            
                            
                            2009Basic:Net
      (loss) income attributable to common shareholders
                            
                            $
                            (6,766,961
                            )
                            
                            $
                            905,678Weighted
      average common shares outstanding
                            
                            
                            38,539,226
                            
                            
                            
                            33,751,300Basic
      earnings per common share
                            
                            $
                            (0.18
                            )
                            
                            $
                            0.03Diluted:Net
      income (loss) attributable to common shareholders
                            
                            $
                            (6,766,961
                            )
                            
                            $
                            905,678Weighted
      average common shares outstanding
                            
                            
                            38,539,226
                            
                            
                            
                            33,751,300Dilutive
      effect of stock options and warrants
                            
                            
                            -
                            
                            
                            
                            1,891,878Weighted
      average common shares outstanding - diluted
                            
                            
                            38,539,226
                            
                            
                            
                            35,643,178Diluted
      earnings per common share
                            
                            $
                            (0.18
                            )
                            
                            $
                            0.03
 
 6
  Share Based
Payments
 
 We have
granted stock-based compensation awards to employees and board members. 
Awards may consist of common stock, warrants, or stock options.  Our stock
options and warrants have up to a ten year life.  The stock options or
warrants vest either upon the grant date or over varying periods of time. The
stock options we grant provide for option exercise prices equal to or greater
than the fair market value of the common stock at the date of the
grant.
  We
granted no options during the three months ended March 31, 2010.  We
granted 196,000 options in the similar period ended March 31, 2009. We recorded
related compensation expenses as our options vest in accordance with guidance
issued by the FASB related to share based payments.  We recognized
$1,300,884 and $1,198,704 in share-based compensation expense during the three
months ended March 31, 2010 and 2009, respectively, from the vesting of stock
options or warrants.
  A summary
of stock option activity during the three months ended March 31, 2010 and
related information is included in the table below:
  Number
      ofOptions
                                      
                                      
                                      Weighted-AverageExercisePrice
                                      
                                      
                                      Weighted-AverageRemainingContractualLife
      (inyears)
                                      
                                      
                                      AggregateIntrinsicValueOutstanding
      at January 1, 2010
                                      
                                      
                                      9,070,659
                                      
                                      
                                      $
                                      2.52
                                      
                                      
                                      
                                      7.2
                                      
                                      
                                      $
                                      -Granted
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Outstanding
      at March 31, 2010
                                      
                                      
                                      9,070,659
                                      
                                      
                                      $
                                      2.52
                                      
                                      
                                      
                                      7.0
                                      
                                      
                                      $
                                      4,041,800Exercisable
      at March 31, 2010
                                      
                                      
                                      5,083,159
                                      
                                      
                                      $
                                      1.88
                                      
                                      
                                      
                                      6.4
                                      
                                      
                                      $
                                      3,961,200
  Share-based
compensation expense included in the statements of operations for the three
months ended March 31, 2010 and 2009 was as follows:
 
 Three Months Ended Mar. 31,2010
                      
                      
                      2009Research
      and development costs
                      
                      $
                      836,196
                      
                      
                      $
                      740,201General,
      selling and administrative expenses
                      
                      
                      464,688
                      
                      
                      
                      458,503Total
                      
                      $
                      1,300,884
                      
                      
                      $
                      1,198,704
 
 7
  Warrants
to purchase common stock were issued to certain officers, directors,
stockholders and consultants.
 Weighted-Weighted-
                      
                      
                      AverageAverage
                      
                      
                      Remaining
                      
                      
                      AggregateNumber
                      
                      
                      Exercise
                      
                      
                      Contractual
                      
                      
                      Intrinsicof Warrants
                      
                      
                      Price
                      
                      
                      Life (in years)
                      
                      
                      ValueOutstanding
      at January 1, 2010
                      
                      
                      15,295,257
                      
                      
                      $
                      1.82
                      
                      
                      
                      2.0
                      
                      
                      
                      -Granted
                      
                      
                      4,526,405
                      
                      
                      
                      2.06
                      
                      
                      
                      5.0
                      
                      
                      
                      276,000Exercised
                      
                      
                      (6,507,044
                      )
                      
                      
                      1.23
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      (25,355
                      )
                      
                      
                      1.25
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at March 31, 2010
                      
                      
                      13,289,263
                      
                      
                      $
                      2.19
                      
                      
                      
                      3.7
                      
                      
                      
                      1,977,484Exercisable
      at March 31, 2010
                      
                      
                      10,269,263
                      
                      
                      $
                      1.95
                      
                      
                      
                      2.9
                      
                      
                      
                      1,977,484
  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
  As
such, 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.  In the first quarter of 2010, 6,532,399 of the common stock
purchase warrants were exercised or forfeited.  The fair value of the
remaining warrants increased, due to a higher stock price, resulting in a
$1,248,452 expense for the three months ended March 31, 2010.
 
 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 do not qualify for hedge accounting, and as such, all future changes in
the fair value of these warrants will be 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:
  March 31,
                    
                    
                    March 31,2010
                    
                    
                    2009Annual
      dividend yield
                    
                    
                    -
                    
                    
                    
                    -Expected
      life (years)
                    
                    
                    0.46
                    
                    
                    
                    1.25-2.75Risk
      free interest rate
                    
                    
                    0.24
                    %
                    
                    
                    0.40
                    %Expected
      volatility
                    
                    
                    61
                    %
                    
                    
                    86
                    %
 
 8
  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.
 
 Warrant
Issuance and Modification Expense
 
 In
February 2010 we extended the lives of warrants for 706,752 shares of common
stock with a strike price of $1.25 for two years.  The warrants had
been issued earlier in exchange for extinguishment of debt.  The
warrants were due to expire in March 2012.  As a result of the term
change, we recorded a Warrant Modification Expense charge of $171,531for the
three months ended March 31, 2010.  In addition, as a fulfillment of
agreements with certain vendors, 3,881,005 warrants were reissued in January and
March 2010 to replace warrants that had been exercised during the
period.  As a result of the reissue of these warrants, the Company
recognized a Warrant Modification Expense charge of $1,735,269.  The
total expense for the first quarter 2010 was $1,906,800.
 
 Significant New Accounting
Pronouncements
 
 In June
2008, the FASB ratified consensus reached on determining whether an instrument
is indexed to an entity’s own stock. The FASB provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity's own stock. The guidance applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative,
as defined by the FASB. The guidance also applies to any freestanding financial
instrument that is potentially settled in an entity's own stock, regardless of
whether the instrument has all the characteristics of a derivative, for purposes
of determining whether the instrument is subject to accounting guidance for
instruments that are indexed to, and potentially settled in, the issuer's own
stock. This guidance is effective for fiscal years beginning after December 15,
2008.
 
 In May
2009, the FASB issued new accounting guidance related to the accounting and
disclosures of subsequent events.  This guidance incorporates the
subsequent events guidance contained in the auditing standards literature into
authoritative accounting literature.  It also requires the disclosure
of the date through which a company has evaluated subsequent events occurring
after the balance sheet date of the financial statements and whether this date
is the date the financial statements were issued or the date the financial
statements were available to be issued.  This guidance is effective
for financial statements issued for interim or annual periods ending after June
15, 2009.
  In June
2009, the FASB issued SFAS 168 the FASB Accounting Standards
Codificationand the
Hierarchy of Generally AcceptedAccounting Principles “a replacement of FASB Statement No.
162” (“SFAS 168”).  SFAS 168 is the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS 168, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
are  nonauthoritative.  SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.  Once the Codification is in effect, all of its content will
carry the same level of authority, effectively superseding SFAS
162.
  3.  Fair
Value
  In
September 2006, the FASB issued accounting guidance related to fair value
measurements and related disclosures.  This guidance establishes a
standard framework for measuring fair value in generally accepted accounting
principles, clarifies the definition of "fair value" within that framework, and
expands disclosures about the use of fair value measurements. We adopted this
guidance in the first quarter of 2008 with regard to all financial assets and
liabilities in our financial statements going forward.  However, the
FASB deferred the effective date of this new guidance for one year as it relates
to fair value measurement requirements for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring
basis.  We adopted these remaining provisions on January 1,
2009.  The adoption of this accounting guidance had no material impact
on our financial statements.
  9
  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 warranty obligations
      are considered Level 3 items.
  Financial
assets and liabilities measured at fair value on a recurring basis are
summarized below:
 
 Fair value measurements at March 31, 2010 usingMarch 31,2010
                                              
                                              
                                              Quoted prices inactive markets foridentical assets(Level 1)
                                              
                                              
                                              Significantotherobservableinputs (Level2)
                                              
                                              
                                              Significantunobservableinputs (Level3)Assets:Cash
      and cash equivalents
                                              
                                              $
                                              7,515,269
                                              
                                              
                                              $
                                              7,515,269
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -Liabilities:Fair
      value of warrant obligations
                                              
                                              
                                              1,497,863
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,497,863
  10
  Three months ended
                            March 31, 2010Fair
      value of warrant obligations at beginning of period
                          
                          $
                          6,462,039Extinguishment
      through warrant exercises and modifications
                          
                          
                          (6,212,374
                          )Extinguishment
      through warrant expirations
                          
                          
                          (254
                          )Net
      loss for change in fair value, included in the statement of operations for
      period
                          
                          
                          1,248,452Fair
      value of warrant obligations at March 31, 2010
                          
                          $
                          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 (Deficit)
  In the
first three months ended March 31, 2010, various warrant holders exercised
6,507,044 warrants at $1.25 per warrant increasing equity by approximately $7.38
million, net of $636,371 in related financing costs.  The exercise of
these warrants reduced the Company’s derivative liability and increased equity
by $5,480,096.
 
 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, 2010), unless another date is specified.
  We
prepare our interim financial statements in accordance with United States
generally accepted accounting principles.  Our financial statements and
results of operations for the three month period ended March 31, 2010 are not
necessarily indicative of our prospective financial condition and results of
operations for the pending full fiscal year ending December 31, 2010. The
interim financial statements presented in this Quarterly Report as well as other
information relating to our company contained herein 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”).
 
 11
  FORWARD
LOOKING STATEMENTS
 
 In this
Report we make a number of statements, referred to as “forward-looking
statements,” within the meaning of Section 27A of the Securities Act of 1933
(“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), which are intended to convey our expectations or predictions
regarding the occurrence of possible future events or the existence of trends
and factors that may impact our future plans and operating results. These
forward-looking statements are derived, in part, from various assumptions and
analyses we have made in the context of our current business plan and
information currently available to use and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe are appropriate in the circumstances.
You can generally identify forward looking statements through words and phrases
such as“believe,” “expect,”
“seek,” “estimate,” “anticipate,” “intend,” “plan,” “budget,” “project,” “may
likely result,” “may be,” “may continue”  and other similar
expressions.
 
 When
reading any forward-looking statement you should remain mindful that actual
results or developments may vary substantially from those expected as expressed
in or implied by such statement for a number of reasons or factors, including
but not limited to:
  ·
                the
      success of our research and development activities, the development of a
      viable commercial product, and the speed with which regulatory
      authorizations and product launches may be
  achieved;
 
 ·
                whether
      or not a market for our product develops, and, if a market develops, the
      rate at which it develops;
 
 ·
                our
      ability to successfully sell or license our products if a market
      develops;
 
 ·
                our
      ability to attract and retain qualified personnel to implement our
      business plan and corporate growth
strategies;
 
 ·
                our
      ability to develop sales, marketing, and distribution
      capabilities;
 
 ·
                our
      ability to obtain reimbursement from third party payers for our proposed
      products if they are developed;
 
 ·
                the
      accuracy of our estimates and
projections;
 
 ·
                our
      ability to fund our short-term and long-term financing
    needs;
 
 ·
                changes
      in our business plan and corporate strategies;
  and
 
 ·
                other
      risks and uncertainties discussed in greater detail in the section
      captioned “Risk
      Factors.”
  Each
forward-looking statement should be read in context with, and in understanding
of, the various other disclosures concerning our company and our business made
elsewhere in this report as well as our public filings with the SEC. You should
not place undue reliance on any forward-looking statement as a prediction of
actual results or developments. We are not obligated to update or revise any
forward-looking statements contained in this report or any other filing to
reflect new events or circumstances unless and to the extent required by
applicable law.
 
 ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is provided in addition to the accompanying 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
      2010.
 •
                    Critical
      Accounting Policies—Accounting policies that we
      believe are important to understanding the assumptions and judgments
      incorporated in our reported financial results and
      forecasts.
  12
  •
                  Results of
      Operations—Analysis of our financial
      results comparing the first quarter of 2010 to
  2009.
 •
                    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.
  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.
 
 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 four (4) issued patents
and twelve (12) patent pending applications in the field of regenerative
medicine and related technologies. We believe our technology base, in
combination with our know-how, and collaborative projects with major research
institutions, provides a competitive advantage and will facilitate the
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. We are headquartered in Rockville, Maryland.
 
 In
addition to our core tissue based technology, we have begun developing
neurogenic and neuroprotective Small-Molecule compounds.  The patent,
covering what we believe to be a new class of drug, was issued on June 10,
2009.
  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
have completed preclinical efficacy and safety studies on these cells sufficient
to gain United States Food and Drug Administration (“FDA”) approval for human
clinical trials. 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). In anticipation of our
Phase I trials, we have created spinal cord cell banks using Good
Manufacturing Practice (GMP).
 
 13
 
 Small-molecule
Compounds
 
 We have
performed tests on cultured neural stem cells as well as in animals models in
order to validate the performance of small molecule compounds for
hippocampal neurogenesis. To date, we have contracted for the manufacturing of
small batches of the compound.  We have also contracted for a
production run using GMP methods which will be large enough to complete safety
testing and Phase I clinical trials.  We expect to file an
Investigational New Drug Application (“IND”) to commence human safety trials of
our lead small molecule compound to treat major depression in early
2011.
 
 In
June of 2009, we received a notice of allowance from the U.S. Patent and
Trademark Office (“USPTO”) for a patent covering
these  compounds.  Patent application 12/049,922, entitled
“Use of Fused Nicotinamides to
Promote Neurogenesis,” claims four chemical entities and any
pharmaceutical composition including them.
 
 Research
 
 We have
devoted substantial resources to our research programs in order to isolate and
develop a series of neural stem cell banks that we believe can serve as a basis
for 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
collarboration with academic institutes.
  Trends
& Outlook
 
 Revenue
 
 We
had no revenue for the year ended December 31, 2009 and three month period ended
March 31, 2010.  Our focus is now on initiating and successfully
managing the clinical trial for ALS commenced earlier this year.  We
are also pursuing pre-clinical studies on other central nervous system
indications in preparation for additional clinical trials. We are not focused at
this time on generating 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.
 
 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 12 to 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.
 
 We will
be working on proof of principle testing, dosing rationale, and the development
of clinical protocols for our most promising indications. We intend to submit
IND applications to the FDA for our most promising treatment
candidates.  We expect to submit an IND application for the treatment
of Spinal Cord Injury in 2010.
 
 Small
Molecule Compounds
 
 We
believe we have successfully demonstrated proof of principle to support
advancement of our lead small molecule compound for the treatment of
depression.  We have completed planning for toxicology,
tumorigenicity, dosing rationale, and development of the clinical protocol. If
the remaining preclinical testing results are successful, we will file an IND.
We hope to begin clinical trials for this indication in early 2011.
 
 14
  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.
 
 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 1of the Notes to Financial Statements describes the significant
accounting policies used in the preparation of the financial statements. Certain
of these significant accounting policies are considered to be critical
accounting policies, as defined below.
 
 A
critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: (1) we are required to
make assumptions about matters that are highly uncertain at the time of the
estimate; and (2) different estimates we could reasonably have used, or
changes in the estimate that are reasonably likely to occur, would have a
material effect on our financial condition or results of
operations.
 
 Estimates
and assumptions about future events and their effects cannot be determined with
certainty. We base our estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the circumstances.
These estimates may change as new events occur, as additional information is
obtained and as our operating environment changes. These changes have
historically been minor and have been included in the financial statements as
soon as they became known. Based on a critical assessment of our accounting
policies and the underlying judgments and uncertainties affecting the
application of those policies, management believes that our financial statements
are fairly stated in accordance with accounting principles generally accepted in
the United States, and present a meaningful presentation of our financial
condition and results of operations. We believe the following critical
accounting policies reflect our more significant estimates and assumptions used
in the preparation of our financial statements:
 
 Use of
Estimates—Our financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and,
accordingly, require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Specifically, our management has estimated the expected
economic life and value of our licensed technology, our net operating loss for
tax purposes and our stock option and warrant expenses related to compensation
to employees and directors, consultants and investment banks. Actual results
could differ from those estimates.
  Revenue
Recognition—We had no revenues for the year ended December 31, 2009 and
the three months ended March 31, 2010 and 2009.  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.
 
 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 months ended March 31, 2010 and 2009, 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.
  15
  Research and
Development Costs—Research and development costs consist of expenditures
for the research and development of patents and technology, which are not
capitalizable and charged to operations when incurred. Our research and
development costs consist mainly of payroll and payroll related expenses,
research supplies and costs incurred in connection with specific research
grants.
  Stock Based
Compensation—The Company accounts for equity instruments issued to
non-employees in accordance with guidance issued by
FASB.  Accordingly, the estimated fair value of the equity instrument
is recorded on the earlier of the performance commitment date or the date the
services required are completed.
 
 Beginning
in 2006, we adopted the guidance issued by the FASB related to share based
payments.  This guidance requires compensation costs related to
share-based payment transactions to be recognized in the financial
statements.  For the three months ended March 31, 2010 and 2009, we
recognized stock-based compensation expense of $1,300,884 and $1,198,704
respectively.
 
 RESULTS
OF OPERATIONS
 
 Result
of Operations – First Quarter
of 2010 Compared to First Quarter of 2009
 
 Three Months Ended March
31,2010
                                    
                                    
                                    2009Revenues
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Operating
      expenses
                                    
                                    $
                                    3,616,861
                                    
                                    
                                    $
                                    2,912,044Operating
      loss
                                    
                                    
                                    (3,616,861
                                    )
                                    
                                    
                                    (2,912,044
                                    )Non-operating
      income (expense)
                                    
                                    
                                    (3,150,100
                                    )
                                    
                                    
                                    3,817,722Net
      income (loss)
                                    
                                    $
                                    (6,766,961
                                    )
                                    
                                    $
                                    905,678
  For the
first quarter of 2010, the Company reported a net loss of $6,766,961, or $0.18
per share, compared to a net income of $905,678, or $0.03 per share, for the
comparable 2009 period. The gain in 2009 was caused by a non-cash entry related
to a change in the way we account for certain warrants offset in part by
reductions in most other expense categories. The increase in net loss from year
to year was due to gain in our warrant accounting for the first quarter in 2009
versus losses in the first quarter 2010, increases in non cash stock-based
compensation expense, and increases in R&D and legal fees.
  Our
results of operations have varied significantly from year to year and quarter to
quarter and may vary significantly in the future.
 
 Revenue
 
 We did
not have revenues for the three months ended March 31, 2010 and
2009.  We do not anticipate any revenues for 2010.
  16
  Operating
Expenses
 
 Operating
expenses totaled $3,616,861 and $2,912,044 for the three months ended March
31, 2010 and 2009, respectively.
 
 Three
      Months Ended March 31,2010
                      
                      
                      2009Operating
      ExpensesResearch &
      development
                      
                      $
                      1,899,963
                      
                      
                      $
                      1,434,010General,
      selling & administrative expense
                      
                      
                      1,687,835
                      
                      
                      
                      1,457,238Depreciation
      and amortization
                      
                      
                      29,063
                      
                      
                      
                      20,796Total
      operating expense
                      
                      $
                      3,616,861
                      
                      
                      $
                      2,912,044
 
 Research
and Development Expenses
  Research
and development expenses totaled $1,899,963 and $1,434,010 for the three
months ended March 31, 2010 and 2009, respectively.  The increase of
$465,953 or 33% for the three months ended March 31, 2010 compared to the
comparable period in 2009 was primarily attributable to costs associated with
the initiation of our clinical trials in January of 2010.
 
 General
and Administrative Expenses
  G&A
expenses totaled $1,687,835 and $1,457,238 for the three months ended March
31, 2010 and 2009, respectively.  The increase of $230,597 or 16% for
the three months ended March 31, 2010 compared to the comparable period
in 2009, was primarily attributable to increased legal
expenses.
 
 Depreciation
and Amortization
 
 Depreciation
and amortization expenses totaled $29,063 and $20,796 for the three
months ended March 31, 2010 and 2009, respectively.   The
increase of $8,267 or 40% for the three months ended March 31, 2010 compared to
the comparable period in 2009 was primarily attributable to fixed asset and
patent filing fee additions over the quarter.
 
 Nonoperating
(expense) income
  Nonoperating
(expense) income totaled ($3,150,100) and $3,817,722 for the three months
ended March 31, 2010 and 2009, respectively. The increase in nonoperating
expense was due to expenses associated with the Company’s warrant
accounting.
 
 Three Months Ended March
31,2010
                        
                        
                        2009Nonoperating
      income:Interest
      income
                        
                        $
                        5,811
                        
                        
                        $
                        2,264Interest
      expense
                        
                        
                        (659
                        )
                        
                        
                        -Warrant
      modification expense
                        
                        
                        (1,906,800
                        )
                        
                        
                        -(Loss)
      gain on change in fair value of warrants
                        
                        
                        (1,248,452
                        )
                        
                        
                        3,815,458Total
      nonoperating (loss) income
                        
                        $
                        (3,150,100
                        )
                        
                        $
                        3,817,722
 
 Interest
income totaled $5,811 for the three months ended March 31, 2010 compared to
$2,264 for the same period of 2009. The increase for the three months ended
March 31, 2010 compared to the comparable period in 2009 was attributable to
higher cash balances and slightly higher interest rates.
  17
  (Loss)
gain from change in fair value of warrant obligations
 
 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
long-term warrant liability of $6.6 million to recognize the fair value of such
warrants. In the three months ended March 30, 2009, the fair value of these
common stock purchase warrants decreased because of a decrease in the stock
price, resulting in a gain for the quarter.  In the first quarter of
2010, ended March 31, 2010, the Company converted, redeemed or modified more
than 70% of the warrants outstanding at the beginning of the year which had
price protection features. These changes removed the price protection
features.  These changes reduced the Company’s derivative liability
from $6,462,039 at December 31, 2009 to $1,497,863 at March 31,
2010.  An increase in stock price resulted in an expense for the
period of $1,248,452 on the remaining outstanding warrants.
 
 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. Our currently monthly cash burn rate is $600,000.   On
December 18, 2008, we filed our first IND with the FDA.  We estimate
that we will have sufficient cash and cash equivalents to finance our current
operations, pre-clinical and clinical work for at least 12 months from March 31,
2010. We cannot assure you that public or private financing or grants will be
available on acceptable terms, if at all. Several factors will affect our
ability to raise additional funding, including, but not limited to, the
volatility of our common shares and general market conditions.
 
 Three
      Months Ended March 31,2010
                      
                      
                      2009Cash and
      cash equivalents
                      
                      $
                      7,515,269
                      
                      
                      $
                      3,567,108Net
      cash used in operating activities
                      
                      $
                      (2,126,976
                      )
                      
                      $
                      (1,296,966
                      )Net
      cash used in investing activities
                      
                      $
                      (52,454
                      )
                      
                      $
                      (39,205
                      )Net
      cash provided by financing activities
                      
                      $
                      7,384,925
                      
                      
                      $
                      -
 
 Total
cash and cash equivalents was $7,515,269 and $3,567,108 on March 31, 2010 and 2009
respectively.  The increasein our cash and cash equivalents of
$3,948,161 or 111% for the three months ended March 31, 2010 compared to the
same period in 2009 was primarily attributable to the exercise of outstanding
warrants.
 
 Net
Cash Used in Operating Activities
  We used
$2,126,976 and $1,296,966 of cash in our operating activities for the three
months ended March 31, 2010 and 2009, respectively.  The increase in
our cash used of $830,011 or 64% for the three months ended March 31, 2010
compared to the same period in 2009 was primarily attributed to the initiation
of our clinical trials and increase in legal expenses..
 
 Net
Cash Used in Investing Activities
  We used
$52,454 and $39,205 of cash in connection with investment activities for the
three months ended March 31, 2010 and 2009, respectively.  The
increase in our use of cash of $13,248 or 34% for the three months ended March
31, 2010 compared to the same period in 2009 was primarily attributed to the
purchase of equipment in the first quarter, as well as additional patents
work.
  Net
Cash Provided by Financing Activities
 
 We raised
$7,384,925 and $0 in net proceeds from the issuance of stock during the three
months ended March, 31 2010 and 2009.
 
 Listed
below are key financing transactions entered into by us in the first quarter
2010:
 
 ·
                On
      January 29, 2010, we received gross consideration 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
      the period January through March 2010, several Series A warrant holders
      exercised 231,763 warrants to purchase our common stock for $1.25 per
      share.  Total gross proceeds were
  $289,704.
  18
 
 ·
                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.
 
 Call
of Series B Warrants
 
 During
the first quarter of 2006, we issued an aggregate of 2,019,231 Series B warrants
in connection with a private placement of our securities. The Series B warrants
contained a call provision allowing us to redeem the warrants for $.01 per
warrant share, upon 30 days notice, provided the following two conditions were
met:  (a) we receive approval of our IND, and (b) a registration
statement covering the resale of the warrant shares shall be
effective.  In September of 2009, we met the conditions of the call
and as a result, we elected to exercise the call feature in February of
2010.  As a result, Series B warrant holders exercised their
respective warrants which resulted in us issuing 1,993,876 common shares and
receiving gross proceeds in the amount of $2,492,345.
 
 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. We have a shelf
registration statement which was declared effective on September 29, 2008 and
covers up to approximately $25,000,000 of our securities that could be available
for financings. On December 18, 2008 and June 30, 2009, we filed Prospectus
Supplements under which we sold securities with an aggregate market value
pursuant to General Instruction I.B.6. of Form S-3, of
$6,167,520.  Accordingly, depending on our market capitalization and
other restrictions and conditions contained in General Instruction I.B.6.of Form
S-3, we may be able to sell up to an additional $18,832,420 pursuant to our
shelf registration statement.
 
 The
source, timing and availability of any future financing will depend principally
upon market conditions, interest rates and, more specifically, on our progress
in our exploratory, preclinical and future clinical development programs.
Funding may not be available when needed — at all, or on terms acceptable to us.
Lack of necessary funds may require us, among other things, to delay, scale back
or eliminate some or all of our research and product development programs,
planned clinical trials, and/or our capital expenditures or to license our
potential products or technologies to third parties.
  ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
 
 We are
not required to provide the information required by this items as we are
considered a smaller reporting company, as defined by Rule
229.10(f)(1).
 
 ITEM
      4. T
                CONTROLS
      AND PROCEDURES.
 
 Evaluation
of Disclosure Controls and Procedures
 
 Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the Quarterly Reports filed or submitted under the Exchange Act is
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.
  19
  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 Report, there are no material pending legal or governmental
proceedings relating to our company or properties to which we are a party, and
to our knowledge there are no material proceedings to which any of our
directors, executive officers or affiliates are a party adverse to us or which
have a material interest adverse to us, other than the following:
 
 ·
                On
      May 7, 2008, we filed suit against StemCells, Inc., StemCells California,
      Inc. (collectively “StemCells”) and Neurospheres Holding Ltd.,
      (collectively StemCells and Neurospheres Holding Ltd are referred to as
      “Plaintiffs”) in U.S. District Court for the District of Maryland,
      alleging that U.S. Patent No. 7,361,505 (the “’505 patent”), alleging that
      the ‘505 patent was exclusively licensed to the Plaintiffs, is invalid,
      not infringed, and unenforceable.   See Civil Action No.
      08-1173.   On May 13, we filed an Amended Complaint seeking
      declaratory judgment that U.S. Patent No. 7,155,418 (the “’418 patent”) is
      invalid and not infringed and that certain statements made by our CEO are
      not trade libel or do not constitute unfair competition as alleged by the
      Plaintiffs.  On July 15, 2008, the Plaintiffs filed a Motion to
      Dismiss for Lack of Subject Matter Jurisdiction, Lack of Personal
      Jurisdiction, and Improper Venue or in the Alternative to Transfer to the
      Northern District of California.  On August 27, 2008, Judge
      Alexander Williams, Jr. of the District of Maryland denied StemCells’
      Motion to Dismiss, but granted Neurospheres’ motion to dismiss. On
      September 11, 2008, StemCells filed its answer asserting counterclaims of
      infringement for the ‘505 patent, the 418 patent, and state law claims for
      trade libel and unfair competition. This case was consolidated with the
      2006 litigation discussed below and it is not known when, nor on what
      basis, this matter will be
concluded.
 
 ·
                On
      July 28, 2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the
      U.S. District Court in Maryland, alleging that Neuralstem has been
      infringing, contributing to the infringement of, and or inducing the
      infringement of four patents owned by or exclusively licensed to StemCells
      relating to stem cell culture compositions, genetically modified stem cell
      cultures, and methods of using such cultures.  See Civil Action
      No. 06-1877.  We answered the Complaint denying infringement,
      asserting that the patents are invalid, asserting that we have intervening
      rights based on amendments made to the patents during reexamination
      proceedings, and further asserting that some of the patents are
      unenforceable due to inequitable conduct.  Neuralstem has also
      asserted counterclaims that StemCells has engaged in anticompetitive
      conduct in violation of antitrust laws.  Discovery has commenced
      and it is not known when, nor on what basis, this matter will be
      concluded.
 
 ITEM
      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.
  20
  Risks
Relating to Our Stage of Development
 
 We
have a limited operating history and have significantly shifted our operations
and strategies since inception.
 
 Since
inception in 1996 and through March 31, 2010, we have raised $79,356,358 of
capital and recorded accumulated losses totaling $74,333,792.   On March
31, 2010, we had a working capital surplus of $4,451,452 and stockholders’
equity of $5,022,566.  Our net losses for the two most recent fiscal years
have been $10,364,363 and $11,830,798 for 2009 and 2008
respectively.  We had no revenues for the twelve months ended December
31, 2009 or the three months ended March 31, 2010.
 
 Our
ability to generate revenues and achieve profitability will depend upon our
ability to complete the development of our proposed stem cell products, obtain
the required regulatory approvals, manufacture, and market and sell our proposed
products. In part because of our past operating results, no assurances can be
given that we will be able to accomplish any of these goals.
 
 Although
we have generated some revenue in prior years, we have not generated any revenue
from the commercial sale of our proposed stem cell products. Since inception, we
have engaged in several related lines of business and have discontinued
operations in certain areas. For example, in 2002, we lost a material contract
with the Department of Defense and were forced to close our principal facility
and lay off almost all of our employees in an attempt to focus our development
strategy on stem cell technologies. This limited and changing history may not be
adequate to enable you to fully assess our future prospects. No assurances can
be given as to exactly when, if at all, we will be able to fully develop,
commercialize, market, sell and/or derive material revenues from our proposed
products
 
 We
will need to raise additional capital to continue operations.
 
 Since
inception, we have relied almost entirely on external financing to fund
operations. Such financing has come primarily from the sale of common stock and
the exercise of investor warrants.  As of March 31, 2010, we had cash
and cash equivalents on hand of $7,515,269.  Presently, we have a
monthly cash burn rate of approximately $600,000.  We will need to
raise additional capital to fund anticipated operating expenses and future
expansion. Among other things, external financing will be required to further
develop our technologies and products, as well as to pay general operating
costs.   Additionally, on September 21, 2009, the FDA approved our IND
application to commence Phase I trials for ALS. The first patient was dosed on
January 21, 2010.  Accordingly, although we do not anticipate it, we
may need additional capital in the event of unforeseen expenses associated with
our clinical trials.
 
 We have
expended and expect to continue to expend substantial cash in the research,
development, clinical and pre-clinical testing of our stem cell technologies
with the goal of ultimately obtaining FDA approval to market our proposed
products. We will require additional capital to conduct research and
development, establish and conduct clinical and pre-clinical trials, enter into
commercial-scale manufacturing arrangements and to provide for marketing and
distribution of our products.
 
 Our long
term capital requirements are expected to depend on many factors,
including:
 
 ·
                the continued progress and costs
      of our research and development
programs;
 
 ·
                the progress of pre-clinical
      studies and clinical trials;
 
 ·
                the time and costs involved in
      obtaining regulatory
clearance;
 
 ·
                the costs involved in preparing,
      filing, prosecuting, maintaining and enforcing patent
      claims;
 
 ·
                The cost of defending any patent
      litigation;
 
 ·
                the costs of developing sales,
      marketing and distribution channels and our ability to sell our products
      if developed;
 
 ·
                the costs involved in
      establishing manufacturing capabilities for commercial quantities of our
      proposed products;
 
 ·
                competing technological and
      market developments;
 
 ·
                market acceptance of our proposed
      products;
 
 ·
                the costs of recruiting and
      retaining employees and consultants;
and
 
 ·
                the costs associated with
      educating and training physicians about our proposed
      products.
 
 We cannot
assure you that financing will be available if needed. If additional financing
is not available, we may not be able to fund operations and planned growth,
develop or enhance our technologies, take advantage of business opportunities or
respond to competitive market pressures.  If we exhaust our cash
reserves and are unable to realize adequate additional financing, we may be
unable to meet operating obligations which could result in us initiating
bankruptcy proceedings or delaying, or eliminating some or all of our research
and product development programs.
  21
  Additional
financing requirements could result in dilution to existing
stockholders.
 
 We are
not able to finance our operations by generating
revenue.  Accordingly, we will be required to secure additional
financing which may be dilutive to current shareholders.  We are
authorized to issue 150,000,000 shares of common stock and 7,000,000 shares of
preferred stock. Such securities may generally be issued without the approval or
consent of our stockholders.  The issuance of such securities may
result in substantial dilution.
  Risks
Relating to Our Business
 
 Our
business is dependent on a single product candidate.
 
 At
present our ability to progress as a company is significantly dependent on a
single product candidate for ALS which is in Phase I clinical
trials.  Any clinical, regulatory or other development that
significantly delays or prevents us from completing any of our trials, any
material safety issue or adverse side effect to any study participant in 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 first clinical trials could
substantially impair our ability to initiate clinical trials to test our stem
cell therapies in other potential indications. This, in turn, could adversely
impact our ability to raise additional capital and pursue our planned research
and development efforts.
 
 Our
business relies on stem cell technologies that we may not be able to
commercially develop.
 
 We have
concentrated the majority of our research on stem cell
technologies.  Our ability to generate revenue and operate profitably
will depend on being able to develop these technologies for human applications.
These are emerging technologies and have limited human applications. We cannot
guarantee that we will be able to develop our technologies or that such
development will result in products with any commercial utility or value. We
anticipate that the commercial sale of such products and royalty/licensing fees
related to the technology, will be our primary sources of revenues. If we are
unable to develop 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.
 
 On
September 21, 2009, we received approval from the FDA for our first IND
application.  We commenced the trials on January 21, 2010 with the
dosing of our first patient.  Although we have commenced the trials,
the outcome of the trials is uncertain, and if we are unable to satisfactorily
complete such trials, or if such trials yield unsatisfactory results, we will be
unable to commercialize our proposed products. No assurances can be given that
the clinical trials will be completed or result in a successful
outcome.  If regulatory authorities do not approve our products or if
we fail to maintain regulatory compliance, we would be unable to commercialize
our therapeutic products, and our business and results of operations would be
materially harmed.
 
 Our
proposed products may not have favorable results in clinical trials or receive
regulatory approval.
 
 Positive
results from pre-clinical studies should not be relied upon as evidence that 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.
 
 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.
  22
 
 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.
  23
  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 two key employees for our continued operations and future
success.
 
 The loss
of either of our key executive officers, Richard Garr and Karl Johe, would be
detrimental to us.
 
 ·
                We currently do not maintain “key
      person” life insurance on the life of Mr. Garr. As a result, the Company
      will not receive any compensation upon the death or incapacity of this key
      individual;
 
 ·
                We currently do maintain “key
      person” life insurance on the life of Mr. Johe. As a result, the Company
      will receive approximately $1,000,000 in the event of his death or
      incapacity.
 
 In
addition, we anticipate growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, regulatory compliance,
manufacturing and marketing.  We anticipate the need for additional
management personnel and the development of additional expertise by existing
management personnel. There is intense competition for qualified personnel in
the areas of our present and planned activities, and there can be no assurance
that we will be able to continue to attract and retain the qualified personnel
necessary for the development our business.
 
 The
employment contracts of key employees contain significant anti-termination
provisions which could make changes in management difficult or
expensive.
 
 We have
entered into employment agreements with Messrs. Garr and Johe which expire on
November 1, 2012.  In the event either individual is terminated prior
to the full term of their respective contracts, for any reason other than a
voluntary resignation, all compensation due to such employee under the terms of
the respective agreement shall become due and payable immediately. These
provisions will make the replacement of either of these employees very costly
and could cause difficulty in effecting a change in control. Termination prior
to the full term of these contracts would cost us as much as $1,000,000 per
contract and the immediate vesting of all outstanding options and/or warrants
held by Messrs. Garr and Johe.
 
 Our
competition has significantly greater experience and financial
resources.
 
 The
biotechnology industry is characterized by intense competition. We compete
against numerous companies, many of which have substantially greater resources.
Several such enterprises have initiated cell therapy research programs and/or
efforts to treat the same diseases which we target. Although not necessarily
direct competitors, companies such as Geron Corporation, Genzyme Corporation,
StemCells, Inc., Advanced Cell Technology, Inc., Aastrom Biosciences, Inc. and
Viacell, Inc., as well as others, may have substantially greater resources and
experience in our fields which put us at a competitive
disadvantage.
 
 Our
outsource model depends on third parties to assist in developing and testing our
proposed products.
 
 Our
strategy for the development, clinical and preclinical testing and
commercialization of our proposed products is based on an outsource model. This
model requires us to engage third parties in order to further develop our
technology and products as well as for the day to day operations of our
business. In the event we are not able to enter into such relationships in the
future, our ability to operate and develop products may be seriously hindered or
we would be required to expend considerable resources to bring such functions
in-house. Either outcome could result in our inability to develop a commercially
feasible product or in the need for substantially more working capital to
complete the research in-house.
  24
 
 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.
 
 Risks
Relating to Our Common Stock
 
 Our
common shares are sporadically or “thinly” traded.
 
 Our
common shares have historically been sporadically or “thinly” traded, meaning
that the number of persons interested in purchasing our common shares at or near
the asking price at any given time may be relatively small or non-existent. This
situation is attributable to a number of factors, including the facts that we
are a small company which is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community.  Even if we came to the attention of such persons, they
tend to be risk-adverse and would be reluctant to follow an unproven development
stage company such as ours or purchase or recommend the purchase of our shares
until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days or more when trading activity in our shares is
minimal as compared to a seasoned issuer which has a large and steady volume of
trading activity that will generally support continuous sales without a material
reduction in share price. We cannot give you any assurance that a broader or
more active trading market for our common shares will develop or be sustained,
or that current trading levels will be sustained. Due to these conditions, we
can give you no assurance that you will be able to sell your shares if you need
money or otherwise desire to liquidate your investment.
 
 We
are currently being monitored by the NYSE AMEX with regard to listing
qualifications.
 
 Effective
January 1, 2009, we adopted new guidance issued by FASB related to determining
whether an instrument or embedded feature is indexed to an entity’s own
stock.  As a result, we reclassified 8,547,762 of our issued and
outstanding common stock purchase warrants from equity to liability
status.  The adjustment also had the effect of reducing stockholder’s
equity by $2.8 million.  Due to such adjustment, we no longer met the
continued listing requirements of the NYSE Amex LLC's ("NYSE Amex") with regard
to stockholders (deficit) equity.   On June 4, 2009, we received
notification from the NYSE AMEX that we were not in compliance with continued
listing requirements contained in Section 1003(i) of the NYSE AMEX company
guide.   In order to maintain our listing on the NYSE AMEX, we
submitted a plan detailing how we intended to regain compliance.  On July
6, 2009, we submitted our plan.  On August 18, 2009, the NYSE AMEX notified
us that it would continue listing our common shares subject certain conditions
being met, provided our compliance with our plan until December 6, 2010 (“Plan
Period”).
 
 On
February 16, 2010 we received a letter from the NYSE Amex informing us that we
had resolved the continued listing deficiencies referenced in the NYSE Amex
letters dated June 4, 2009 and August 18, 2009. The Exchange said that while we
remain noncompliant with the stockholders' equity requirements under Section
1003 of the NYSE Amex Company Guide, the Exchange staff has determined that we
complied with the alternative listing standards in Section 1003, including the
requirement for $50,000,000 million in market capitalization. The Exchange will
continue to monitor our compliance with the continued listing standards in
Section 1003 of the NYSE Amex Company Guide. As provided in Section 1009(f) of
the NYSE Amex Company Guide.  If we are able to demonstrate compliance
with the continued listing standards for a period of two consecutive quarters
ending June 30, 2010, the Exchange staff will deem the Plan Period over.
However, if we cannot demonstrate compliance over the next two quarters, the
Plan Period will remain open and Exchange staff will continue to monitor us
throughout the end of the Plan Period, which is December 6, 2010. At any time
during the Plan Period, the Exchange staff may initiate delisting proceedings
based on its evaluation of the Company.  In the event we do not comply
with all continued listing standards as of December 6, 2010, the Exchange staff
will promptly initiate delisting procedures.
  25
 
 The
delisting of our common shares from the NYSE Amex may limit the ability of our
stockholders to sell their common stock.
 
 We are
currently being monitored by the NYSE AMEX.  If we are delisted, our
stock will most likely commence trading on the Over-the-Counter Bulletin Board
or the Pink Sheets. In such case, a stockholder likely would find it more
difficult to trade our common stock or to obtain accurate market quotations for
it.  If our common stock is delisted, it will become subject to the
Securities and Exchange Commission’s “penny stock rules,” which impose sales
practice requirements on broker-dealers that sell that common stock to persons
other than established customers and “accredited investors.” Application of this
rule could make broker-dealers unable or unwilling to sell our common stock and
limit the ability of stockholders to sell their common stock in the secondary
market.
  The
market price for our common shares is particularly volatile.
 
 The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than those of a seasoned issuer. The volatility in
our share price is attributable to a number of factors. First, our common shares
are sporadically or thinly traded. As a consequence of this lack of liquidity,
the trading of relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either direction. The
price for our shares could, for example, decline precipitously in the event that
a large number of our common shares are sold on the market without commensurate
demand.  Secondly, we are a speculative or “risky” investment due to
our limited operating history, lack of significant revenues to date and the
uncertainty of future market acceptance for our products if successfully
developed. As a consequence of this enhanced risk, more risk-adverse investors
may, under the fear of losing all or most of their investment in the event of
negative news or lack of progress, be more inclined to sell their shares on the
market more quickly and at greater discounts than would be the case with the
stock of a seasoned issuer. Additionally, in the past, plaintiffs have often
initiated securities class action litigation against a company following periods
of volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management’s attention and
resources.
 
 The
following factors may add to the volatility in the price of our common
shares:  actual or anticipated variations in our quarterly or annual
operating results; government regulations; announcements of significant
acquisitions, strategic partnerships or joint ventures; our capital commitments;
and additions or departures of our key personnel. Many of these factors are
beyond our control and may decrease the market price of our common shares,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common shares will be
at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price.
 
 We
face risks related to compliance with corporate governance laws and financial
reporting standard.
 
 The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the SEC and the Public Company Accounting Oversight Board,
require changes in the corporate governance practices and financial reporting
standards for public companies. These new laws, rules and regulations, including
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to
internal control over financial reporting (“Section 404”), will materially
increase the Company's legal and financial compliance costs and make some
activities more time-consuming, burdensome and expensive.  ). On
October 2, 2009, the SEC announced it would extend the deadline for
non-accelerated filers to comply with Section 404(b) of the Sarbanes-Oxley Act.
 Unless further extended, we will be required to include attestation
reports in our annual report for year ending on December 31, 2010.  We
anticipate this will further increase the costs associated with our compliance
with the Sarbanes-Oxley Act of 2002.
 
 Any
failure to comply with the requirements of the Sarbanes-Oxley Act of 2002, our
ability to remediate any material weaknesses that we may identify during our
compliance program,  or difficulties  encountered in their
implementation,  could harm our operating results,  cause us
to fail to meet our reporting  obligations  or result
in  material  misstatements  in
our  financial statements. Any such failure could
also adversely affect the results of the periodic management
evaluations of our internal controls and, in the case of a failure to remediate
any material weaknesses that we may identify, would adversely
affect the annual auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that are required under Section 404 of
the Sarbanes-Oxley Act.  Inadequate internal controls could also
cause investors to lose confidence in our reported financial information, which
could have a negative effect on the trading price of our common
stock.
 
 We
have never paid a cash dividend and do not intend to pay cash dividends on our
common stock in the foreseeable future.
 
 We have
never paid cash dividends nor do we anticipate paying cash dividends in the
foreseeable future.  Accordingly, any return on your investment will
be as a result of stock appreciation.
  26
 
 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, 2010, we have issued and outstanding 42,250,875 common shares,
22,385,277 common shares reserved for issuance upon the exercise of current
outstanding options and warrants, 319,341 common shares reserved for issuance of
additional grants under our 2005 incentive stock plan, and 534,525 shares
reserved for issuance of grants under our 2007 stock plan. Accordingly, we will
be entitled to issue up to 84,509,982 additional common shares
and 7,000,000 additional preferred shares. Our board may generally issue
those common and preferred shares, or options or warrants to purchase those
shares, without further approval by our shareholders based upon such factors as
our board of directors may deem relevant at that time. Any preferred shares we
may issue shall have such rights, preferences, privileges and restrictions as
may be designated from time-to-time by our board, including preferential
dividend rights, voting rights, conversion rights, redemption rights and
liquidation provisions. It is likely that we will be required to issue a large
amount of additional securities to raise capital to further our development and
marketing plans. It is also likely that we will be required to issue a large
amount of additional securities to directors, officers, employees and
consultants as compensatory grants in connection with their services, both in
the form of stand-alone grants or under our various stock option plans, in order
to attract and retain qualified personnel. In the event of issuance, your
proportionate ownership and voting rights may be significantly decreased and the
value of your investment impacted.
 
 Risks
Relating to Intellectual Property and Government Regulation
 
 We
may not be able to withstand challenges to our intellectual property
rights.
 
 We rely
on our intellectual property, including issued and applied-for patents, as the
foundation of our business. Our intellectual property rights may come under
challenge.  No assurances can be given that, even though issued, our
current and potential future patents will survive such challenges. For example,
in 2005 our neural stem cell technology was challenged in the U.S. Patent and
Trademark Office. Although we prevailed in this particular matter upon
re-examination by the patent office, these cases are complex, lengthy,
expensive, and could potentially be adjudicated adversely to our interests,
removing the protection afforded by an issued patent. The viability of our
business would suffer if such patent protection were limited or eliminated.
Moreover, the costs associated with defending or settling intellectual property
claims would likely have a material adverse effect on our business and future
prospects. At present, there is litigation with StemCells, Inc. which is in its
initial stages and any likely outcome is difficult to predict.
 
 We
may not be able to adequately protect against the piracy of the intellectual
property in foreign jurisdictions.
 
 We
anticipate conducting research in countries outside of the United
States.  A number of our competitors are located in these countries
and may be able to access our technology or test results.  The laws
protecting intellectual property in some of these countries may not adequately
protect our trade secrets and intellectual property.  The
misappropriation of our intellectual property may materially impact our position
in the market and any competitive advantages, if any, that we may
have.
 
 Our
products may not receive regulatory approval.
 
 The FDA
and comparable government agencies in foreign countries impose substantial
regulations on the manufacturing and marketing of pharmaceutical products
through lengthy and detailed laboratory, pre-clinical and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and vary
substantially based upon the type, complexity and novelty of the proposed
product.  On September 21, 2009 the FDA approved our IND application
to commence a Phase I trial for ALS.  We commenced the trials on
January 21, 2010 with the dosing of our first patient.  We cannot assure
you that we will successfully complete any clinical trials in connection with
such IND. Further, we cannot predict when we might first submit any product
license application for FDA approval or whether any such product license
application will be granted on a timely basis, if at all.  Moreover,
we cannot assure you that FDA approvals for any products developed by us will be
granted on a timely basis, if at all. Any delay in obtaining, or failure to
obtain, such approvals could have a material adverse effect on the marketing of
our products and our ability to generate product revenue.
 
 Development
of our technologies is subject to extensive government regulation.
 
 Our
research and development efforts, as well as any future clinical trials, and the
manufacturing and marketing of any products we may develop, will be subject to,
and restricted by, extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
necessary regulatory approvals is lengthy, expensive and uncertain. FDA and
other legal and regulatory requirements applicable to the development and
manufacture of the cells and cell lines required for our preclinical and
clinical products could substantially delay or prevent us from producing the
cells needed to initiate additional clinical trials. We may fail to obtain the
necessary approvals to commence clinical testing or to manufacture or market our
potential products in reasonable time frames, if at all. In addition, the U.S.
Congress and other legislative bodies may enact regulatory reforms or
restrictions on the development of new therapies that could adversely affect the
regulatory environment in which we operate or the development of any products we
may develop.
  27
  We base
our research and development on the use of human stem cells obtained from human
tissue. The U.S. federal and state governments and other jurisdictions impose
restrictions on the acquisition and use of human tissue, including those
incorporated in federal Good Tissue Practice, or “GTP,” regulations. These
regulatory and other constraints could prevent us from obtaining cells and other
components of our products in the quantity or of the quality needed for their
development or commercialization. These restrictions change from time to time
and may become more onerous. Additionally, we may not be able to identify or
develop reliable sources for the cells necessary for our potential products —
that is, sources that follow all state and federal laws and guidelines for cell
procurement. Certain components used to manufacture our stem and progenitor cell
product candidates will need to be manufactured in compliance with the FDA’s
Good Manufacturing Practices, or “GMP.” Accordingly, we will need to enter into
supply agreements with companies that manufacture these components to “GMP”
standards.  There is no assurance that we will be able to enter into
any such agreements.
 
 Noncompliance
with applicable requirements both before and after approval, if any, can subject
us, our third party suppliers and manufacturers and our other collaborators to
administrative and judicial sanctions, such as, among other things, warning
letters, fines and other monetary payments, recall or seizure of products,
criminal proceedings, suspension or withdrawal of regulatory approvals,
interruption or cessation of clinical trials, total or partial suspension of
production or distribution, injunctions, limitations on or the elimination of
claims we can make for our products, refusal of the government to enter into
supply contracts or fund research, or government delay in approving or refusal
to approve new drug applications.
 
 We
cannot predict if or when we will be permitted to commercialize our products due
to regulatory constraints.
 
 Federal,
state and local governments and agencies in the United States (including the
FDA) and governments in other countries have significant regulations in place
that govern many of our activities.  We are or may become subject to
various federal, state and local laws, regulations and recommendations relating
to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially
hazardous substances used in connection with its research and development work.
The preclinical testing and clinical trials of our proposed products are subject
to extensive government regulation that may prevent us from creating
commercially viable products. In addition, our sale of any commercially viable
product will be subject to government regulation from several standpoints,
including manufacturing, advertising, marketing, promoting, selling, labeling
and distributing. If, and to the extent that, we are unable to comply with these
regulations, our ability to earn revenues will be materially and negatively
impacted.
 
 ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 The
following information is given with regard to unregistered securities sold
during the period covered by this report.  The unregistered securities
were issued pursuant to section 4(2) of the Securities Act:
 
 ·
                On January 8, 2010, pursuant to a
      consulting agreement for investor relations and business development
      services, we issued Market Development Consulting Group, Inc.: (i) 140,000
      common shares; and (ii) a common stock purchase warrant entitling the
      holder to purchase 400,000 shares of common stock at $1.70 per
      share.  The warrant is exercisable immediately, shall expire on
      December 31, 2019, and is freely assignable in whole or in
      part.   We also agreed to register the shares underlying
      the warrant for resale.
 
 ·
                On January 15, 2010, we issued a
      consultant options to purchase an aggregate of 45,000 common shares at
      $2.40 per share.  The options vest as follows: (i) 25,000 upon
      grant; and (ii) 20,000 on December 31, 2010.  The options have a
      term of 5 years.
 
 ·
                On January 15, 2010, we issued a
      consultant options to purchase an aggregate of 100,000 common shares at
      $2.40 per share.  The options are 100% vested upon grant and
      have a term of 7 years.
 
 ·
                On January 29, 2010, as an
      inducement to exercise 800,000 Series D Warrants, we issued Vicis Capital
      Master Fund a replacement warrant.  As a result of the exercise,
      we received gross proceeds in the amount of $1,000,000.  The
      replacement warrant entitles the holder to purchase 400,000 common shares
      at price of $1.85 per share.  The warrant has a term of 1
      year.
 
 ·
                In March of 2010, in connection
      with the exercise of 2,699,400 Series C Warrants, we issued the prior
      warrant holders an aggregate of 2,699,400 replacement
      warrants.  As a result of the exercise, we received gross
      proceeds in the amount of $3,374,250.   The replacement
      warrant is substantially the same as the prior Series C warrants except
      that: (i) the exercise price is $2.13; (ii) the replacement warrants
      expire 5 years from the date they were issued; (iii) is callable by the
      company in the event our common stock trades above $5.00 and certain other
      conditions are met, and (iv) the replacement warrants do not provide for
      any anti-dilution rights.
 
 ·
                In March of 2010, in connection
      with the exercise of 782,005 placement agent warrants, we issued T.R.
      Winston & Company, LLC, a replacement warrant to purchase
      782,005.   As a result of the exercise, we received gross
      proceeds in the amount of $860,205.  The replacement
      warrant is substantially the same as the prior warrants issued to our
      Series C Warrant holders except that: (i) the exercise price is $2.13;
      (ii) the replacement warrants expire 5 years from the date they were
      issued; and (iii) the replacement warrants do not provide for any
      anti-dilution rights.
  28
  ·
                In March of 2010, we amended
      706,752 placement agent warrants held by TR Winston & Company,
      LLC.  Pursuant to the amendment, we agreed to extend the
      expiration date of the placement agent warrants from March 15, 2012 to
      March 15, 2014 in exchange for the removal of the anti-dilution provisions
      from said warrants.  We did not receive any additional
      consideration in connection with the
  amendment.
 
 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 14, 2010
                    
                    /s/ I. Richard GarrChief
      Executive OfficerChief
      Executive Officer and/s/ John ConronChief
      Financial Officer(Principal
      Accounting Officer)
  29
  INDEX
TO EXHIBITS
 Incorporated by
ReferenceExhibit
                                          No.
                                        
                                        Description
                                        
                                        Filed
                                          Herewith
                                        
                                        Form
                                        
                                        Exhibit
                                          No.
                                        
                                        FileNo.
                                        
                                        Filing Date3.01(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
                                        
                                        Private
      Placement Memorandum for March 2006 offering
                                        
                                        
                                        
                                        SB-2
                                        
                                        4.12
                                        
                                        333-132923
                                        
                                        6/21/064.05
                                        
                                        Form
      of Placement Agent Warrant issued in connection with the March 2006
      offering
                                        
                                        
                                        
                                        SB-2
                                        
                                        4.13
                                        
                                        333-132923
                                        
                                        6/21/064.06
                                        
                                        Form
      of Series A Warrant ($1.50) issued in connection with the March 2006
      offering
                                        
                                        
                                        
                                        SB-2
                                        
                                        4.14
                                        
                                        333-132923
                                        
                                        6/21/064.07
                                        
                                        Form
      of Series B Warrant ($2.00) issued in connection with the March 2006
      offering
                                        
                                        
                                        
                                        SB-2
                                        
                                        4.15
                                        
                                        333-132923
                                        
                                        6/21/064.08
                                        
                                        Form
      of Subscription Agreement for March 2006 offering
                                        
                                        
                                        
                                        SB-2
                                        
                                        4.16
                                        
                                        333-132923
                                        
                                        7/26/064.09
                                        
                                        Form
      of Securities Purchase Agreement dated March 15, 2007
                                        
                                        
                                        
                                        8-K
                                        
                                        4.1
                                        
                                        333-132923
                                        
                                        3/16/074.10
                                        
                                        Form
      of Common Stock Purchase Warrant dated March 15, 2007 (Series
      C)
                                        
                                        
                                        
                                        8-K
                                        
                                        4.2
                                        
                                        333-132923
                                        
                                        3/16/074.11
                                        
                                        Form
      of Registration Rights Agreement dated March 15, 2007
                                        
                                        
                                        
                                        8-K
                                        
                                        4.3
                                        
                                        333-132923
                                        
                                        3/16/074.12**
                                        
                                        Neuralstem,
      Inc. 2007 Stock Plan
                                        
                                        
                                        
                                        10-QSB
                                        
                                        4.21
                                        
                                        333-132923
                                        
                                        8/14/07
  30
 
 4.13
                        
                        Form
      of Common Stock Purchase Warrant Issued to Karl Johe on June 5,
      2007
                        
                        
                        
                        10-KSB
                        
                        4.22
                        
                        333-132923
                        
                        3/27/084.14
                        
                        Form
      of Registration Rights Agreement entered into on February 19, 2008 between
      the Company and CJ CheilJedang Corporation
                        
                        
                        
                        8-K
                        
                        10.20
                        
                        001-33672
                        
                        2/25/084.15
                        
                        Form
      of Placement Agent Warrant Issued to Midtown Partners & Company on
      December 18, 2008
                        
                        
                        
                        8-K
                        
                        4.1
                        
                        001-33672
                        
                        12/18/084.16
                        
                        Form
      of Consultant Common Stock Purchase Warrant issued on January 5,
      2009
                        
                        
                        
                        S-3/A
                        
                        10.1
                        
                        333-157079
                        
                        02/3/094.17
                        
                        Form
      of Series D, E and F Warrants
                        
                        
                        
                        8-K
                        
                        4.01
                        
                        001-33672
                        
                        7/1/094.18
                        
                        Form
      of Placement Agent Warrant
                        
                        
                        
                        8-K
                        
                        4.02
                        
                        001-33672
                        
                        7/1/094.19
                        
                        Form
      of December 29, 2009 Securities Purchase Agreement
                        
                        
                        
                        10-K
                        
                        4.19
                        
                        001-33672
                        
                        3/31/104.20
                        
                        Form
      of Consultant Warrant Issued January 8, 2010
                        
                        
                        
                        10-K
                        
                        4.20
                        
                        001-33672
                        
                        3/31/104.21
                        
                        Form
      of Replacement Warrant Issued January 29, 2010
                        
                        
                        
                        10-K
                        
                        4.21
                        
                        001-33672
                        
                        3/31/104.22
                        
                        Form
      of Replacement Warrant Issued March of 2010
                        
                        
                        
                        10-K
                        
                        4.22
                        
                        001-33672
                        
                        3/31/104.23
                        
                        Form
      of employee and consultant option grant
                        
                        
                        
                        10-K
                        
                        4.23
                        
                        001-33672
                        
                        3/31/1010.01**
                        
                        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
                        
                        10.1
                        
                        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
                        
                        3/31/0914.01
                        
                        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
                        
                        6/6/07
 23
                            
                            Consent
      of Stegman & Company
                            
                            *
 
 31
 
 31.1
                            
                            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.
  32