PALISADE BIO, INC. - Annual Report: 2008 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008.

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 000-1357459

NEURALSTEM, INC.

(Exact name of registrant as specified in its charter)

Delaware		52-2007292
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

9700 Great Seneca Highway Rockville, MD		20850
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common stock, $0.01 par value		NYSE Amex

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. oYes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller 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 Act). Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter based upon the closing price of the common stock as reported by NYSE Amex on such date, was approximately $42,611,966

The number of shares outstanding of Registrant’s common stock, $0.01 par value at March 13, 2009 was 33,751,300.

DOCUMENTS INCORPORATED BY REFERENCE

None.

SUBSEQUENT EVENTS

On February 20, 2009 we announced our spinal cord stem cell trial to treat ALS was on clinical hold and that the FDA has provided us with specific comments, questions and recommendations for modifications to our trial protocol. The FDA has asked for additional information regarding our product manufacturing process and pre-clinical studies, as well as our novel clinical delivery injection device and technique. We believe we can provide this information in an expeditious manner. We are evaluating various modifications to the protocol and eligibility criteria for patients in the trial proposed by the FDA, as well as slight changes to the timing of the surgeries. The FDA had extensive 'non hold' comments, requests for information, and recommendations. These items concerned issues that will need to be addressed for final product manufacturing and testing. We expect to reach agreement with the FDA on all matters so that our application can be approved and the trial commenced.

NEURALSTEM, INC

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2008

INDEX

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 2.	Properties	20
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	21

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	F-1
Item 8.	Financial Statements and Supplementary Data	F-1
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	30
Item 9A.	Controls and Procedures	30

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	31
Item 11.	Executive Compensation	34
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationships and Related Transactions, and Director Independence	39
Item 14.	Principal Accounting Fees and Services	39

PART IV
Item 15.	Exhibits, Financial Statement Schedules	40

PART I

We urge you to read this entire Annual Report on Form 10-K, including the” Risk Factors” section, the financial statements and related notes included herein. As used in this Annual Report, unless context otherwise requires, the words “we,” “us,”“our,” “the Company,” “Neuralstem” and “Registrant” refer to Neuralstem, Inc. Also, any reference to “common shares,” “Common Stock,” “common stock” or “Common Shares” refers to our $.01 par value common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in this Annual Report, including those related to our cash, liquidity, resources and our anticipated cash expenditures, as well as any statements other than statements of historical fact, regarding our strategy, future operations, financial position, projected costs, prospects, plans and objectives are forward-looking statements. 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 us 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, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. In addition, any forward-looking statement represents our expectation only as of the day this Annual Report was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

When reading any forward-looking statement, you should remain mindful that actual results or developments may vary substantially from those 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 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 Annual Report as well as our public filings with the SEC. You should not place undue reliance on any forward-looking statement. We are not obligated to update or revise any forward-looking statements contained in this Annual Report or any other filing to reflect new events or circumstances unless and to the extent required by applicable law.

ITEM 1.

BUSINESS

We are a biotechnology company focused on developing and commercializing human neural stem cell technology in the emerging field of regenerative medicine. We are headquartered in Rockville Maryland.

Our History

We began operations in 1996 and were incorporated in 1997 in the state of Maryland. In 2001 we re-incorporated in the state of Delaware. From 1997 to 2003, our research focused on:

“Genomics,” which is the study of genes and their functions;

“Drug Discovery,” which consists of the identification of molecules with desired biological effects that have promise as new therapeutic drugs; and

“Cell Therapy,” which consists of therapies in which cells are administered to patients in order to repair damaged or depleted tissues.

In 2001, we were paid a licensing fee of $7.5 million by Gene Logic, Inc., payable over three years, to create a database using our technology. Also, in 2001, we received a United States Defense Department contract to do drug screening using the cells derived from our technology in the amount of $2.5 million over 18 months. Finally, during this period, we pursued our own research into transplanting cells derived from our technology to cure disease. We reached a high of roughly 50 employees in early 2000, mostly involved in the infrastructure involved with the Gene Logic/genomics and drug discovery programs.

In late 2000 and early 2001, as a result of the decline in biotech funding and the accompanying devaluation of the genomics industry, our genomics program was no longer commercially viable. Additionally, in late 2002, the Department of Defense cancelled the program which funded our drug discover efforts. As a result, by the end of 2003, we made the strategic decision to lay off our employees involved in the genomic and drug discovery programs and focus entirely on the transplantation of neural stem cells to treat diseases in patients.

We spent 2004 restructuring our capitalization and creating an “outsourced” model of product development by having our research conducted at various universities and research labs and having all other functions outsourced. In November of 2004 we completed a ten-for-three reverse stock split.

In 2005, we continued to operate under this model, with all accounting, facility, manufacturing, transplantation experimentation and regulatory functions outsourced, under the supervision of Richard Garr, our President, Chief Executive Officer, and general counsel and Dr. Karl Johe, our Chairman and Chief Scientific Officer.

Overview

Starting in 2004, we refocused our research efforts to concentrate primarily in the field of Cell Therapy. Specifically, we are focused on the development and commercialization of treatments based on transplanting human neural stem cells.

We have developed and maintain a portfolio of patents and patent applications that form the proprietary base of our research and development efforts in the area of neural stem cell research, and related technologies. We believe our technology base, in combination with our know-how, and collaborative projects with major research institutions, provide a competitive advantage and will facilitate the successful development and commercialization of products for use in treatment of a wide array of neurodegenerative conditions and in regenerative repair of acute disease. We are focused on leveraging our key assets, including our intellectual property, our scientific team, our facilities and our capital, to accelerate the advancement of our stem cell technologies. In addition, we are pursuing strategic collaborations with members of academia.

Regenerative Medicine is a young and emerging field. There can be no assurances that our intellectual property portfolio will ultimately produce viable commercialized products and processes. Even if we are able to produce a commercially viable product, there are strong competitors in this field and our product may not be able to successfully compete against them.

All of our research efforts to date are at the level of basic research or in the pre-clinical stage of development. On December 18, 2008 we filed our first Investigational New Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”) to begin a clinical trial to treat amyotrophic lateral sclerosis (“ALS” or “Lou Gehrig’s Disease”). On February 20, 2009, the FDA provided us with specific comments, questions and recommendations for modification to the protocol submitted in our IND. The trial is currently on clinical hold. We are in the process of analyzing the notice and the FDA’s comments and recommendations.

The Field of Regenerative Medicine

The emerging field of treatment called "regenerative medicine" or "cell therapy" refers to treatments that are founded on the concept of producing new cells to replace malfunctioning or dead cells as a way to treat disease and injury. Many significant and currently untreatable human diseases arise from the loss or malfunction of specific cell types in the body. Our focus is the development of effective methods to generate replacement cells from neural stem cells. We believe that replacing damaged or malfunctioning or dead neural cells with fully functional ones may be a useful therapeutic strategy in treating many diseases and conditions of the central nervous system (“CNS”) including: Alzheimer's disease, Parkinson's disease, Multiple Sclerosis, ALS, depression, and injuries to the spinal cord.

Stem Cell Therapy Background

Cells maintain normal physiological function in healthy individuals by secreting or metabolizing substances, such as sugars, amino acids, neurotransmitters and hormones, which are essential to life. When cells are damaged or destroyed, they no longer produce, metabolize or accurately regulate those substances. Cell loss or impaired cellular functions are leading causes of degenerative diseases, and some of the specific substances or proteins that are deficient in some of these diseases have been identified. Although administering these substances or proteins has some advantages over traditional pharmaceuticals, such as specificity, there is no existing technology that can deliver them precisely to the sites of action, under the appropriate physiological regulation, in the appropriate quantity, nor for the duration required to cure the degenerative condition. Cells, however, may do all this naturally. Thus, where failing cells are no longer producing needed substances or proteins or where there has been irreversible tissue damage or organ failure, transplantation of stem or progenitor cells may enable the generation of new functional cells, thus potentially restoring organ function and the patient's health.

Stem cells have two defining characteristics: (i) they produce mature cells which make up particular organs; and (ii) they self renew — that is, some of the cells developed from stem cells are themselves new stem cells, thus permitting the process to continue again and again. Stem cells are known to exist for a number of systems of the human body, including the blood and immune system, the central and peripheral nervous systems (including the brain), the skin, bone, and even hair. They are thought to exist for many others, including the liver and pancreas endocrine systems, gut, muscle, and heart. Stem cells are responsible for organ regeneration during normal cell replacement and, to a greater or lesser extent, after injury.

Stem cells are rare and only available in limited supply, whether from the patients themselves or from donors. Also, cells can often be obtained only through significant surgical procedures. Therefore, in order to develop stem cell therapeutics, three key challenges must be overcome: (i) identification of stem or progenitor cells of a particular organ and testing them for therapeutic potential; (ii) creation of processes to enable use of these rare cells in clinical applications, such as expanding and banking them in sufficient quantities to transplant into multiple patients; and (iii) demonstration of the safety and efficacy of these potential therapeutics in human clinical trials.

The Potential of Our Tissue-Derived Stem Cell-Based Therapy

We believe that, if successfully developed, stem cell therapeutics have the potential to provide a broad therapeutic approach comparable in importance to traditional pharmaceuticals and genetically engineered biologics. With respect to the human neural stem cells, we have developed proprietary and reproducible processes to identify, isolate, expand, purify1 and control cell differentiation in mature functioning human neurons2 and glia3 and bank human neural stem cells derived from brain tissue. Because the cells are purified normal human neural stem cells, they may be better suited for transplantation and may provide a safer and more effective alternative to therapies that are based on cells derived from cancer cells, animal derived cells or cells derived from an unpurified mix of many different cell types.

Potential Markets

We believe that, if successfully developed, neural stem cell-based therapies have the potential to treat a broad range of diseases and injuries of the CNS. We believe the potential application of our technologies given our current research focus includes developing neural cell therapies to treat Parkinson's disease, ALS, and injuries to the spinal cord.

We believe the potential markets for regenerative medicine based on our technologies are large. The table below summarizes the potential United States patient populations which we believe may be amenable to neural cell transplantation and represent potential target markets for our proposed products:

Medical Condition		Number of Patients *
Parkinson's Disease		1 million
Spinal-cord injuries		0.25 million
Amyotrophic Lateral Sclerosis		0.03 million

*These estimates are based on the estimates published by the following organizations as of April 2006; the Parkinson's Disease Foundation, the Parkinson's Action Network, the Foundation for Spinal Cord Injury Prevention, Care and Cure, and the Amyotrophic Lateral Sclerosis Association.

1 Purification of our cells is the process whereby we separate “raw” donor tissue into our cells. During the process, we monitor the division of the neural stems cells and remove or “weed out” any cells which have failed to divide after a predetermined period of time. We repeat this process 3 to 4 times until the cells remaining have been “purified” in our estimation.

2 Neurons are a major class of cells in the nervous system. Neurons are sometimes called nerve cells, though this term is technically imprecise since many neurons do not form nerves. In vertebrates, they are found in the brain, the spinal cord and in the nerves and ganglia of the peripheral nervous system, and their primary role is to process and transmit neural information. One important characteristic of neurons is that they have excitable membranes which allow them to generate and propagate electrical signals.

3 Glia cells, commonly called neuroglia or simply glia, are non-neuronal cells that provide support and nutrition, maintain homeostasis, form myelin, and participate in signal transmission in the nervous system. In the human brain, glia are estimated to outnumber neurons by as much as 50 to 1.

Our Technology

Our technology is the ability to isolate human neural stem cells from most areas of the developing human brain and spinal cord. Our technology includes the ability to grow neural stem cells into physiologically relevant human neurons of all types. Our two issued core patents entitled “Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammals” and “ In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multi-potential CNS Stem Cell” contain claims which cover the process of deriving the cells and the cells created from such process.

Our technology is the ability to isolate human neural stem cells from most areas of the human brain and spinal cord and to grow them into physiologically relevant human neurons of all types. Our core patents entitled:

·	Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammal; and

·	In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multi-potential CNS Stem Cell

contain claims which cover the details of this process and the culture of cells created. What differentiates our stem cell technology from others is that our patented processes do not require us to “push” the cells towards a certain fate by adding specific growth factors. Our cells actually “become” the type of cell they are fated to be. We believe this process and the resulting cells create a technology platform that allows for the efficient isolation and ability to produce, in commercially reasonable quantities, neural stem cells.

Our technology allows for cells to grow in cultured dishes, also known as “in vitro” growth, without mutations or other adverse events that would compromise their usefulness. We believe this provides two distinct advantages:

First, the growth or expansion of the cells in vitro occurs while the cells are still in their “stem cell” or blank state which allows for the creation of commercially reasonable quantities of neural stem cells. Once a sufficient number of blank cells have been grown, our technology allows us to program or differentiate the cells into either neurons or glia; and

·	Secondly, we have the ability to sample the cells while still in vitro in order to confirm that the cells are differentiating in the desired cell type.

Although not the focus of our business, our technology also has ancillary uses with respect to drug development. Our ability to grow and differentiate neural cells in vitro, gives us the ability to analyze the potential biological effects of molecules on these cells. This has resulted in the identification of a group of small molecule compounds with the potential to enhance the survival of the endogenous cells residing in the hippocampus4 region on the brain.

Business Strategy

We are seeking to develop and commercialize stem cell therapeutics to treat, and possibly cure, a range of human diseases. Our strategy has been to identify, isolate and patent important human neural stem and progenitor cells derived from human tissue with therapeutic and commercial importance; to develop techniques which enable the expansion and banking of those cells; and then to take them into clinical development as transplantable therapeutics.

A central element of our business strategy is to obtain patent protection for the compositions, processes and uses of these multiple types of cells that would make the commercial development of neural stem cell therapeutics financially feasible. We have obtained rights to certain inventions relating to stem cells and progenitor through our own research and from academic collaborators. We expect to continue to expand our search for, and to seek to acquire rights from third parties where relevant, and to further develop our intellectual property positions with respect to both in-house research and through research conducted at commercial and scholarly institutions.

Our Research and Programs

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

In addition to research which we conduct internally or under our direct supervision, we conduct research and development through research collaborations. These collaborations, or programs, are undertaken with both commercial and scholarly institutes pursuant to the terms and conditions of our standard material transfer agreement.

The terms of our standard material transfer agreement require us to provide our research partner or collaborator with access to our technology or “research materials,” which are comprised of our neurological stem cells, for a specific pre-defined purpose. As part of the agreement, we agree to provide sufficient research materials and technical assistance to accomplish the purpose of the program. The determination of sufficiency is determined at our sole discretion. As part of these agreements, we are entitled to certain reporting rights and the right to have patentable discoveries presented to us prior to publication in order for us to file applicable patents. In the event we choose to file a patent, we will either be responsible for all filing and maintenance fees or we will split the fees with our research partner depending on the type of patent to be filed. The agreements also provide for us to receive a fully paid up, royalty free, non-exclusive license to any inventions made by our partner with respect to our technologies and their interest in any intellectual property jointly developed and first right to negotiate an exclusive license. The agreements also provide confidentiality between the parties. Generally each party is responsible for its own expense, there are no milestone payment or royalty payment requirements and the duration of these agreements is for a three year term which can be terminated by either party by providing 90 days written notice. Also, these agreements may require us to pay for certain costs and expenses incurred in connection with the research.

Number	Country	Filing Date	Issue Date	Expiration Date	Title

2257068	CA	5/7/1997	N/A	N/A	ISOLATION, PROPOGATION, AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM CENTRAL NERVOUS SYSTEM OF MAMMALS

2343571	CA	9/20/1999	N/A	N/A	STABLE NEURAL STEM CELL LINES

99948396.9	EP	9/20/1999	N/A	N/A	STABLE NEURAL STEM CELL LINES

2000-574224	JP	9/20/1999	N/A	N/A	STABLE NEURAL STEM CELL LINES

10/047,352	US	1/14/2002	N/A	N/A	STABLE NEURAL STEM CELLS

3790356.4	EP	12/5/2003	N/A	N/A	METHOD FOR DISCOVERING NEUROGENIC AGENTS

10/914,460	US	8/9/2004	N/A	N/A	USE OF FUSED IMIDAZOLES, AMINOPYRIMIDINES, ISONICOTINAMIDES, MINOMETHYL PHENOXYPIPERIDINES AND ARYLOXYPIPERIDINES TO PROMOTE AND DETECT ENDOGENOUS NEUROGENESIS

11/281,640	US	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

200580039450	CN	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

5851748.3	EP	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

2613/CHENP/2007	IN	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

183092	IL	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

2007-543219	JP	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

10-2007-7012097	KR	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

1-2007-501016	PH	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

2007122507	RU	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

200703490-3	SG	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

1-2007-01216	VN	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEURODEGENERATIVE CONDITIONS

20073078	NO	11/17/2005	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

11/852,922	US	9/10/2007	N/A	N/A	METHOD FOR DISCOVERING NEUROGENIC AGENTS

11/932,923	US	10/31/2007	N/A	N/A	TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

915968	GB	5/7/1997	7/25/2007	5/7/2017	ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS

915968	IE	5/7/1997	7/25/2007	5/7/2017	ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS

915968	SE	5/7/1997	7/25/2007	5/7/2017	ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS

	High		Low
2007:
First Quarter	$	3.95	$	2.25
Second Quarter(1)	$	3.45	$	2.20
Third Quarter	$	4.17	$	2.75
Fourth Quarter	$	3.36	$	2.25
2008:
First Quarter	$	3.58	$	2.29
Second Quarter	$	2.59	$	1.31
Third Quarter	$	1.86	$	1.20
Fourth Quarter	$	2.15	$	1.01

	(a)	(b)		(c)
	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available or Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders
2005 Stock Plan, as amended	3,330,659	$	1.19	669,341
2007 Stock Plan	5,320,000		2.46	830,000
Equity compensation plans not approved by security holders	N/A		N/A	N/A
Total	8,650,659	$	1.51	1,499,341


	•	Trends & Outlook. Discussion of what we view as the overall trends affecting our business and the strategy for our operating segments and outlook for 2009.


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


	•	Results of Operations. Analysis of our financial results comparing 2008 to 2007.


	•	Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.

					Change in
					2008
					Versus 2007
	2008		2007		$			%
Revenue	$	—	$	306,057	$	(306,057	)		(100]	)%

		Page

Report of Independent Registered Public Accounting Firm		F-1

Balance Sheets		F-2

Statements of Operations		F-3

Statements of Cash Flows		F-4

Statements of Stockholders’ Equity		F-5

Notes to Financial Statements		F-6

	December 31,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,903,279		$	7,403,737
Prepaid expenses		136,287			130,719

Total current assets		5,039,566			7,534,456

Property and equipment, net		163,930			136,920
Intangible assets, net		212,265			111,406
Other assets		52,972			43,271

Total assets	$	5,468,733		$	7,826,053

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Accounts payable and accrued expenses	$	1,265,488		$	1,016,699

LONG-TERM LIABILITIES -		—			—

Total liabilities		1,265,488			1,016,699

STOCKHOLDERS' EQUITY

Common stock, $0.01 par value, 150 million shares authorized, 33,751,300 and 31,410,566 shares outstanding in 2008 and 2007		337,513			314,106
Additional paid-in capital		61,352,527			52,151,245

Accumulated deficit		(57,486,795	)		(45,655,997	)
Total stockholders' equity		4,203,245			6,809,354

Total liabilities and stockholders' equity	$	5,468,733		$	7,826,053

	Years Ended December 31,
	2008			2007

Revenues	$	—		$	306,057

Operating expenses:
Research and development		6,513,349			3,440,129
General, selling and administrative expenses		5,252,863			3,201,443
Depreciation and amortization		65,761			32,057
		11,831,973			6,673,629
Operating loss		(11,831,973	)		(6,367,572	)

Nonoperating income (expense):
Interest income		39,806			194,753
Interest expense		-			(1,302	)
Warrant modification expense		(38,631	)		—
Non-operating income		1,175			193,451

Net loss		(11,830,798	)		(6,174,121	)

Deemed dividend – Repriced Warrants		—			(889,151	)

Net loss attributable to common shareholders	$	(11,830,798	)	$	(7,063,272	)

Net loss per share, basic and diluted	$	(0.37	)	$	(0.24	)

Average number of shares of common stock outstanding		32,114,365			29,012,858

	Years ended December 31,
	2008			2007
Cash Flows From Operating Activities:
Net loss	$	(11,830,798	)	$	(6,174,121	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		65,761			32,055
Stock and warrant based compensation		4,632,847			1,575,120
Warrant Modification Expense		38,631			—

Changes in operating assets and liabilities:

Prepaid expenses		(5,568	)		(97,871	)
Other assets		(9,701	)		(1,288	)
Accounts payable and accrued expenses		248,789			664,737
Net cash used in operating activities		(6,860,039	)		(4,001,368	)

Cash Flows From Investing Activities:
Capital outlay for intangible assets		(116,921	)		(95,721	)
Purchase of property and equipment		(76,709	)		(133,906	)
Net cash used in investing activities		(193,630	)		(229,627	)

Cash Flows From Financing Activities:
Issuance of common stock		4,553,211			9,856,036
Payments on notes payable					(28,345	)
Net cash provided by financing activities		4,553,211			9,827,691

Net (decrease) increase in cash and cash equivalents		(2,500,458	)		5,596,696

Cash and cash equivalent, beginning of period		7,403,737			1,807,041
Cash and cash equivalent, end of period	$	4,903,279		$	7,403,737
Supplemental disclosure of cash flow information:
Cash paid for interest	$	—		$	1,302

Supplemental schedule of non cash investing and financing activities:

Issuance shares of common stock to satisfy common stock payable commitment
conversion of 6,254,402 shares of preferred stock to 14,182,399 shares of common stock		-			150,000

	Common Stock		Common Stock		Common Stock			Additional Paid-In		Accumulated			Total Stockholders’
	Shares		Amount		Payable			Capital		Deficit			Equity

Balance at January 1, 2007		26,011,605	$	260,116	$	150,000		$	39,734,878	$	(38,592,725	)	$	1,552,269

Issuance of common stock for satisfaction of common stock payable		300,000		3,000		(150,000	)		147,000					-

Issuance of common stock related to exercise of warrants, between $0.05-$0.50 exercise price per share		169,000		1,690					51,760					53,450

Issuance of common stock related to exercise of warrants related to Private Placement Offering, between $0.05 and $3.00 exercise price per share		2,475,961		24,760					4,161,597		-			4,186,356

Issuance of common stock related to Private Placement Offering, net of $520,400 in offering related expenses, $2.50 per share		2,454,000		24,540					5,590,060					5,614,600

Vesting of officer/directors stock options		-		-					1,530,576					1,530,576

Vesting of warrants for 19,789 shares of common stock, $2.33 fair value per share		-		-					46,224					46,224

On October 26, 2007, the Company agreed to reduce the exercise price of the warrants issued in connection with the Company’s March 2007 offering by $.25 per share. As a result of the discounted exercise price we recorded a deemed dividend charge of $889,151 for the warrants that were so exercised.		-							889,151		(889,151	)		-

Net loss		-		-					-		(6,174,121	)		(6,174,121	)

Balance at December 31, 2007		31,410,566	$	314,106		-		$	52,151,245	$	(45,655,997	)		6,809,354

Exercise of Warrants to purchase Common Stock ($1.50 to $2.00 per share), net of offering costs of $20,889		125,425		1,254					209,957					211,211

Issuance of common stock though private placement ($4.06 per share).		615,309		6,153					2,493,847					2,500,000

Issuance of common stock though private placement ($1.25 per share) , net of offering costs of $158,000		1,600,000		16,000					1,826,000					1,842,000

Share Based Payment – Employee Compensation									4,632,847					4,632,847

Warrant Modification Expense									38,631					38,631

Net loss for 2008											(11,830,798	)		(11,830,798	)

Balance at December 31, 2008		33,751,300	$	337,513		-		$	61,352,527	$	(57,486,795	)	$	4,203,245

A summary of stock option activity during the twelve months ended December 31, 2008 and related information is included in the table below:	Number of Options	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2007	2,432,326	0.66		7.5
Granted	718,333	3.04
Exercised	-				-
Forfeited	-				-

Outstanding at January 1, 2008	3,150,659	$	1.19	6.8	$
Granted	5,600,000		3.34	9.3
Exercised	-		-	-		-
Forfeited	-		-	-

Outstanding at December 31, 2008	8,750,659	$	2.55	8.2	$	2,799,600

Exercisable at December 31, 2008	2,322,326	$	1.11	6.7	$	2,070,000

Range of Exercise Price	Outstanding Options		Expiration Dates

$0.5 - 2.00		2,800,000		2015 - 2018
$ 2.01 - 3.00		1,065,000		2017 - 2018
$3.01 - 4.00		4,818,275		2012 - 2018
$4..01 - 8.00		62,042		2011 - 2015
$8.01 - higher		5,342		2010 - 2011

		8,750,659

	Twelve Months Ended December 30,
	2008		2007

Research and development costs	$	3,024,537	$	1,167,172
General, selling and administrative expenses		1,608,310		407,948
Total	$	4,632,847	$	1,575,120

				Weighted-
				Average
	Number of			Exercise
	Warrants			Price

Outstanding at January 1, 2007		8,148,602		$	1.90
Issued		5,752,480		$	2.95
Exercised		(2,692,567	)	$	(1.61	)
Forfeited		–

Outstanding at December 31, 2007		11,208,515		$	2.44

Issued		2,046,672		$	1.30
Exercised		(125,425	)	$	1.68
Forfeited		-

Outstanding at December 31, 2008		13,129,762		$	2.27

Exercisable at December 31, 2008		10,129,762		$	2.05

Exercise	Outstanding		Expiration
Price	Warrants		Date
$0.50		320,000	2010
$1.10		782,005	2011
$1.25		3,111,672	2012
$1.25		294,480	2012
$1.50		2,131,265	2011
$1.50		112,000	2013
$2.00		2,228,340	2011
$2.00		100,000	2016
$2.75		50,000	2013
$3.01		1,000,000	2015
$3.01		2,000,000	2016
$5.00		1,000,000	2016
		13,129,762

	Year Ended		Year Ended
	December 31, 2008		December 31, 2007

Research and development	$	3,024,537	$	1,167,172
General and administrative		1,608,310		407,948
Stock-based compensation expense included in operating expenses	$	4,632,847	$	1,575,120

	2008			2007
Dividend yield		0	%		0	%
Expected volatility range	46% to 82		%	47% to 82		%
Risk-free interest rate range	1.22 to 4.96		%	3.09% to 4.96		%
Expected life	2 to 6.5 yrs			2 to 6.5 yrs

	2008			2007
Furniture and Fixtures	$	14,400		$	5,289
Computers and office equipment		43,273			39,181
Lab equipment		196,036			132,530

	$	253,709		$	177,000
Less accumulated depreciation and amortization		(89,779	)		(40,080	)
Property and equipment, net	$	163,930		$	136,920

	2008			2007
Net operating loss carry-forwards	$	15,563,878		$	12,795,157
Valuation allowance		(15,563,878	)		(12,795,157	)
Net deferred tax asset	$	-		$	-

Name	Principal Occupation	Age		Director Since
I. Richard Garr	Chief Executive Officer, President, General Counsel and Director of Neuralstem, Inc.		56	1996

Karl Johe, Ph.D	Chief Scientific Officer, Chairman of the Board and Director of Neuralstem, Inc.		48	1996

Name	Position	Age	Position Since
I. Richard Garr	Chief Executive Officer, President, General Counsel	56	1996

Karl Johe, Ph.D.	Chief Scientific Officer	48	1996

John Conron	Chief Financial Officer	58	4/1/2007

Name of Reporting Person	Type of Report Filed Late	No. of Transactions Reported Late
Richard Garr	Form 4 - Statement of Change in Beneficial Ownership	1

Karl Johe	Form 4 - Statement of Change in Beneficial Ownership	1

William Oldaker	Form 4 - Statement of Change in Beneficial Ownership	2

Scott Ogilvie	Form 4 - Statement of Change in Beneficial Ownership	2

Name and principal position (a)	Year (b)	Salary ($) (c)			Bonus ($) (d)		Stock Awards ($) (e)	Option Award ($) (f)(2)			Nonequity Incentive Plan compensation ($) (g)	Non-qualified deferred compensation earning ($) (h)	All other Compensation ($) (i)(1)		Total ($) (j)

I. Richard Garr Chief Executive President, General Counsel (“PEO”)	2008	$	436,750			307,662			3,437,056					88,523	$	4,269,991
	2007	$	357,000			26,750								33,384	$	417,134
Karl Johe Chief Scientific Officer	2008	$	427,250			343,350			3,437,056					6,000	$	4,213,656
	2007	$	345,000	(3)		26,750			570,478	(4)					$	636,612
John Conron Chief Financial Officer	2008	$	208,750			18,750			1,125,581					4,500	$	1,357,581
	2007	$	80,000			10,000			315,000					—	$	405,000

Termination Date	Amount of Payment (1)
October 31, 2009	$	1,221,000
October 31, 2010 until the end of Contract	$	1,000,000

Name (a)		Number of securities underlying unexercised options (#) exercisable (b)		Number of securities underlying unexercised options (#) unexercisable (c)		Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) (d)	Option exercise price ($) (e)		Option expiration date (f)	Number of shares or units of stock that have not vested (#) (g)	Market value of shares of units of stock that have not vested ($) (h)	Equity incentive plan award: Number of un- earned shares, units or other rights that have not vested (#) (i)	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) (j)

I. Richard Garr	(1)		900,000		300,000		$	0.50	7/28/15
	(2)				2,100,000		$	3.66	1/1/18

Karl Johe (3)	(4)		900,000		300,000		$	0.50	7/28/15
	(5)				333,333		$	3.01	10/31/15
	(6)				2,100,000		$	3.66	1/1/18

John Conron	(7)		100,000				$	3.15	4/1/15
	(8)		50,000				$	2.60	4/1/18
	(9)				1,000,000		$	2.60	4/1/18