---

 

Neuralstem, Inc.

 

 

		Page
PART I -	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008	3
	Statements of Operations (Unaudited)
	Three months ended March 31, 2009 and 2008	4
	Statements of Cash Flows (Unaudited)
	Three months ended March 31, 2009 and 2008	5
	Statements of Changes in Stockholders' Equity (Unaudited)
	For the period from January 1, 2009 through March 31, 2009	6
	Notes to Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20
PART II -	OTHER INFORMATION	21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders.	29
Item 5.	Other Information	29
Item 6.	Exhibits	31

 

 

2

---

 

PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Neuralstem, Inc.

 

Balance Sheets

		March 31,				December 31,
		2009				2008
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	3,567,108			$	4,903,279
Prepaid expenses			99,427				136,287
Total current assets			3,666,535				5,039,566
Property and equipment, net			155,516				163,930
Intangible assets, net			239,088				212,265
Other assets			61,472				52,972
Total assets		$	4,122,611			$	5,468,733
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	1,630,442			$	1,265,488
LONG-TERM LIABILITIES
Fair value of warrant obligations			2,762,835				-
Total liabilities			4,393,277				1,265,488
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, 7,000,000 shares authorized, zero shares issued and outstanding
Common stock: $0.01 par value; 150 million shares authorized, 33,751,300 shares outstanding in 2009 and 2008			337,513				337,513
Additional paid-in capital			58,688,611				61,352,527
Accumulated deficit			(56,296,790	)			(57,486,795	)
Total stockholders' (deficit) equity			(270,666	)			4,203,245
Total liabilities and stockholders' equity		$	4,122,611			$	5,468,733

 

3

---

 

Neuralstem, Inc.

 

Statements of Operations

(Unaudited)

		Three Months
		Ended March 31,
		2009				2008
Revenues		$	-			$	-
Operating expenses:
Research and development costs			1,434,010				1,198,843
General, selling and administrative expenses			1,457,238				1,083,169
Depreciation and amortization			20,796				13,757
			2,912,044				2,295,769
Operating loss			(2,912,044	)			(2,295,769	)
Nonoperating income:
interest income			2,264				21,317
Gain from change in fair value of warrant obligations			3,815,458				-
			3,817,722				21,317
Net Income (loss) attributable to common shareholders		$	905,678			$	(2,274,452	)
Net income (loss) per share, basic		$	0.03			$	(0.07	)
Net income (loss) per share, diluted		$	0.03			$	(0.07	)
Weighted average common shares outstanding - basic			33,751,300				31,762,872
Weighted average common shares outstanding - diluted			35,643,178				31,762,872

 

4

---

 

Neuralstem, Inc.

Statements of Cash Flows

(Unaudited)

		Three Months
		Ended March 31,
		2009				2008
Cash Flows From Operating Activities:
Net income (loss)		$	905,678			$	(2,274,452	)
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization			20,796				13,758
Stock based expenses			1,198,704				1,094,538
Gain from change in fair value of warrants			(3,815,458	)			0
Changes in operating assets and liabilities:
Prepaid expenses			36,860				6,655
Other assets			(8,500	)			(6,001	)
Accounts payable and accrued expenses			364,954				(522,692	)
Net cash used in operating activities			(1,296,966	)			(1,688,194	)
Cash Flows From Investing Activities:
Capital outlay for intangible assets			(33,948	)			(2,744	)
Purchase of property and equipment			(5,257	)			(28,886	)
Net cash used in investing activities			(39,205	)			(31,630	)
Cash Flows From Financing Activities:
Issuance of common stock			-				2,573,937
Net cash provided by financing activities			0				2,573,937
Net (decrease) increase in cash			(1,336,171	)			854,113
Cash and cash equivalents, beginning of period			4,903,279				7,403,737
Cash and cash equivalents, end of period		$	3,567,108			$	8,257,850

 

5

---

 

Neuralstem, Inc.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Three Months Ended March 31, 2009

(Unaudited)

										Additional								Total
		Common Stock				Common Stock				Paid-In				Accumulated				Stockholders'
		Shares				Amount				Capital				Deficit				Equity
Balance at January 1, 2009			33,751,300			$	337,513			$	61,352,527			$	(57,486,795	)		$	4,203,245
Cumulative effect of reclassification of warrants under EITF 07-5											(6,862,620	)			284,327				(6,578,293	)
Balance, January 1, 2009, as adjusted			33,751,300			$	337,513				54,489,907				(57,202,468	)			(2,375,048	)
Share based payment - employee compensation											1,198,704							$	1,198,704
Net income															905,678				905,678
Balance at March 31, 2009			33,751,300			$	337,513			$	55,688,611			$	(56,296,790	)		$	(270,666	)

 

 

6

---

 

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

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 generates limited amounts of cash which will not be sufficient to meet its future capital requirements. 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 and access to funds that we will not require additional debt or equity financing during 2009.

 

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 the SEC’s Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements as amended by SAB 104.  Our revenue is 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.

 

Income or Loss per Common Share

 

Basic income or loss per common share is calculated by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted income or loss per common share adjusts basic income or loss per share for the potentially dilutive effects of shares issuable under our stock option plan, using the treasury stock method. At March 31, 2009 6,500,659 options and 4,212,000 warrants were excluded from the calculation as their effect would have been anti-dilutive.  At March 31, 2008 all of the Company’s 7,400,659 options and 11,158,515 warrants have been excluded from the calculation as their effect would have been anti-dilutive.

 

7

---

 

 

		For The Three Months Ended March 31,
			2009				2008
Basic:
Net income (loss) attributable to common shareholders		$	905,678			$	(2,274,452	)
Weighted average common shares outstanding			33,751,300				31,762,872
Basic earnings per common share		$	0.03			$	(0.07	)
Diluted:
Net income (loss) attributable to common shareholders		$	905,678			$	(2,274,452	)
Weighted average common shares outstanding			33,751,300				31,762,872
Dilutive effect of stock options and warrants			1,891,878				-
Weighted average common shares outstanding - diluted			35,643,178				31,762,872
Diluted earnings per common share		$	0.03			$	(0.07	)

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. 

 

During the three months ended March 31, 2009, we granted no options, and in the similar period ended March 31, 2008, we granted 4,200,000 options. We recorded related compensation expenses as our options vest in accordance with the Statement of Financial Accounting Standards (“SFAS”) 123(R),  Share-Based Payment.   We recognized $1,198,704 and $1,094,538 in share-based compensation expense during the three months ended March 31, 2009 and 2008, respectively, from the vesting of stock options or warrants.

 

A summary of stock option activity during the three months ended March 31, 2009 and related information is included in the table below:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
		Number				Exercise				Contractual				Intrinsic
		of Options				Price				Life (in years)				Value
Outstanding at January 1, 2009			8,800,659			$	2.55				8.2
Granted			196,000				1.64
Exercised			-
Forfeited			-
Outstanding at March 31, 2009			8,996,659			$	2.53				7.9			$	1,152,000
Exercisable at March 31, 2009			3,872,326			$	2.07				7.3			$	864,000

 

Share-based compensation expense included in the statements of operations for the three months ended March 31, 2009 and 2008 was as follows:

 

	Three Months Ended March 31,
	2009			2008
Research and development costs	$	740,201		$	752,014
General, selling and administrative expenses		458,503			342,524
Total	$	1,198,704		$	1,094,538

 

 

8

---

 

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

 

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
		Number				Exercise				Contractual				Intrinsic
		of Options				Price				Life (in years)				Value
Outstanding at January 1, 2009			13,079,762			$	2.27				2				-
Granted			-
Exercised			-
Forfeited			-
Outstanding at March 31, 2009			13,079,762			$	2.27				2				-
Exercisable at March 31, 2009			10,079,762			$	2.05				2				-

 

 

12

---

 

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 included herein.  As used in this Quarterly Report, unless the 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.   The information contained herein is current as of the date of this Quarterly Report (March 31, 2009), unless another date is specified.  

We prepare our interim financial statements in accordance with United States generally accepted accounting principles.  Our financials and results of operation for the three month period ended March 31, 2009 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2009. The interim financial statements presented in this Quarterly Report as well as other information relating to our company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with the United States Securities and Exchange Commission (“SEC”).

FORWARD LOOKING STATEMENTS

In this Quarterly 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 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 production, and the speed with which regulatory authorizations and product launches may be achieved;
·	whether or not a market for our proposed product develops and, if a market develops, the rate at which it develops;

 

·	our ability to successfully sell our products once developed;

 

·	our ability to attract and retain qualified personnel to implement our growth strategies;

 

·	our ability to develop sales, marketing, and distribution capabilities;

 

·	our ability to obtain reimbursement from third party payers for the products that we intend to sell;

 

·	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 of this report 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. 

 

13

---

 

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. 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 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 the first quarter of 2009 to 2008.
	•	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.

 

 

The various sections of the 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

 

Neuralstem is 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 for our research and development efforts in the area of neural stem cell research.  We own or exclusively license four (4) issued patents and thirteen (13) 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 successful development and commercialization of products for use in the treatment of a wide array of neurodegenerative conditions and in regenerative repair of acute disease.

This 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.  

In addition to our core stem cell tissue based technology we have begun developing a small-molecule compound.  The Company has performed preliminary in vitro and in vivo tests on the compound with regard to neurogenesis.  Based on the results of these tests we have applied for a U.S. patent on the compound.

Technology

Our technology is the ability to isolate human neural stem cells from most areas of the developing human brain and spinal cord and our technology includes the ability to grow them into physiologically relevant human neurons of all types. Our two issued core patents entitled: (i)  Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammals ; and (ii)  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.

 

14

---

 

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 from the human brain and spinal cord.

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.

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 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.

 

TRENDS & OUTLOOOK

Revenue: Our revenue was previously derived primarily from grant reimbursements and licensing fees. As our focus is now on pre-clinical work in anticipation of entering clinical trials in 2009, we are not concentrated on generating revenue.

Long-term, we anticipate that our revenue will be derived primarily from licensing fees and the sale of our cell therapy products. At present, we are in our pre-clinical stage of development and as a result, we cannot accurately predict when or if we will be able to produce a product for commercialization. Accordingly, we cannot accurately estimate if or when we will begin generating revenue from such sources.

Research & Development Expense: Our research and development expenses consist primarily of costs associated with 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. The cost of our research and development personnel is the most significant category of expense. However, we also incur expenses with third parties, including license agreements, third-party contract services, sponsored research programs and consulting expenses.

We do not segregate research and development costs on a per project basis. Although we have different areas of focus for our research, these areas are completely intertwined and have not yet matured to the point where they are separate and distinct projects. The intellectual property, scientists and other resources dedicated to these efforts are not separately allocated to individual projects, but rather are conducting our research on an integrated basis.

We expect that research and development expenses will continue to increase in the foreseeable future as we add personnel, expand our pre-clinical research (animal surgeries, manufacturing of cells, and in vitro characterization of cells which includes testing and cell quality control), begin clinical trial activities, increase our regulatory compliance capabilities, and ultimately begin manufacturing.

In 2006 we retained Quintiles, Inc. to assist with regulatory compliance, preparation of our first IND application, and patient enrollment for our first human trial. While recruitment for the trial cannot commence until we have received an FDA approved protocol, much of the infrastructure required must be developed and in place well in advance. For instance, we can begin to identify, contact, and educate prospective patients as well as the treatment community prior to commencing these trials.

The amount of monetary increases stemming from increased personnel and expenses as we move from pre-clinical to clinical stage is difficult to predict due to the uncertainty inherent in the timing and extent of progress in our research programs, and initiation of clinical trials. In addition, the results from our basic research and pre-clinical trials, as well as the results of trials of similar therapeutics underdevelopment by others, will influence the number, size and duration of planned and unplanned trials. As our research efforts mature, we will continue to review the direction of our research based on an assessment of the value of possible commercial applications emerging from these efforts. Based on this continuing review, we expect to establish discrete research programs and evaluate the cost and potential for cash inflows from commercializing products, partnering with others in the biotechnology industry, or licensing the technologies associated with these programs to third parties.

 

15

---

 

On December 18, 2008 we filed our IND with the FDA to begin a clinical trial to treat 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 on clinical hold. We are in the process of analyzing the notice and the FDA’s comments and recommendations.  We believe that it is not possible at this stage to provide a meaningful estimate of the total cost to complete our ongoing projects, including clinical trials, and bring any proposed products to market. The use of human stem cells as a therapy is an emerging area of medicine, and it is not known what clinical trials will be required by the FDA in order to gain marketing approval. The costs to complete such clinical trials could vary substantially depending upon the projects selected for development, the number of clinical trials required and the number of patients needed for each study. At a minimum, we estimate that a trial for an individual indication such as ALS will require at least 10 to 12 patients at an estimated cost of $100,000 per patient. It is possible that the completion of these studies could be delayed for a variety of reasons, including difficulties in enrolling patients, delays in manufacturing, incomplete or inconsistent data from the pre-clinical or clinical trials, and difficulties evaluating the trial results. Any delay would increase the cost of that trial, which would harm our operating results. Due to these uncertainties, we cannot reasonably estimate the size, nature, nor timing of the costs to complete, or the amount or timing of the net cash inflows from our current activities. Until we obtain further relevant pre-clinical and clinical data, we will not be able to estimate our future expenses related to these programs or when, if ever, and to what extent, we will receive cash inflows from resulting products.

 

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 pre-clinical to a clinical phase.

We anticipate G&A expenses related to our core business will increase at a slower rate than that of similar companies making such transition, due in large part to our outsourcing model.

 

CRITICAL ACCOUNTING POLICIES

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

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

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

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

 

Revenue Recognition—our revenues, to date, has been derived primarily from providing services as a subcontractor under federal grant programs and licensing fees.  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.

 

 

16

---

 

Intangible and Long-Lived Assets—we follow SFAS No. 144, "Accounting for Impairment of Disposal 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 period ended December 31, 2008 no impairment losses were recognized.

 

Accounting for Warrants – The Company has adopted the provisions of EITF 07-05, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-05”). EITF 07-05 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.  As a result, certain of our warrants are considered to be derivatives and must be valued using various assumptions as they are recorded as liabilities.

 

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

 

Stock Based Compensation—The Company accounts for equity instruments issued to non-employees in accordance with EITF 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.”  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 SFAS No. 123R “Share Based Payment” which superseded APB Opinion No. 25. SFAS No. 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements.

RESULTS OF OPERATIONS

Result of Operations – First Quarter of 2009 Compared to First Quarter of 2008

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future.

Revenue

 

The company did not have revenue for the three months ended March 31, 2009 and 2008, respectively.

 

		Three Months Ended March 31,
		2009			2008
Revenue		$	--		$	--

We do not anticipate any revenues for 2009.

Operating Expenses

 

Operating expense totaled $2,912,044  and $2,295,769  for the three months ended March 31, 2009 and 2008, respectively.

		Three Months Ended March 31,
		2009				2008
Operating expenses
Research & development		$	1,434,010			$	1,198,843
General, selling & administrative expense			1,457,238				1,083,169
Depreciation and amortization			20,796				13,757
Total expense		$	2,912,044			$	2,295,769

 

 

17

---

 

Research and Development Expenses

 

 

Research and development expenses totaled $1,434,010 for the three months ended March 31, 2009 compared to $1,198,843  for the same period of 2008.  The increase of $235,167 or 20% for the three months ended March 31, 2009 compared to the comparable period in 2008 was primarily attributable to the costs of completing the application to the FDA to move our tissue based products into clinical trials and other operating expenses.

General and Administrative Expenses

 

G&A expenses totaled $1,457,238 for the three months ended March 31, 2009 compared to $1,083,169  for the same period of 2008.  The increase of $374,069 or 35% for the three months ended March 31, 2009 compared to the comparable period in 2008 was primarily attributable to increased litigation expenses and a $116,000 increase in stock-based compensation expense.

Depreciation and Amortization

Depreciation and amortization expenses totaled $20,796 for the three months ended March 31, 2009 compared to $13,757 for the same period of 2008.   The increase of $7,039or 51% for the three months ended March 31, 2009 compared to the comparable period in 2008 was primarily attributable to fixed asset and patent filing fee additions over the past year.

 

Nonoperating Income

 

Nonoperating income totaled $3,817,722 and $21,317 for the three months ended March 31, 2009 and 2008, respectively.

 

		Three Months Ended March 31,
		2009				2008
Nonoperating income:
Interest income		$	2,264			$	21,317
Change on gain in fair value of warrants			3,815,458				-
Total nonoperating income		$	3,817,722			$	21,317

 

 

Interest Income

 

Interest income totaled $2,264 for the three months ended March 31, 2009 compared to $21,317 for the same period of 2008. The decrease of $19,053 for the three months ended March 31, 2009 compared to the comparable period in 2008 was attributable to lower cash balances and much reduced  interest rates on short term savings.

Gain from change in fair value of warrants

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. The fair value of these common stock purchase warrants declined to $2.8 million as of March 31, 2009 because of a decline in the stock price. We recognized a $3.8 million non-cash gain from the change in fair value of these warrants for the three months ended March 31, 2009.

 

18

---

 

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 approximately $500,000. In the next several months we expect the monthly burn rate to drop below $400,000. We anticipate that our available cash will be sufficient to finance most of our current activities for at least the next 9 months from March 31, 2009, although certain activities and related personnel may need to be reduced.

 

		Three Months Ended March 31,
		2009				2008
Cash and cash equivalents		$	3,567,108			$	8,257,850
Net cash used in operating activities		$	(1,296,966	)		$	(1,688,194	)
Net cash used in investing activities			(39,205	)			(31,630	)
Net cash provided by financing activities			0				2,573,937

 

Total cash and cash equivalents was $3,567,108 and $8,257,850 for the three months ended March 31, 2009 and 2008, respectively.  The decrease in our cash of $4,690,742or 57% for the three months ended March 31, 2009 compared to the comparable period in 2008 was primarily attributed to placement of our common equity of $2,573,937 in the first quarter of 2008, a reduction of $600,000 in amounts payable by the company in less than one year in the first quarter of 2008, an increase of $300,000 in short term financing by vendors, employees and other service providers in the first quarter of 2009.   The Company also accelerated research and development spending in the first quarter of 2009 to prepare for clinical trials and experienced higher legal fees due to litigation.

Net Cash Used in Operating Activities

 

In our operating activities we used $1,296,966 for the three months ended March 31, 2009 compared to $1,688,194 for the same period of 2008. The decrease in our cash of $391,288 or 23% for the three months ended March 31, 2009 compared to the comparable period in 2008 was primarily attributable to placement of our common equity of $2,573,937 in the first quarter of 2008, a reduction of $600,000 in amounts payable by the company in less than one year in the first quarter of 2008, an increase of $300,000 in short term financing by vendors, employees and other service providers in the first quarter of 2009.   The Company also accelerated research and development spending in the first quarter of 2009 to prepare for clinical trials and experienced higher legal fees due to litigation.

Net Cash Used in Investing Activities

In our investment activities we used $39,205 for the three months ended March 31, 2009 compared to $31,630 for the same period of 2008. The increase in our cash of $7,575 or 24% for the three months ended March 31, 2009 compared to the comparable period in 2008 was primarily attributable to an increase in our investment in property and equipment.

Net Cash Provided by Financing Activities

There was no cash provided by financing activities for the three months ended March 31, 2009 compared to $2,573,937 for the same period of 2008.

 

 

19

---

 

Listed below are key financing transactions entered into by us.  Also, please refer to the section of this Quarterly Report entitled “Recent Sale of Unregistered Securities” for a further description of the following transactions:

 

	•	In March of 2006 we completed the private placement of $5,000,000 of our units consisting of: (i) one shares of common stock; (ii) one half class A warrant; and (iii) one half class B warrant.  The units were priced at $1.00.
	•	In March of 2007 we completed the private placement of $6,135,000 of our units consisting of: (i) one share of common stock; and (ii) one half class C warrant.  The units were priced at $2.50.
	•	In October of 2007 warrant holders holding approximately 1,227,000 of our class C warrants exercised their warrants.  As an inducement for the exercise, we issued those warrant holders who exercised their warrants a replacement class C warrant.
	•	In February of 2008, we sold a strategic purchaser $2,500,000 of our common stock.
	•	On December 18, 2008, we sold $2,000,000 of common stock pursuant to our shelf registration statement on Form S-3.

 

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 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, we filed a Prospectus Supplement announcing that we entered into a securities purchase agreement under which we sold $2,000,000 of common shares pursuant to such shelf registration.  Accordingly, we may issue an additional $23,000,000 pursuant to the 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.

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 and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  

 

Based on management’s evaluation (with the participation of our CEO and Chief Financial Officer (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.

 

 

20

---

 

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