$CUR Form 10-K

0
516
Biotech Stocks

Form 10-K for NEURALSTEM, INC.


16-Mar-2015

Annual Report

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur Management’s Discussion and Analysis of Financial Condition and Results of Operations or MD&A, is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:� Executive Overview – Overview discussion of our business in order to provide context for the remainder of MD&A.

� Trends & Outlook – Discussion of what we view as the overall trends affecting our business and the strategy for 2015.

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

� Results of Operations- Analysis of our financial results comparing the: (i) year ended December 31, 2014 to the comparable period of 2013 and (ii) year ended December 31, 2013 to the comparable period of 2012.

� Liquidity and Capital Resources- Analysis of cash flows and discussion of our financial condition and future liquidity needs.

Executive Overview
We are focused on the development and commercialization of treatments based on human neuronal stem cells and the development and commercialization of treatments using small molecule compounds. We are headquartered in Germantown, Maryland and have a wholly-owned subsidiary in China.

We have developed and maintain a portfolio of patents and patent applications that form the proprietary base for our research and development efforts. We own or exclusively license ninety-five (95) U.S. or foreign issued patents and fifty-one (51) U.S. and foreign patent applications in the field of regenerative medicine, related to our stem cell technologies as well as our small molecule compounds. At times, including in the third quarter 2012 and the first quarter of 2013, we have licensed the use of our intellectual property to third parties.

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

We have not derived any revenue or cash flows from the sale or commercialization of our products. In the past, we have derived limited revenue from the licensing of certain intellectual property to third parties and from consulting fees. As a result, we have incurred annual operating losses since inception and expect to continue to incur substantial operating losses in the future. Therefore, we are dependent upon external financing and revenue from collaborative research arrangements with sponsors to finance our operations. We have no such collaborative research arrangements at this time and there can be no assurance that such financing or partnering revenue will be available when needed or on terms acceptable to us.

Before we can derive revenue or cash inflows from the commercialization of any of our proposed product candidates, we will need to: (i) conduct substantial testing of our proposed products, (ii) undertake pre-clinical and clinical testing for specific disease indications; and (iii), obtain required regulatory approvals. These steps are risky, expensive and time consuming.

Trends & Outlook
We generated no revenues from the sale of our proposed therapies for any of the years presented. We are mainly focused on successfully managing our current clinical trials related to our stem cell technology and small molecule compounds. We are also pursuing pre-clinical studies on other central nervous system indications in preparation for additional clinical trials.

In the first quarter of 2013 and the third quarter of 2012, we licensed the use of certain of our intellectual property to third parties. During the years ended December 31, 2014, 2013 and 2012, we recognized approximately $19,000, $110,000 and $173,000 of revenue, respectively, related to up-front payments and ongoing fees under these licenses.

On a long-term basis, we anticipate that our revenue will be derived primarily from licensing fees and sales of our cell based therapy and small molecule compounds. Because we are at such an early stage in the clinical trials process, we are not yet able to accurately predict when we will have a product ready for commercialization, if ever.

Research and Development Expenses

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

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

For a further description of these clinical trials, see the section of this report entitled “Clinical Programs” contained in Item 1.

We expect that research and development expenses, which include expenses related to our ongoing clinical trials, will increase in the future, as funding allows and we proceed into our anticipated Phase II trials. To the extent that it is practical, we will continue to outsource much of our efforts, including product manufacture, proof of principle and pre-clinical testing, toxicology, tumorigenicity, dosing rationale, and development of clinical protocol and IND applications. This approach allows us to use the best expertise available for each task and permits staging new research projects to fit available cash resources.

We have formed a wholly owned subsidiary in the People’s Republic of China. We anticipate that this subsidiary will primarily: (i) conduct pre-clinical research with regard to proposed stem cells therapies, and (ii) oversee our approved future clinical trials in China, including the current trial to treat motor deficits due to ischemic stroke. Through December 31, 2014 this subsidiary has incurred expenses of approximately $500,000.

General and Administrative Expenses

General and administrative expenses are primarily comprised of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations, legal fees, facilities and other external general and administrative services.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of the Notes to Consolidated Financial Statements included elsewhere herein describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

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

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

Use of Estimates – Our financial statements prepared in accordance with U.S. GAAP require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, we have estimated the expected economic life and value of our patent technology, our net operating loss carryforward and related valuation allowance for tax purposes and our stock -based compensation expenses related to employees, directors, consultants and investment banks. Actual results could differ from those estimates.

Long Lived Intangible Assets – Our long lived intangible assets consist of our intellectual property patents including primarily legal fees associated with the filings and in defense of our patents. The assets are amortized on a straight-line basis over the expected useful life which we define as ending on the expiration of the patent group. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We assess this recoverability by comparing the carrying amount of the asset to the estimated undiscounted future cash flows to be generated by the asset. If an asset is deemed to be impaired, we estimate the impairment loss by determining the excess of the asset’s carrying amount over the estimated fair value. These determinations use assumptions that are highly subjective and include a high degree of uncertainty. During the years ended December 31, 2014, 2013 and 2012, no significant impairment losses were recognized.

Fair Value Measurements – The carrying amounts of our short-term financial instruments, which primarily include cash and cash equivalents, other short-term investments, accounts payable and accrued expenses, approximate their fair values due to their short maturities. The fair value of our long-term indebtedness is estimated based on the quoted prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair values of our derivative instruments were estimated using Level 3 unobservable inputs.

Share-Based Compensation – We account for share-based compensation at fair value; accordingly we expense the estimated fair value of share-based awards over the requisite service period. Share-based compensation cost for stock options and warrants issued to employees and board members is determined at the grant date using an option pricing model. Option pricing models require us to make assumptions, including expected volatility and expected term of the options. If any of the assumptions we use in the model were to significantly change, stock based compensation expense may be materially different. Share-based compensation cost for restricted stock and restricted stock units issued to employees and board members is determined at the grant date based on the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period.

Comparison of Our Results of Operations for the Year Ended December 31, 2014 and 2013

Revenue

We did not generate any revenues from the sale of our proposed products in 2014 or 2013. During 2014 and 2013, we recognized revenue of approximately $19,000 and $110,000, respectively related to the licensing of certain of our intellectual properties to third parties. The revenue in 2013 included up-front fees for new licenses while the revenue recognized in 2014 consisted solely of ongoing, annual fees.

 

Operating Expenses



Operating expenses for 2014 and 2013 were as follows:



                                           Year Ended December 31,             Increase (Decrease)
                                            2014             2013                $                %
Operating Expenses
Research & development costs            $  8,134,753     $  7,134,301     $     1,000,452             14 %
General & administrative expenses          8,971,299        5,254,915           3,716,384             71 %
Depreciation and amortization                348,630          244,725             103,905             42 %
Total expense                           $ 17,454,682     $ 12,633,941     $     4,820,741             38 %

Research and Development Expenses

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

The increase of approximately $1,000,000 or 14% in research in development expenses was primarily attributable to a $674,000 increase in payroll and related expense due to increased salaries and headcount, a $140,000 increase in project and lab expenses and a $112,000 increase in travel and related expense due to our clinical trial activities. These increased expenses are all related to a ramping up of our pre-clinical and clinical trial efforts and are expected to continue into subsequent periods.

General and Administrative Expenses

General and administrative expenses are primarily comprised of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations, legal fees, facilities and other external general and administrative services.

The increase of approximately of approximately $3,716,000 or 71% in general and administrative expenses was primarily attributable to a $1,953,000 increase in non-cash stock based compensation expense primarily related to a consultant achieving a performance based milestone which resulted in a term extension of certain common stock purchase warrants, a $1,010,000 increase in legal and professional fees related to patent, litigation and other corporate matters, a $554,00 increase in consulting fees primarily related to new business development efforts and a $236,000 increase in payroll and related expenses due to current year headcount increases.

Depreciation and Amortization

The increase in depreciation and amortization expenses is due to additions to our patents and property and equipment.

Other income (expense)

Other expense totaled approximately $5,193,000 and $7,308,000 in the years ended December 31, 2014 and 2013, respectively. Other expense in 2014 consisted primarily of $3,110,000 related to our extension of certain common stock purchase warrants, $1,621,000 of interest expense principally related to our long-term debt, a $446,000 loss on our debt amendment transaction and $334,000 related to the change in fair value of the Company’s warrant liabilities partially offset by $250,000 of income from a milestone payment from a legal settlement.

Other expense in 2013 consisted primarily of a $5,017,000 expense related to the modification of certain common stock purchase warrants, $1,394,000 of interest expense primarily related to the Company’s March 2013 long-term debt and a $965,000 expense related to the change in fair value of the Company’s warrant liabilities partially offset by approximately $68,000 in interest income.

Comparison of Our Results of Operations for the Year Ended December 31, 2013 and 2012

Revenue

We did not generate any revenues from the sale of our proposed products in 2013 or 2012. During 2012, we recognized revenue of approximately $234,000, for our services as principal subcontractor under the DOD contract; this contract was completed in the second quarter of 2012. During 2013 and 2012, we recognized revenue of approximately $110,000 and $173,000, respectively related to the licensing of certain of our intellectual properties to third parties.

 

Operating Expenses



Operating expenses for 2013 and 2012 were as follows:



                                           Year Ended December 31,             Increase (Decrease)
                                            2013             2012                $                %
Operating Expenses
Research & development costs            $  7,134,301     $  6,105,984     $     1,028,317             17 %
General & administrative expenses          5,254,915        4,247,037           1,007,878             24 %
Depreciation and amortization                244,725          211,143              33,582             16 %
Total expense                           $ 12,633,941     $ 10,564,164     $     2,069,777             20 %

Research and Development Expenses

The increase in research and development expenses was primarily attributable to an approximately $389,000 increase in project and lab expenses, a $136,000 increase in personnel related expenses due to the hiring of additional research and development personnel, a $147,000 increase in travel expenses all due to the ramping up of our clinical trial and research efforts coupled with a $277,000 increase in share-based compensation.

General and Administrative Expenses

The increase in general and administrative expenses was primarily attributable to an approximately $494,000 increase in professional services, a $444,000 increase in share-based compensation, a $77,000 increase in insurance premiums and a $57,000 increase in charitable donations, partially offset by a $92,000 decrease in bonus and personnel related expenses.

Depreciation and Amortization

The increase in depreciation and amortization expenses is primarily due to depreciation over fixed assets purchased in 2013 along with amortization of 2013 additions to our patent assets.

Other income (expense)

Other income (expense) totaled approximately ($7,308,000) and $35,000 in the years ended December 31, 2013 and 2012, respectively. Other expense in 2013 consisted primarily of a $5,017,000 expense related to the modification of certain common stock purchase warrants, $1,394,000 of interest expense primarily related to the Company’s March 2013 long-term debt and a $965,000 expense related to the change in fair value of the Company’s warrant liabilities partially offset by approximately $68,000 in interest income. Other income in 2012 consisted primarily of interest income.

Liquidity and Capital Resources
Since our inception, we have financed our operations through the sales of our securities, issuance of long-term debt, the exercise of investor warrants, and to a lesser degree from grants and research contracts as well as the licensing of our intellectual property to third parties. In January 2014, we received approximately $20 million of gross proceeds from the sale or our securities pursuant to a registered direct offering and in October 2014, we raised approximately $4 million of net proceeds in our debt amendment transaction.

We will require additional capital to conduct research and development, establish and conduct clinical and pre-clinical trials, enter into commercial-scale manufacturing arrangements and to provide for marketing and distribution of our products. We cannot assure you that we will be able to secure such additional financing or that the expected income will materialize. Several factors will affect our ability to raise additional funding, including, but not limited to market conditions, interest rates and, more specifically, our progress in our exploratory, preclinical and future clinical development programs.

Cash Flows – 2014 compared to 2013

 

                                                Year Ended December 31,             Increase (Decrease)
                                                2014              2013                $               %

Cash and cash equivalents                   $  12,518,980     $  16,846,052     $  (4,327,072 )          -26 %
Short term investments                         15,007,478                 -        15,007,478            - %
Total cash and short term investments       $  27,526,458     $  16,846,052     $  10,680,406             63 %

Net cash used in operating activities       $ (11,706,688 )   $ (10,591,617 )   $  (1,115,071 )           11 %
Net cash used in investing activities       $ (15,563,826 )   $    (537,050 )   $ (15,026,776 )         2798 %
Net cash provided by financing activities   $  22,944,425     $  20,524,702     $   2,419,723             12 %

The increase in our cash and short term investments was primarily due to our raising approximately $19.5 million, net through the sale of our common stock and warrants and $4.2 million, net in our debt amendment transaction partially offset by our cash used in operations.

Net Cash Used in Operating Activities

The increase in cash used in operating activities during 2014 as compared to 2013 was primarily the result of a $2,797,000 increase in our net loss partially offset by changes in our operating assets and liabilities.

Net Cash Used in Investing Activities

The increase in our use of cash in investing activities during 2014 as compared to 2013 was primarily due to approximately $15,007,000 of purchases, net of maturities of short term investments using the proceeds from our January 2014 registered direct offering.

Net Cash Provided by Financing Activities

In 2014 we raised approximately $19,468,000, net through the sale of our common stock and warrants, $4,213,000 from our debt amendment transaction and $1,795,000 from exercises of stock purchase warrants. These were partially offset by $1,929,000 of principal payments on our long-term debt and the $426,000 payment of taxes related to stock option exercises.

In 2013 we raised approximately $7,048,000, net through the sale of our common stock and warrants, $7,551,000 from the issuance of long-term debt and $6,108,000 from exercises of stock purchase warrants.

Cash Flows – 2013 compared to 2012

 

                                               Year Ended December 31,              Increase (Decrease)
                                                2013              2012                $                %

Cash and cash equivalents                   $  16,846,052     $  7,443,773     $     9,402,279            126 %

Net cash used in operating activities       $ (10,591,617 )   $ (8,477,700 )   $    (2,113,917 )           25 %
Net cash used in investing activities       $    (537,050 )   $   (254,858 )   $      (282,192 )          111 %
Net cash provided by financing activities   $  20,524,702     $ 13,824,318     $     6,700,384             48 %

The increase in our cash and cash equivalents was primarily due to proceeds of approximately $20,708,000 from our debt and equity transactions partially offset by our cash used to fund our operations.

Net Cash Used in Operating Activities

The increase in cash used in operating activities during 2013 as compared to 2012 was primarily related to the ramping up of our clinical trial and other research and development efforts.

Net Cash Used in Investing Activities

The increase in our cash used in investing activities during 2013 as compared to 2012 was primarily attributable to an increased level of property and equipment purchases coupled with an increase in activity related to our patents.

Net Cash Provided by Financing Activities

In 2013 we raised approximately $7,048,000, net through the sale of our common stock and warrants, $7,551,000 from the issuance of long-term debt and $6,108,000 from exercises of stock purchase warrants while in 2012 we raised approximately $13,889,000 from the issuance and sale of our common stock and warrants.

Future Liquidity and Needs

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

We intend to pursue opportunities to obtain additional financing in the future through the sale of our securities and additional research grants. We currently have two shelf registration statements that are effective. On June 19, 2014, our shelf registration statement registering the sale of up to $100 million of our securities was declared effective by the SEC. To date, we have not sold any securities under this shelf registration statement. On September 13, 2013, our shelf registration statement (Registration No. 333-190936) registering the sale of up to $50 million of our securities was declared effective by the SEC. To date, through February 28, 2014 we have sold or reserved for sale upon the exercise of outstanding warrants approximately $47.2 million of securities under this shelf registration statement. Additionally, securities sold pursuant to our At the Market Offering Agreement (see below) are being sold pursuant to this registration statement and accordingly, we have reserved the balance of approximately $2.8 million of securities pursuant thereto. We anticipate conducting financing in the future based on our shelf registration statement when and if financing opportunities arise.

In October 2013, we entered into an At the Market Offering Agreement with T.R. Winston & Company as our sales agent pursuant to which we can sell up to $25 million of our common stock. The At the Market Offering Agreement was entered into pursuant to a takedown from our shelf registration statement declared effective on September 13, 2013 (Registration No. 333-190936). To date through February 28, 2015 we have sold 1,931,329 shares under such agreement at an average price per share of $3.07 resulting in gross proceeds of approximately $5,938,000 and net proceeds of approximately $5,707,000. Future sales under our agreement are limited to approximately $2.8 million which is the amount available under our shelf registration of which the At the Market Offering Agreement is part of.

The source, timing and availability of any future financing will depend . . .

LEAVE A REPLY

Please enter your comment!
Please enter your name here