Filed with the Securities and Exchange Commission on June 20, 2006
Registration No. 333-132923
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
AMENDMENT NO. 1
FORM SB-2
 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
NEURALSTEM, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
2836
 
52-2007292
(State of Incorporation)
 
(Primary Standard Industrial Code No.)
 
(IRS Employer Identification No.)
 
9700 Great Seneca Highway, Rockville, Maryland 20850
(301) 366-4841
(Address and telephone number of principal executive offices)
 
The Corporation Trust Company
1209 Orange Street
New Castle County, Wilmington, Delaware 19801
(Name, address and telephone number of agent for service)
 
Copies to:
Christopher H. Dieterich, Esq.
Dieterich & Associates
11300 West Olympic Blvd., Suite 800
Los Angeles, California 90064
 
Raul Silvestre
Law Offices of Raul Silvestre & Associates, APLC
31200 Via Colinas, Suite 200
Westlake Village, CA 91362

Approximate date of commencement of proposed sale to the public:  From time-to-time after the effective date of this Registration Statement.
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 


If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. o
 
CALCULATION OF REGISTRATION FEE
 
 
Title of Each Class of
Securities to be Registered
 
Amount
to be
Registered
 
Proposed
Offering Price
Per Share
 
Proposed
Aggregate
Offering Price
 
Amount
Of
Registration Fee
 
Common Stock
   
8,088,667
 
$
1.00
(1)
$
8,088,667
 
$
865.49
 
Common Stock underlying class “A” warrant
   
2,508,333
 
$
1.50
(2)(3)
$
3,762,500
 
$
402.59
 
Common Stock underlying class “B” warrant
   
2,508,333
 
$
2.00
(2)(4)
$
5,016,667
 
$
536.78
 
Common Stock underlying $.50 warrants issued to service providers
   
1,330,000
 
$
.50
(2)(5)
$
665,000
 
$
71.16
 
Common Stock underlying $5.00 warrant
   
1,000,000
 
$
5.00
(2)(6)
$
5,000,000
 
$
535.00
 
Common Stock underlying Placement Agent Warrant
   
800,000
 
$
1.10
(2)(7)
$
880,000
 
$
94.16
 
Total
   
16,235,333
       
$
23,412,834
 
$
2,505.18
(8)
 

 
(1)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 of the Securities Act based upon a per share amount of $1.00, based on the price on which the securities were previously sold pursuant to the Company’s March 2006 private placements. There is currently no trading market for the Registrant's common stock. The price of $1.00 is a fixed price at which the selling stockholders identified herein may sell their shares until the Registrant's common stock is quoted on the OTC Bulletin Board, at which time the shares may be sold at prevailing market prices or privately negotiated prices.
(2)   Fee based on exercise price applicable to shares issuable upon exercise of warrants in accordance with Rule 457(g).
(3)   Represents shares of Common Stock issuable upon the exercise (at a price of $1.50 per share) of outstanding warrants.
(4)   Represents shares of Common Stock issuable upon the exercise (at a price of $2.00 per share) of outstanding warrants.
(5)   Represents shares of Common Stock issuable upon the exercise (at a price of $.50 per share) of outstanding warrants.
(6)   Represents shares of Common Stock issuable upon the exercise (at a price of $5.00 per share) of outstanding warrants.
(7)   Represents shares of Common Stock issuable upon the exercise (at a price of $1.10 per share) of outstanding warrants.
(8)   Registrant previously paid $2,052.79 in connection with its initial filing.
 
2


The information in this Prospectus is not complete and may be changed. We have filed a registration statement containing this prospectus with the Securities and Exchange Commission.  The securities offered for sale under this prospectus may not be offered for sale or sold until the registration statement filed with the Securities and Exchange Commission is effective.  This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Prospectus
NEURALSTEM, INC.
A DELAWARE CORPORATION

16,235,333 Common Shares

This prospectus relates to the offer and sale by some of our shareholders during the period in which the registration statement containing this prospectus is effective of up to 16,235,333 common shares, consisting of:

·      
  8,088,667 common shares presently held by the selling shareholders;

·      
2,508,333 common shares issuable by the company with respect to the prospective exercise of class “A” common share purchase warrants held by the selling shareholders;

·      
2,508,333 common shares issuable by the company with respect to the prospective exercise of class “B” common share purchase warrants held by the selling shareholders;

·       
1,330,000 common shares issuable by the company with respect to the prospective exercise of warrants with an exercise price of $.50;

·      
1,000,000 common shares issuable by the company with respect to the prospective exercise of warrants with an exercise price of $5.00; and

·      
800,000 common shares issuable by the company with respect to the Placement Agent Warrant.
 
This offering is not being underwritten. The common shares offered under this prospectus may be sold by the selling shareholders on the public market, in negotiated transactions with a broker−dealer or market maker as principal or agent, or in privately negotiated transactions not involving a broker or dealer. We will not receive any of the proceeds from those sales.

Our common stock is not presently traded on any market or securities exchange, and we have not applied for listing or quotation on any public market. We anticipate seeking sponsorship for the trading of our common stock on the National Association of Securities Dealers OTC Bulletin Board upon the effectiveness of the registration statement of which this prospectus forms a part. However, we can provide no assurance that our shares will be traded on the OTC Bulletin Board or, if traded, that a public market will materialize.

Please read this prospectus carefully. It describes our company, finances, products and services. Federal and state securities laws require that we include in this prospectus all the important information that you will need to make an investment decision.
 

 
3



An investment in the common shares offered for sale under this prospectus involves a high degree of risk. You should purchase our securities only if you can afford losing your entire investment.
See “Risk Factors” beginning on page 6 of this prospectus.
 

Neither the United States Securities and Exchange Commission nor any state securities commission has approved or disapproved of the common shares offered for sale under this prospectus or the
merits of that offering, or has determined that this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.

 
The date of this Prospectus is June 20, 2006

4

 
TABLE OF CONTENTS
 
RISK FACTORS
7
FORWARD LOOKING STATEMENTS
16
USE OF PROCEEDS
17
OUR BUSINESS
17
Our History
17
Overview
17
The Field of Regenerative Medicine
18
Stem Cell Therapy Background
18
The Potential of Our Tissue-Derived Stem Cell-Based Therapy
18
Potential Markets
19
Our Technology
19
Business Strategy
20
Our Research and Programs
20
Our Grant
21
Our Intellectual Property Licensed to Others
21
Manufacturing
22
Products & Marketing
22
Our Intellectual Property
22
Patents Pending
23
Patents Issued
23
Competition
24
Government Regulation
25
Employees
27
PROPERTIES
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
28
RESULTS OF OPERATIONS
29
LEGAL PROCEEDINGS
34
MANAGEMENT
34
Audit Committee Financial Expert
35
Code of Ethics
35
EXECUTIVE COMPENSATION
35
Summary Compensation Table
35
Option Grants in Last Fiscal Year
36
Compensation of Directors
36
Employment Agreements and Change-in-Control Arrangements
36
PRINCIPAL STOCKHOLDERS
37
TRANSACTIONS AND BUSINESS RELATIONSHIPS WITH
38
DESCRIPTION OF SECURITIES
39
General
39
Common Stock
39
Preferred Stock
39
Options And Warrants Convertible into Common Shares
39
EQUITY COMPENSATION PLAN INFORMATION
39
2005 Stock Plan
40
MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS
40
Market Information
40
Dividend Policy
40
SHARES ELIGIBLE FOR FUTURE SALE
40
SELLING SHAREHOLDER
42
 
5

 
REGISTRATION RIGHTS
45
PLAN OF DISTRIBUTION
46
TRANSFER AGENT
48
LEGAL MATTERS
48
EXPERTS
48
INDEMNIFICATION OF DIRECTORS AND OFFICERS
48
WHERE YOU CAN FIND MORE INFORMATION
48
FINANCIAL INFORMATION
F-1
INFORMATION NOT REQUIRED IN PROSPECTUS
49
Indemnification Of Directors & Officers
49
Other Expenses of Issuance & Distribution
49
Recent Sales of Unregistered Securities
49
Exhibits
52


6


RISK FACTORS

An investment in Neuralstem, Inc. involves significant risks. You should read these risk factors carefully before deciding whether to invest in our company. The following is a description of what we consider our key challenges and risks.
 
Risks Relating to the Company’s Stage of Development

Since the Company has a limited operating history and has significantly shifted its operations and strategies since inception, you cannot rely upon the Company’s limited historical performance to make an investment decision.  

Since inception in 1996 and through December 31, 2005, the Company has raised an aggregate of slightly in excess of $31,500,894 in invested capital and recorded accumulated losses totaling $32,167,150. As of December 31, 2005, the Company had a working capital deficit of $475,243 and negative stockholder’s equity of $460,173. Our net losses for the two most recent fiscal years have been $952,342 and $7,104,424 for 2005 and 2004 respectively. During this period, we have generated only marginal revenue from licensing and grants in the amount of $125,457 and $309,142 for the 2004 and 2005 fiscal years, respectively.

The Company’s ability to generate revenues and achieve profitability depends upon its ability to complete the development of its stem cell products, obtain the required regulatory approvals and manufacture, market and sell its products. In part because of the Company’s past operating results, no assurances can be given that the Company will be able to accomplish all or any these goals.

Although the Company has generated some revenue to date, the Company has not generated any revenue from the commercial sale of its proposed stem cell products. Since inception, the Company has engaged in several related lines of business and has discontinued operations in certain areas. For example, in 2002, the Company lost a material contract with the Department of Defense and was forced to close its principal facility and lay off almost all of its employees in an attempt to focus the Company’s strategy on its stem cell technology. This limited and changing history may not be adequate to enable you to fully assess the Company’s current ability to develop and commercialize its technologies and proposed products, obtain approval from the U.S. Food and Drug Administration (“FDA”), achieve market acceptance of its proposed products and respond to competition. No assurances can be given as to exactly when, if at all, the Company will be able to fully develop, commercialize, market, sell and derive material revenues from its proposed products in development.

The Company   will need to raise additional capital to continue operations, and failure to do so would impair the Company’s ability to fund operations, develop its technologies or promote its products.  

The Company has relied almost entirely on external financing to fund operations. Such financing has historically come primarily from the sale of common and preferred stock and convertible debt to third parties and to a lesser degree from grants, loans and revenue from license and royalty fees. The Company anticipates, based on current proposed plans and assumptions relating to its operations (including the timetable of, and costs associated with, new product development) and financing the Company has undertaken prior to the date of this prospectus, that its current working capital will be sufficient to satisfy contemplated cash requirements for approximately 18 months, assuming that the Company does not engage in an extraordinary transaction or otherwise face unexpected events or contingencies, any of which could effect cash requirements. Presently, the Company has a monthly cash burn rate of $240,000. Accordingly, the Company will need to raise additional capital to fund anticipated operating expenses and future expansion after such 18 month period. Among other things, external financing will be required to cover the further development of the Company’s technologies and products and other operating costs. The Company cannot assure you that financing whether from external sources or related parties will be available if needed or on favorable terms. If additional financing is not available when required or is not available on acceptable terms, the Company may be unable to fund operations and planned growth, develop or enhance its technologies, take advantage of business opportunities or respond to competitive market pressures. Any negative impact on the Company’s operations may make capital raising more difficult and may also result in a lower price for the Company’s securities.

 
7


The Company may have difficulty raising needed capital in the future as a result of, among other factors, the Company’s limited operating history and business risks associated with the Company.

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, including with the proceeds of this Offering, substantial funds in the research, development and clinical and pre-clinical testing of the Company’s stem cell technologies and products. The Company will require additional funds to conduct research and development, establish and conduct clinical and pre-clinical trials, commercial-scale manufacturing arrangements and to provide for the marketing and distribution. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable from any available source, the Company may have to delay, reduce the scope of or eliminate one or more of its research, development or commercialization programs or product launches or marketing efforts which may materially harm the Company’s business, financial condition and results of operations.

The Company’s long term capital requirements are expected to depend on many factors, including:
 
·      
continued progress and cost of its research and development programs;
 
·      
progress with pre-clinical studies and clinical trials;
 
·      
time and costs involved in obtaining regulatory clearance;
 
·      
costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
 
·      
costs of developing sales, marketing and distribution channels and its ability to sell the Company’s stem cell products;
 
·      
costs involved in establishing manufacturing capabilities for commercial quantities of its products;
 
·      
competing technological and market developments;
 
·      
market acceptance of its stem cell products;
 
·      
costs for recruiting and retaining employees and consultants; and
 
·      
costs for educating and training physicians about its stem cell products.
 
The Company may consume available resources, including the proceeds from this Offering, more rapidly than currently anticipated, resulting in the need for additional funding. The Company may seek to raise any necessary additional funds through the exercising of warrants, equity or debt financings, collaborative arrangements with corporate partners or other sources, which may be dilutive to existing stockholders or otherwise have a material effect on the Company’s current or future business prospects. If adequate funds are not available, the Company may be required to significantly reduce or refocus its development and commercialization efforts.
 
The Company’s additional financing requirements could result in dilution to existing stockholders.

The additional financings which the Company will require may in the future be obtained through one or more transactions which will effectively dilute the ownership interests of stockholders. The Company has the authority to issue additional shares of common stock and preferred stock, as well as additional classes or series of ownership interests or debt obligations which may be convertible into any one or more classes or series of ownership interests. The Company is authorized to issue 75 million shares of common stock and 7 million shares of preferred stock. Such securities may be issued without the approval or other consent of the Company’s stockholders.

8

 
Risks Relating to Intellectual Property and Government Regulation
 
The Company may not be able to withstand challenges to its intellectual property rights, such as patents, should contests be initiated in court or at the U.S Patent and Trademark Office .
 
The Company relies on its intellectual property, including its issued and applied for patents, as the foundation of its business. The intellectual property rights of the Company may come under challenge, and no assurances can be given that, even though issued, the Company’s current and potential future patents will survive claims commencing in the court system alleging invalidity or infringement on other patents. For example, in 2005, the Company’s neural stem cell technology was challenged in the U.S. Patent and Trademark Office by a competitor. Although the Company prevailed in this particular matter upon re-examination by the patent office, these cases are complex, lengthy and expensive, and could potentially be adjudicated adversely to the Company, removing the protection afforded by an issued patent. The viability of the Company’s business would suffer if such patent protection were limited or eliminated. Moreover, the costs associated with defending or settling intellectual property claims would likely have a material adverse effect on the Company.
 
The Company may not be able to adequately protect against piracy of intellectual property in foreign jurisdictions.  
 
Considerable research in the area of stem cell therapies is being performed in countries outside of the United States, and a number of the Company’s competitors are located in those countries.  The laws protecting intellectual property in some of those countries may not provide protection for the Company’s trade secrets and intellectual property adequate to prevent its competitors from misappropriating the Company’s trade secrets or intellectual property.  If the Company’s trade secrets or intellectual property are misappropriated in those countries, the Company may be without adequate remedies to address the issue.
 
The Company relies on stem cell technologies that it may not be able to commercially develop, which will prevent the Company from generating revenues, operating profitably or providing investors any return on their investment.  
 
The Company has concentrated its research on its stem cell technologies, and the Company’s ability to generate revenue and operate profitably will depend on it being able to develop these technologies for human applications. These are emerging technologies with, as yet, limited human applications. The Company cannot guarantee that it will be able to develop its stem cell technologies or that such development will result in products or services with any significant commercial utility. The Company anticipates that the commercial sale of such products or services, and royalty/licensing fees related to its technology, will be the Company’s primary sources of revenues. If the Company is unable to develop its technologies, investors will likely lose their entire investment.
 
Inability to complete pre-clinical and clinical testing and trials will impair the viability of the Company.  
 
The outcome of pre-clinical, clinical and product testing of the Company’s products is uncertain, and if the Company is unable to satisfactorily complete such testing, or if such testing yields unsatisfactory results, the Company will be unable to commercially produce its proposed products. Before obtaining regulatory approvals for the commercial sale of any potential human products, the Company’s products will be subjected to extensive pre-clinical and clinical testing to demonstrate their safety and efficacy in humans. No assurances can be given that the clinical trials of the Company’s products, or those of licensees or collaborators, will demonstrate the safety and efficacy of such products at all, or to the extent necessary to obtain appropriate regulatory approvals, or that the testing of such products will be completed in a timely manner, if at all, or without significant increases in costs, program delays or both, all of which could harm the Company’s ability to generate revenues. In addition, the Company’s proposed products may not prove to be more effective for treating disease or injury than current therapies. Accordingly, the Company may have to delay or abandon efforts to research, develop or obtain regulatory approval to market its proposed products. Many companies involved in biotechnology research and development have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and could harm the Company’s ability to generate revenues, operate profitably or produce any return on an investment in the Company.

 
9

 
The Company’s products may not receive FDA approval, which would prevent the Company from commercially marketing its products and producing revenues.  

The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product. The Company cannot yet accurately predict when it might first submit any Investigational New Drug, or IND, application to the FDA, or whether any such IND application would be granted on a timely basis, if at all, nor can the Company assure you that it will successfully complete any clinical trials in connection with any such IND application. Further, the Company cannot yet accurately predict when it might first submit any product license application for FDA approval or whether any such product license application would be granted on a timely basis, if at all.  As a result, the Company cannot assure you that FDA approvals for any products developed by it will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of the Company’s products and its ability to generate product revenue.

Potential and actual legislation and regulation related to the Company’s business could limit its activities and ability to develop products for commercial sales, depriving the Company of its anticipated source of future revenues.  

Bills may be introduced in the U.S. Congress in the future aiming to prohibit the use or commercialization of certain pharmaceutical research methods or products resulting from them. If passed, such a bill could have a significant influence on the Company’s ability to pursue its research, development and commercialization plans in the United States. Even though the Company’s cells are not embryos or embryonic stem cells, any future or additional government-imposed restrictions in these or other jurisdictions with respect to use of embryos or human embryonic stem cells in research and development could have a material adverse effect on us, by, among other things:
 
·      
harming the Company’s ability to establish critical partnerships and collaborations;
 
·      
delaying or preventing progress in the Company’s research and development;
 
·      
limiting or preventing the development, sale or use of the Company’s products; and
 
·      
causing a decrease in the price of the Company’s stock.
 
Because the Company or its collaborators must obtain regulatory approval to market its products in the United States and other countries, the Company cannot predict whether or when it will be permitted to commercialize its products.  

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

10

 
Risks Relating to Competition
 
The Company’s competition includes both public and private organizations and collaborations among academic institutions and large pharmaceutical companies, most of which have significantly greater experience and financial resources than the Company does.  

The biotechnology and pharmaceutical industries are characterized by intense competition. The Company competes against numerous companies, many of which have substantially greater financial and other resources than it has. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases targeted by the Company. Companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Advanced Cell Technology, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, have substantially greater resources and experience in the Company’s fields than it does, and are well situated to compete with us effectively. Of course, any of the world’s largest pharmaceutical companies represent a significant actual or potential competitor with vastly greater resources than the Company’s.
 
Risks Relating to the Company’s Reliance on Third Parties
 
The Company may depend on its collaborators to help it develop and test its proposed products, and its ability to develop and commercialize products may be impaired or delayed if collaborations are unsuccessful.  

The Company’s strategy for the development, clinical testing and commercialization of its proposed products may require that the Company enter into collaborations with corporate partners, licensors, licensees and others. If so, then the Company would be dependent upon the subsequent success of these other parties in performing their respective responsibilities and the continued cooperation of its partners. The Company’s collaborators may not cooperate with the Company or perform their obligations under its agreements with them. The Company cannot control the amount and timing of its collaborators’ resources that will be devoted to the Company’s research and development activities related to its collaborative agreements with them. The Company’s collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with the Company. For further information relating to our collaborations, see that section of this prospectus captioned “ Our Business—Our Research and Programs”.

Under agreements with collaborators, the Company may rely significantly on such collaborators to, among other things:
 
·      
design and conduct advanced clinical trials in the event that the Company reaches clinical trials;
 
·      
fund research and development activities with the Company;
 
·      
pay the Company fees upon the achievement of milestones; and
 
·      
market, with the Company, any commercial products that result from the collaborations.
 
The development and commercialization of potential products will be delayed if collaborators fail to conduct these activities in a timely manner or at all. In addition, the Company’s collaborators could terminate their agreements with the Company and the Company may not receive any development or milestone payments. If the Company does not achieve milestones set forth in the agreements, or if the collaborators breach or terminate their collaborative agreements with the Company, the Company’s business may be materially harmed.

11


The Company’s reliance on the activities of its non-employee consultants, research institutions, and scientific contractors, whose activities are not wholly within the Company’s control, may lead to delays in development of its proposed products.

The Company relies extensively upon and has relationships with scientific consultants at academic and other institutions, some of whom conduct research at the Company’s request, and other consultants with expertise in clinical development strategy or other matters. These consultants are not the Company’s employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to the Company. The Company has limited control over the activities of these consultants and, except as otherwise required by its collaboration and consulting agreements to the extent they exist, can expect only limited amounts of their time to be dedicated to its activities.

The Company also relies on other companies for certain process development, including manufacturing of our stem cells, or other technical scientific work. The Company has contracts with these companies that specify the work to be done and results to be achieved, but the Company does not have direct control over their personnel or operations.  If any of these third parties are unable or refuse to contribute to projects on which the Company needs their help, its ability to generate advances in its technologies and develop its products could be significantly harmed.

We intend to rely upon the third-party FDA-approved manufacturers for our stem cells. Should these manufacturers fail to perform as expected, we will need to develop or procure other manufacturing sources, which would cause delays or interruptions in our product supply and result in the loss of significant sales and customers.
 
We currently have no internal manufacturing capability, and will rely extensively on FDA-approved licensees, strategic partners or third party contract manufacturers or suppliers. Should we be forced to manufacture our stem cells, we cannot give you any assurance that we will be able to develop an internal manufacturing capability or procure third party suppliers. Moreover, we cannot give you any assurance that any contract manufacturers or suppliers we procure will be able to supply our product in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications.
 
General Risks Relating to the Company’s Business

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

The Company’s business may bring it into conflict with its licensees, licensors, or others with whom it has contractual or other business relationships or with its competitors or others whose interests differ from the Company’s. If the Company is unable to resolve those conflicts on terms that are satisfactory to all parties, the Company may become involved in litigation brought by or against it. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of the Company’s business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require the Company to pay damages, enjoin it from certain activities, or otherwise affect its legal or contractual rights, which could have a significant adverse effect on its business. 
 
The Company may not be able to obtain third-party patient reimbursement or favorable product pricing, which would reduce its ability to operate profitably.
 
The Company’s ability to successfully commercialize certain of its proposed products in the human therapeutic field may depend to a significant degree on patient reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations. The Company cannot assure you that reimbursement in the United States or foreign countries will be available for any products it may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, its products with a consequent harm to the Company’s business. The Company cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such regulation or legislation may have on the Company’s business. If additional regulations are overly onerous or expensive, or if health care related legislation makes its business more expensive or burdensome than originally anticipated, the Company may be forced to significantly downsize its business plans or completely abandon its business model.

12



The Company’s products may be expensive to manufacture, and they may not be profitable if the Company is unable to control the costs to manufacture them.  

The Company’s products may be significantly more expensive to manufacture than most other drugs currently on the market today due to a fewer number of potential manufactures, greater level of needed expertise, and other general market conditions affecting manufacturers of stem cell based products.  The Company would hope to substantially reduce manufacturing costs through process improvements, development of new science, increases in manufacturing scale and outsourcing to experienced manufacturers. If the Company is not able to make these, or other improvements, and depending on the pricing of the product, its profit margins may be significantly less than that of most drugs on the market today. In addition, the Company may not be able to charge a high enough price for any cell therapy product it develops, even if they are safe and effective, to make a profit. If the Company is unable to realize significant profits from its potential product candidates, its business would be materially harmed.
 
In order to secure market share and generate revenues, the Company’s proposed products must be accepted by the health care community, which can be very slow to adopt or unreceptive to new technologies and products.  
 
The Company’s proposed products and those developed by its collaborative partners, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community in general may decide not to accept and utilize these products. The products that the Company is attempting to develop represents substantial departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any of the Company’s developed products will depend on a number of factors, including:
 
·      
the Company’s establishment and demonstration to the medical community of the clinical efficacy and safety of its proposed products;
 
·      
the Company’s ability to create products that are superior to alternatives currently on the market;
 
·      
the Company’s ability to establish in the medical community the potential advantage of its treatments over alternative treatment methods; and
 
·      
reimbursement policies of government and third-party payors.
 
If the health care community does not accept the Company’s products for any of the foregoing reasons, or for any other reason, the Company’s business would be materially harmed.

We depend on two key employees for our continued operations and future success. A loss of either employee could significantly hinder our ability to move forward with our business plan.  

The loss of either of our key executive officers, Richard Garr and Karl Johe, would be significantly detrimental to us. We currently do not maintain “key person” life insurance on the lives of Messrs. Garr or Johe. As a result, the Company will not receive any compensation upon the death or incapacity of these key individuals.

In addition, the Company’s anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing, will require the addition of new management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of the Company’s present and planned activities, and there can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. The failure to attract and retain such personnel or to develop such expertise would adversely affect the Company’s business.

13

 
The Company has entered into long-term contracts with key personnel and stockholders, with significant anti-termination provisions, which could make future changes in management difficult or expensive.  

Messrs. Garr and Johe have entered into seven (7) year employment agreements with the Company which expire on November 1, 2012 and which include termination provisions stating that if either employee is terminated for any reason other than a voluntary resignation, then all compensation due to such employee under the terms of the respective agreement shall become due and payable immediately. These provisions will make the replacement of either of these employees very costly to the Company, and could cause difficulty in effecting a change in control of the Company. Termination prior to full term on the contracts would cost the Company $240,000 per year unserved, or as much as $1,680,000 per contract, and immediate vesting of all outstanding options (1,200,000 shares each). Further, three of the Company’s existing shareholders (Westreich, Solomon and Drescher, collectively owning approximately 36% of the outstanding shares of Common Stock), have entered into a voting agreement such that so long as Messrs. Garr and Johe are stockholders, these 3 owners will vote their shares for the election of Garr and Johe as directors of the Company. This voting agreement gives more control to Johe and Garr than their respective stockholdings alone would provide, and will also make future changes in control more difficult without their approval. For further information relating to these agreements, see that section of this prospectus captioned Executive Compensation—Employment Agreements and Change in Control Arrangementst ”.

The Company has no product liability insurance, which may leave it vulnerable to future claims that the Company will be unable to satisfy.  

The testing, manufacturing, marketing and sale of human therapeutic products entails an inherent risk of product liability claims, and the Company cannot assure you that substantial product liability claims will not be asserted against it. The Company has no product liability insurance. In the event the Company is forced to expend significant funds on defending product liability actions, and in the event those funds come from operating capital, the Company will be required to reduce its business activities, which could lead to significant losses.

The Company cannot assure you that adequate insurance coverage will be available in the future on acceptable terms, if at all, or that, if available, the Company will be able to maintain any such insurance at sufficient levels of coverage or that any such insurance will provide adequate protection against potential liabilities.  

The Company will have limited director and officer insurance and commercial insurance policies. Any significant insurance claims would have a material adverse effect on its business, financial condition and results of operations. Insurance availability, coverage terms and pricing continue to vary with market conditions. The Company endeavors to obtain appropriate insurance coverage for insurable risks that it identifies, however, the Company may fail to correctly anticipate or quantify insurable risks, may not be able to obtain appropriate insurance coverage, and insurers may not respond as the Company intends to cover insurable events that may occur. The Company has observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and lower coverage limits. For some risks, the Company may not have or maintain insurance coverage because of cost or availability.
 
Risks Relating to the Company’s Common Stock
 
There is no public market for the Company’s securities and no assurances can be given that one will ever develop.

The Company is a private company. Without registration, there is only a limited ability of a security holder to sell their securities, as those transfers or sales would be made privately. Therefore, an investment in the Units should be considered as totally illiquid, and investors are cautioned that may not be able to liquidate their investment readily or at all when the need or desire to sell arises. Moreover, although investors in this Offering will be given the right to participate in a contemplated public registration of their Company common stock, no assurances can be given that such public registration will ever be effected due to, among other possibilities, regulatory scrutiny of the Company.

 
14

 
The Company has identified significant weaknesses with regard to its financial control procedures.   These weaknesses, if not remedied, could result in a significant misstatement of the Company’s financials or its inability to provide timely disclosure to the public should it become subject to such reporting requirements.

As a result of its stage of development, lack of resources and changes that have occurred in the Company’s operations since 2002, there are currently deficiencies in the operating effectiveness of the Company’s internal controls over financial reporting that the Company believes would collectively constitute significant deficiencies and material weaknesses under standards established by the American Institute of Certified Public Accountants, resulting in more than a remote likelihood that a material misstatement of the annual or interim financial statements of the Company will not be prevented or detected. Specifically, the Company has found deficiencies or weaknesses with the timely reporting of transactions and the documentation thereof. At the date of this Offering, the Company does not have a permanent Chief Financial Officer, although Richard Garr, the Company’s President, is temporarily serving in this capacity. As a result, there is a risk that the Company may not be able to properly account for operations and/or generate reliable financial statements.

When and if the Company becomes a public company, the Company faces risks related to compliance with corporate governance laws and financial reporting standards.  

The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company’s legal and financial compliance costs and made some activities more time-consuming and more burdensome. Starting in 2007, Section 404 of the Sarbanes-Oxley Act of 2002 will require that the Company’s management assess the Company’s internal control over financial reporting annually and include a report on its assessment in its annual report filed with the SEC. The Company’s independent registered public accounting firm is required to audit both the design and operating effectiveness of its internal controls and management’s assessment of the design and the operating effectiveness of its internal controls. There exist material weaknesses and deficiencies at this time in the Company’s internal controls. These weaknesses and deficiencies could have a material adverse effect on the Company’s business and operations.

The Company does not intend to pay cash dividends on its common stock in the foreseeable future .

Any payment of cash dividends will depend upon the Company’s financial condition, results of operations, capital requirements and other factors and will be at the discretion of the Board of Directors. The Company does not anticipate paying cash dividends on its common stock in the foreseeable future. Furthermore, the Company may incur additional indebtedness that may severely restrict or prohibit the payment of dividends.

Our issuance of additional common shares or preferred shares, or options or warrants to purchase those shares, could dilute your proportionate ownership and voting rights and negatively impact the value of your investment in our common shares as the result of preferential voting rights or veto powers, dividend rights, disproportionate rights to appoint directors to our board, conversion rights, redemption rights and liquidation provisions granted to the preferred shareholders, including the grant of rights that could discourage or prevent the distribution of dividends to you, or prevent the sale of our assets or a potential takeover of our company.
 
We are entitled under our certificate of incorporation to issue up to 75,000,000 common and 7,000,000 “blank check” preferred shares. After taking into consideration our outstanding common shares as of June 16, 2006, we will be entitled to issue up to 49,179,061 additional common shares and 7,000,000 additional preferred shares. Our board may generally issue those common and preferred shares, or options or warrants to purchase those shares, without further approval by our shareholders based upon such factors as our board of directors may deem relevant at that time. Any preferred shares we may issue shall have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions. It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development and marketing plans. It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock plans. We cannot give you any assurance that we will not issue additional common or preferred shares, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.

 
15

 
There will be a continuation of management control .  

The Company’s present officers, directors and principal stockholders own a majority of the Company’s outstanding common stock and may purchase Units in the Offering. However, even if the officers, directors and principal stockholders do not purchase any of the securities offered hereby, such persons will still own a majority of the outstanding voting stock. Therefore, the Company’s present management and principal stockholders will continue to be able to elect a majority of the directors and otherwise exert control over the Company, and the investors in the Offering will have very limited ability to remove, control or direct such management. See “Principal Stockholders”.


FORWARD LOOKING STATEMENTS

In this prospectus we make a number of statements, referred to as “forward-looking statements”, 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 that 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 model, 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 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 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 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 prospectus. 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 prospectus to reflect new events or circumstances unless and to the extent required by applicable law.  

16


USE OF PROCEEDS
 
The proceeds from the sale of the common shares to be sold under this prospectus will be retained by the selling shareholders, and will not be paid or remitted or otherwise made available to our company. Should any selling shareholder acquire the shares to be sold by exercising common share purchase warrants, or options we would receive the proceeds from the exercise price. In such an event we anticipate we would use the proceeds of such exercise for working capital and general corporate purposes.
 
OUR BUSINESS

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

Our History

We were incorporated in 1997 in the state of Maryland and re-incorporated in the state of Delaware in 2001. From 1997 until 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 treatments in which cells are administered to patients in order to repair damaged or depleted tissues.

In November of 2004 we completed a ten-for-three reverse stock split.

Overview

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 for our research and development efforts in the area of neural stem cell research, and have ownership or exclusive licensing of four issued patents and 12 patent pending applications in the field of regenerative medicine and related technologies. We believe our technology base, in combination with our know-how, and collaborative projects with major research institutions provides a competitive advantage and will facilitate the successful development and commercialization of products for use in 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. 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. We are currently headquartered in Rockville, Maryland.

17

 
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 vehicle 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, Amyotrophic Lateral Sclerosis (ALS, or Lou Gehrig’s Disease), 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 all the kinds of mature cells making up the particular organ; 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) identifying the stem or progenitor cells of a particular organ and testing them for therapeutic potential; (ii) creating 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) demonstrating 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, purify, expand, control the cells differentiation in mature functioning human neurons and glia and bank human neural stem cells 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 are an unpurified mix of many different cell types.
 

1   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.
2  Glial 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.
18

 
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 applications of our technologies include developing neural cell therapies to treat Stroke, Alzheimer's disease, traumatic brain injury, Parkinson's disease, cerebral palsy, multiple sclerosis, Amyotrophic Lateral Sclerosis (ALS), and injuries to the spinal cord.

We believe the potential markets for regenerative medicine based on our neural stem cell therapies 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 products:

POTENTIAL U.S. PATIENT POPULATIONS
FOR NEURAL CELL-BASED THERAPIES
 

Medical Condition
 
Number of Patients *
     
Stroke
 
5.5 million
Alzheimer’s Disease
 
4.5 million
Traumatic Brain Injury
 
1.4 million
Parkinson’s Disease
 
1 million
Cerebral Palsy
 
0.76 million
Multiple Sclerosis
 
0.4 million
Spinal-cord injuries
 
0.25 million
Amyotrophic Lateral Sclerosis
 
0.03 million
 

  * These estimates are based on the most current patient estimates published by the following organizations as of April 2006; The American Stroke Association (American Heart Association), the Alzheimer’s Association, the Alzheimer’s Disease Education & Referral Center (National Institute of Aging), the Brain Injury Association of America, the Parkinson’s Disease Foundation, the Parkinson’s Action Network, the National Multiple Sclerosis Society, United Cerebral Palsy Research and Education Foundation, the Foundation for Spinal Cord Injury Prevention, Care and Cure, and the Amyotrophic Lateral Sclerosis Association. All estimates are total US patient populations, except the estimates for stoke and traumatic brain injury that are estimated new cases per year.

Our Technology

Our technology allows for the isolation of human neural stem cells from most areas of the developing human brain and spinal cord and to grow them into physiologically relevant human neurons of all types. We believe that our technology platform 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. We believe this provides for 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 glial; 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.

19


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 hippocampus 3   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 be the first 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 relating to, neural stem and progenitor cells, and to further develop our intellectual property positions with respect to these cells in-house and through research 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. Generally speaking, as part of these programs, we 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. 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 exclusive license.

In addition to our general research regarding the application of our technology to central nervous systems diseases, we are presently involved in the following specific programs with our partners in order to demonstrate that our products work in small, non-statistically controlled studies (commonly referred to as proof-of-principle), in animal models:

University of California San Diego, San Diego, CA : In May of 2002, we initiated a research project with the University of California in San Diego for the purpose of researching the applicability of our technology to the treatment of Ischemic Spastic Paraplegia and traumatic spinal cord injury. The project is ongoing. The research yielded findings that contributed to our filing of patent entitled Transplantation of Human Cells for Treatment of Neurological Disorders.
 

3   The hippocampus region of the brain plays a part in memory and navigation. We believe that this ability to enhance the survival rate of the endogenous cells may result in the development of drugs or compounds that could be used to treat a variety of central nervous system diseases.
 
20

 
John Hopkins University, School of Medicine, Baltimore, MD : In March of 2001 we initiated a research project with John Hopkins University, School of Medicine for the purpose of researching the applicability of our technology to the treatment of Amyotrophic Lateral Sclerosis and traumatic spinal cord injury. The project is ongoing. The research yielded findings that contributed to our filing of patent entitled Transplantation of Human Cells for Treatment of Neurological Disorders.

University of Southern Florida, Tampa, FL : In September of 2005 we initiated a research project with the University of Southern Florida for the purpose of researching the applicability of our technology to the treatment of Parkinson’s Disease. The project is ongoing.

University of Central Florida, Orlando, FL : In March of 2006 we initiated a research project with the University of Central Florida for the purpose of researching the applicability of our technology to the treatment of spinal cord injuries. The project is ongoing.

Our Grants

In August of 2005 we were awarded a two year, $500,000 Small Business Innovation Research grant from the National Institute of Health, to further our research with regard to depression. The grant covers salary, wages, personnel costs, supplies, travel costs, and consortium/contractual costs with regard to the research.
 
Our Intellectual Property Licensed to Others

 The following summarizes licenses from us to third parties.

A-T Children’s Project . On December 22, 2004, we entered into a non exclusive limited license and material transfer agreement with A-T Children’s Project (“A-TCP”), pursuant to which we granted to A-TCP a non-exclusive limited license to our technology for use in developing suitable assay(s) for screening compounds to treat Ataxia-Telangiectasia. In consideration of the rights and licenses granted to A-TCP, A-TCP paid to us a one time payment of $37,500.
     
Biomedical Research Models, Inc. License . On February 7, 2005, we entered into an exclusive, worldwide, royalty-bearing license with Biomedical Research Models, Inc. (“BRM”), pursuant to which we exclusively licensed to BRM certain technology and patent rights embodied in our patent application entitled “Use of Fused Imidazoles, Aminopyrimidines, Isonicotinamides, Aminomethyl Phenoxypiperidines and Aryloxypiperidines to Promote and Detect Endogenous Neurogenesis.” Under the agreement, we license rights to certain patent rights and technology useful as compounds and therapeutic agents to treat diabetes and its complications.

Under the terms of the agreement, BRM is obligated to pay us an annual license fee of $75,000 on January 1, 2007 and 2008. In the event a milestone payment becomes due during this period, the annual payments will cease and the last amounts paid will be credited towards the milestone payment. BRM has agreed to the following milestone payments:
 
(i)      
$750,000 within 30 days of initiating Phase I clinical trials (Milestone 1);
 
(ii)      
$1,000,000 within 30 days of initiating Phase II clinical trials (Milestone 2);
 
(iii)      
$1,500,000 within 30 days of initiating Phase III clinical trials (Milestone 3);
 
(iv)      
$35,000,000 within one year after full commercial approval and licensure is granted by the United States Food and Drug Administration (Milestone 4); and
 
(v)      
A one time sale bonus of $100 million within one year after the first time the aggregate net sales of any licensed product by BRM reaches $1.0 billion.
 
 
21

 
Under the terms of the agreement, BRM shall also pay us royalties of 7.0% of net sales of products they market directly, or 20% of any sub-license income. For a more detailed description of the BRM license, please refer to the exclusive licensing agreement filed as an exhibit to this prospectus.

High Med Technologies, Inc. License .    On July 7, 2005, we entered into a limited exclusive, licensing agreement relating to the sales, distribution and marketing of our technology by High Med Technologies, Inc. (HiMed). Under the agreement, we granted HiMed the exclusive right (excluding Neuralstem) to create, manufacture, develop, sublicense or offer for sale our technology for the sole purpose of in vitro research that does not involve the injection of cells or cell-derivative materials into living animals or human beings. As part of the agreement, HiMed has agreed to certain revenue targets which if met, will extend the term of this agreement from five years to the life of all applicable patents.

As compensation under the license, we will be entitled to:
 
·  
80% of revenues obtained by HiMed where HiMed does not manufacture and supply the product to the customer; and
 
·  
20% of revenues obtained by HiMed where HiMed is required to manufacture and supply the product to the customer.
 
We have also agreed that should we directly supply a customer who is or was a customer of HiMed, we will be required to pay HiMed 20% of any revenues received therefrom.
 
Manufacturing
 
We currently outsource all the manufacturing and storage of our stem cells to Charles River Laboratories, Inc., of Wilmington, Massachusetts. The Charles River facility has the capacity to be used for cell processing under the FDA determined Good Manufacturing Practices (GMP) in quantities sufficient for our current research and anticipated future clinical trial needs. We believe the facility has sufficient capacity to provide for our needs in the near to intermediate term.

Products & Marketing
 
Because of the early stage of our programs, we have yet to identify any specific product and we have not yet addressed questions of channels of distribution and marketing of potential future products. We are however focusing our efforts on applications of our technology to diseases that affect the central nerve system.
 
Our Intellectual Property

Our research and development is supported by our intellectual property. We currently own or have exclusive licenses to 4 patents and 12 patent applications pending worldwide in the field of regenerative medicine and stem cell therapy.

Our success will likely depend upon our ability to preserve our proprietary technologies and operate without infringing the proprietary rights of other parties. However, we may rely on certain proprietary technologies and know-how that are not patentable. We protect our proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors.

We maintain a disciplined patent policy and, when appropriate, seek patent protection for inventions in our core technologies and in ancillary technologies that support our core technologies or which we otherwise believe will provide us with a competitive advantage. We pursue this strategy by filing patent applications for discoveries we make, either alone or in collaboration with scientific collaborators and strategic partners. Typically, although not always, we file patent applications both in the United States and in select international markets. In addition, we plan to obtain licenses or options to acquire licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing our research, development and commercialization initiatives and our strategic business interests.

22


The following table identifies the issued and pending patents we own that we believe currently support our technology platform.

Patents Pending

Number
 
Country
 
Filing
Date
 
Issue Date
 
Expiration
Date
 
Title
97923569.4
 
EP
 
05/07/97
 
Pending
 
N/A
 
Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammals
                     
2257068
 
CA
 
05/07/97
 
Pending
 
N/A
 
Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammals
                     
99948396.9
 
EP
 
09/20/99
 
Pending
 
N/A
 
Stable Neural Stem Cell Lines
                     
2002-526065
 
JAP
 
09/20/99
 
Pending
 
N/A
 
Stable Neural Stem Cell Lines
                     
2343571
 
CA
 
09/20/99
 
Pending
 
N/A
 
Stable Neural Stem Cell Lines
                     
10/047,352]
 
US
 
01/14/02
 
Pending
 
N/A
 
Stable Neural Stem Cells
                     
10/728,652
 
US
 
12/05/03
 
Pending
 
N/A
 
Method for Discovering Neurogenic Agents
                     
2004/053071
 
WO
 
12/05/03
 
Pending
 
N/A
 
Method for Discovering Neurogenic Agents
                     
10/914,460
 
US
 
08/09/04
 
Pending
 
N/A
 
Use of Fused Imidazoles, Aminopyrimidines, Isonicotinamides, Aminomethyl Phenoxypiperidines and Aryloxypiperidines to Promote and Detect Endogenous Neurogenesis
                     
1576134
 
EP
 
12/05/03]
 
Pending
 
N/A
 
Method for Discovering Neurogenic Agents
                     
11/281,640
 
US
 
11/17/05
 
Pending
 
N/A
 
Transplantation of Human Cells for Treatment of Neurological Disorders
                     
PCT/US05/41367
 
WO
 
11/17/05
 
Pending
 
N/A
 
Transplantation of Human Cells for Treatment of Neurological Disorders

Patents Issued

Number
 
Country
 
Filing
Date
 
Issue Date
 
Expiration
Date
 
Title
                     
5,753,506
 
US
 
09/25/96
 
05/19/98
 
09/25/2016
 
Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammals
                     
6,040,180
 
US
 
05/07/97
 
03/21/00
 
09/25/2016
 
In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multi-potential CNS Stem Cell
                     
6,284,539
 
US
 
10/09/98
 
09/04/01
 
10/9/2018
 
Method for Generating Dopaminergic Cells Derived from Neural Precursors
                     
755849
 
Australia
 
09/22/99
 
04/03/03
 
09/20/2019
 
Stable Neural Stem Cell Lines
 
23


We also rely upon trade-secret protection for our confidential and proprietary information and take active measures to control access to that information.
 
Our policy is to require our employees, consultants and significant scientific collaborators and sponsored researchers to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. These agreements generally provide that all confidential information developed or made known to the individual by us during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and consultants, the agreements generally provide that all inventions conceived by the individual in the course of rendering services to us shall be our exclusive property.

The patent positions of pharmaceutical and biotechnology companies, including ours, are uncertain and involve complex and evolving legal and factual questions. The coverage sought in a patent application can be denied or significantly reduced before or after the patent is issued. Consequently, we do not know whether any of our pending applications will result in the issuance of patents, or if any existing or future patents will provide significant protection or commercial advantage or will be circumvented by others. Since patent applications are secret until the applications are published (usually eighteen months after the earliest effective filing date), and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending patent applications or that we were the first to file patent applications for such inventions. There can be no assurance that patents will issue from our pending or future patent applications or, if issued, that such patents will be of commercial benefit to us, afford us adequate protection from competing products, or not be challenged or declared invalid.
 
In the event that a third party has also filed a patent application relating to inventions claimed in our patent applications, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. There can be no assurance that our patents, if issued, would be held valid by a court of competent jurisdiction.
 
A number of pharmaceutical, biotechnology and other companies, universities and research institutions have filed patent applications or have been issued patents relating to cell therapy, stem cells and other technologies potentially relevant to or required by our expected products. We cannot predict which, if any, of such applications will issue as patents or the claims that might be allowed.
 
If third party patents or patent applications contain claims infringed by our technology and such claims are ultimately determined to be valid, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost, if at all, or be able to develop or obtain alternative non-infringing technology. If we are unable to obtain such licenses or develop or obtain alternative non-infringing technology at a reasonable cost, we may not be able to develop certain products commercially. There can be no assurance that we will not be obliged to defend ourselves in court against allegations of infringement of third party patents. Patent litigation is very expensive and could consume substantial resources and create significant uncertainties. An adverse outcome in such a suit could subject us to significant liabilities to third parties, require us to seek licenses from third parties, or require us to cease using such technology.

Competition

The biotechnology industries are characterized by rapidly evolving technology and intense competition. Our competitors include major multinational pharmaceutical companies, specialty biotechnology companies and chemical and medical products companies operating in the fields of regenerative medicine, cell therapy, tissue engineering and tissue regeneration. Many of these companies are well-established and possess technical, research and development, financial and sales and marketing resources significantly greater than ours. In addition, certain smaller biotech companies have formed strategic collaborations, partnerships and other types of joint ventures with larger, well established industry competitors that afford these companies potential research and development and commercialization advantages. Academic institutions, governmental agencies and other public and private research organizations are also conducting and financing research activities which may produce products directly competitive to those we are developing. Moreover, many of these competitors may be able to obtain patent protection, obtain FDA and other regulatory approvals and begin commercial sales of their products before we do.

24


In the general area of cell-based therapies, we compete with a variety of companies, most of whom are specialty biotechnology companies. Some of these, such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., are well-established and have substantial technical and financial resources compared to us. However, as cell-based products are only just emerging as medical therapies, many of our direct competitors are smaller biotechnology and specialty medical products companies. These smaller companies may become significant competitors through rapid evolution of new technologies. Any of these companies could substantially strengthen their competitive position through strategic alliances or collaborative arrangements with large pharmaceutical or biotechnology companies.

The diseases and medical conditions we are targeting have no effective long-term therapies. Nevertheless, we expect that our technologies and products will compete with a variety of therapeutic products and procedures offered by major pharmaceutical companies. Many pharmaceutical and biotechnology companies are investigating new drugs and therapeutic approaches for the same purposes, which may achieve new efficacy profiles, extend the therapeutic window for such products, alter the prognosis of these diseases, or prevent their onset. We believe that our products, when and if successfully developed, will compete with these products principally on the basis of improved and extended efficacy and safety and their overall economic benefit to the health care system.

Competition for any stem cell products that we may develop may be in the form of existing and new drugs, other forms of cell transplantation, surgical procedures, and gene therapy. We believe that some of our competitors are also trying to develop similar stem cell-based technologies. We expect that all of these products will compete with our potential stem cell products based on efficacy, safety, cost and intellectual property positions. We may also face competition from companies that have filed patent applications relating to the use of genetically modified cells to treat disease, disorder or injury. In the event our therapies should require the use of such genetically modified cells, we may be required to seek licenses from these competitors in order to commercialize certain of our proposed products, and such licenses may not be granted.

If we develop products that receive regulatory approval, they would then have to compete for market acceptance and market share. For certain of our potential products, an important success factor will be the timing of market introduction of competitive products. This timing will be a function of the relative speed with which we and our competitors can develop products, complete the clinical testing and approval processes, and supply commercial quantities of a product to market. These competitive products may also impact the timing of clinical testing and approval processes by limiting the number of clinical investigators and patients available to test our potential products.

Government Regulation

Regulation by governmental authorities in the United States and other countries is a significant factor in our research and development and will be a significant factor in the manufacture and marketing of our proposed products. The nature and extent to which such regulation applies to us will vary depending on the nature of any products we may develop. We anticipate that many, if not all, of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures of the U.S. Food and Drug Administration, referred to as the FDA, and similar regulatory authorities in European and other countries. Various governmental statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and recordkeeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money, and there can be no guarantee that approvals will be granted.

FDA Approval     The FDA requirements for our potential products to be marketed in the United States include the following five steps:

25


Preclinical laboratory and animal tests must be conducted. Preclinical tests include laboratory evaluation of the cells and the formulation intended for use in humans for quality and consistency. In vivo studies are performed in normal animals and specific disease models to assess the potential safety and efficacy of the cell therapy product.

An investigational new drug application, or IND, must be submitted to the FDA, and the IND must become effective before human clinical trials in the United States may commence. The IND is submitted to the FDA with the preclinical data, a proposed development plan and a proposed protocol for a study in humans. The IND becomes effective 30 days following receipt by the FDA, provided there are no questions, requests for delay or objections from the FDA. If the FDA has questions or concerns, it notifies the sponsor, and the IND will then be on clinical hold until a satisfactory response is made by the sponsor.

Adequate and well-controlled human clinical trials must be conducted to establish the safety and efficacy of the product. Clinical trials involve the evaluation of a potential product under the supervision of a qualified physician, in accordance with a protocol that details the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND. The protocol for each clinical study must be approved by an independent institutional review board, or IRB, of the institution at which the study is conducted, and the informed consent of all participants must be obtained. The IRB reviews the existing information on the product, considers ethical factors, the safety of human subjects, the potential benefits of the therapy and the possible liability of the institution. The IRB is responsible for ongoing safety assessment of the subjects during the clinical investigation. Clinical development is traditionally conducted in three sequential phases.
 
·  
Phase 1 studies for a cell therapy product are designed to evaluate safety in a small number of subjects in a selected patient population by assessing adverse effects, and may include multiple dose levels. This study may also gather preliminary evidence of a beneficial effect on the disease.
 
·  
Phase 2 may involve studies in a limited patient population to determine biological and clinical effects of the product and to identify possible adverse effects and safety risks of the product in the selected patient population.
 
·  
Phase 3 trials would be undertaken to conclusively demonstrate clinical benefit or effect and to test further for safety within a broader patient population, generally at multiple study sites. The FDA continually reviews the clinical trial plans and results and may suggest changes or may require discontinuance of the trials at any time if significant safety issues arise.
 
Marketing authorization applications must be submitted to the FDA. The results of the preclinical studies and clinical studies are submitted to the FDA in the form of marketing approval authorization applications.

The FDA must approve the applications prior to any commercial sale or practice of the technology or product. Biologic product manufacturing establishments located in certain states also may be subject to separate regulatory and licensing requirements. The testing and approval process will require substantial time, effort and expense. The time for approval is affected by a number of factors, including relative risks and benefits demonstrated in clinical trials, the availability of alternative treatments and the severity of the disease, and animal studies or clinical trials that may be requested during the FDA review period.

Our research and development is based largely on the use of human stem and progenitor cells. The FDA has initiated a risk-based approach to regulating human cell, tissue and cellular and tissue-based products and has published current Good Tissue Practice regulations. As part of this approach, the FDA has published final rules for registration of establishments that engage in the recovery, screening, testing, processing, storage or distribution of human cells, tissues, and cellular and tissue-based products, and for the listing of such products. In addition, the FDA has published rules for making suitability and eligibility determinations for donors of cells and tissue and for current good tissue practice for manufacturers using them, which have recently taken effect. We cannot now determine the full effects of this regulatory initiative, including precisely how it may affect the clarity of regulatory obligations and the extent of regulatory burdens associated with our stem cell research and the manufacture and marketing of stem cell products.

26


European and Other Regulatory Approval    Approval of a product by regulatory authorities comparable to the FDA in Europe and other countries will likely be necessary prior to commencement of marketing a product in any of these countries. The regulatory authorities in each country may impose their own requirements and may refuse to grant approval, or may require additional data before granting approval, even though the relevant product has been approved by the FDA or another authority. The regulatory authorities in the European Union, or EU, and other developed countries have lengthy approval processes for pharmaceutical products. The process for gaining approval in particular countries varies, but is generally similar to the FDA approval process. In Europe, the European Committee for Proprietary Medicinal Products provides a mechanism for EU-member states to exchange information on all aspects of product licensing. The EU has established a European agency for the evaluation of medical products, with both a centralized community procedure and a decentralized procedure, the latter being based on the principle of licensing within one member country followed by mutual recognition by the other member countries.

Other Regulations    In addition to safety regulations enforced by the FDA, we are also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act and other present and potential future and federal, state, local, and foreign regulations.

Outside the United States, we will be subject to regulations that govern the import of drug products from the United States or other manufacturing sites and foreign regulatory requirements governing human clinical trials and marketing approval for our products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursements vary widely from country to country.
 
The United States Congress, several states and foreign countries have considered legislation banning or restricting human application of stem cell-based and nuclear transfer based technologies. No assurance can be given regarding future restrictions or prohibitions that might affect our technology and business. In addition, we cannot assure you that future judicial rulings with respect to nuclear transfer technology or human stem cells will not have the effect of delaying, limiting or preventing the use of nuclear transfer technology or stem cell-based technology or delaying, limiting or preventing the sale, manufacture or use of products or services derived from nuclear transfer technology or stem cell-derived material. Any such legislative or judicial development would harm our ability to generate revenues and operate profitably.

        For additional information about governmental regulations that will affect our planned and intended business operations, see "RISK FACTORS" beginning on page 6.
 
Employees
 
As of June 16, 2006, we had two full-time employees and two part-time employees. Of these employees, one is directly involved in research and development activities and three are engaged in business development and administration. We also use the services of numerous outside consultants in business and scientific matters. We believe that we have good relations with our employees and consultants.
 
PROPERTIES

We currently lease two facilities.   Our executive   offices and primary research facilities are located at 9700 Great Seneca Highway, Rockville MD, 20850. We lease these facilities consisting of approximately 2,500 square feet for $4,000.00 per month. The term of our lease expires on March 31, 2007.

We have recently entered into a 12 month lease to secure animal research space in San Diego California at a monthly lease rate of $5,500. This amount includes personnel and supplies used in connection with our animal tests

27



The aforesaid properties are in good condition and we believe they will be suitable for our purposes for the next 12 months. There is no affiliation between us or any of our principals or agents and our landlords or any of their principals or agents.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION

Overview

This prospectus contains forward-looking statements that involve risks and uncertainties. See " Risk Factors " set forth on page 6 of this prospectus for a more complete discussion of these factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this prospectus.

We are a biotechnology company focused on developing and commercializing human stem cell technology in the emerging fields of regenerative medicine and stem cell therapy.

Significant 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 1 of the Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements:

 Use of Estimates —These 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.

28


Cash and Equivalents —Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain our cash in bank deposit accounts, which at times, may exceed federally insured limits. We have not experienced any losses in such account.

Revenue Recognition —Our revenues, to date, revenue has been derived primarily from providing treated samples for gene expression data from stem cell experiments and from providing services under a federal grant program sponsored by the Defense Advanced Research Projects Agency (DARPA) $70,000 and $125,000 in 2005 and 2004, respectively. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery of goods and services has occurred, the price is fixed and determinable, and collection is reasonably assured .

Intangible and Long-Lived Assets —We follow 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, 2005 no impairment losses were recognized.

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 —We recognize expenses for stock-based compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, “ Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any. 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 Good 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. We do not believe the adoption of SFAS No. 123R will have a material impact on our financial statements.

RESULTS OF OPERATIONS

Revenues

Revenues for the twelve months ended December 31, 2005 and December 31, 2004 were approximately $309,000 and $125,000 respectively. These amounts relate primarily to grant reimbursements for the twelve months ending December 31, 2004 and license fees, grant reimbursements and royalties for the twelve months ending December 31, 2005. The increase in revenue in current periods was due to additional licensing revenues.

29


Research and Development Expenses

Research and development expenses for the twelve months ended December 31, 2005 and December 31, 2004 were approximately $495,000 and $254,000, respectively. The increase in expenses in current periods, which consist mainly of payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants.

Our 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. 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 by project because our research is focused exclusively on human stem cell therapies as a unitary field of study. 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, begin clinical trial activities, increase our regulatory compliance capabilities, and ultimately begin manufacturing. The amount of these increases 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 under development 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 or pharmaceutical industry, or licensing the technologies associated with these programs to third parties.

We believe that it is not possible at this stage to provide a meaningful estimate of the total cost to complete our ongoing projects 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. 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 in completion of a trial would increase the cost of that trial, which would harm our results of operations. 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.

Grant reimbursements for the twelve months ended December 31, 2005 and December 31, 2004 were approximately $70,000 and $125,000, respectively. These amounts represent approved reimbursements pursuant the grant from Defense Research Projects Agency.

General and Administrative Expenses

General and administrative expenses for the twelve months ended December 31, 2005 and December 31, 2004 were approximately $680,000 and $730,000, respectively. The principal decrease in expenses in the current periods versus the same periods last year is a result of decreased professional expenses related to accountants and financial advisors related to capital raised in 2004.

30


Other Income/Loss

 Other income (loss) for the twelve months ended December 31, 2005 and December 31, 2004 were approximately $(700) and $(6,091,000), respectively. The decrease in other income (loss) in the twelve months ended December 31, 2005, compared to other income (loss) in the prior periods, relates primarily to a one time charge of $842,719 and $5,000,000 in 2004 stemming from the sale of obsolete lab equipment and 3,125,000 shares given to Class C Preferred Shareholders as an inducement of converting from noteholders into preferred shareholders without any monetary consideration to us.

Net Loss

Net loss for the twelve months ended December 31, 2005 and December 31, 2004 was approximately $919,000 and $7,104,000, respectively. The increased loss in the current periods is the result of the foregoing factors discussed.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaced SFAS No. 123 and superseded Accounting Principles Board Opinion No. 25. SFAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statements. On April 14, 2005, the Securities and Exchange Commission issued an announcement amending the compliance dates for the FASB's SFAS 123R that addresses accounting for equity based compensation arrangements. Under SFAS 123R registrants would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. The Commission's new rule will allow companies to implement SFAS 123R at the beginning of the next fiscal year after June 15, 2005. The Company anticipates adopting SFAS 123R in the first quarter 2006. The Company does not believe that the adoption of SFAS No. 123R will have a material impact on our financial statements.
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 became effective for our Company as of July 1, 2005. The Company will apply the requirements of SFAS No. 153 on any future nonmonetary exchange transactions.
 
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47 "Accounting for Conditional Asset Retirement Obligations—an Interpretation of FASB Statement No. 143" ("FIN No. 47"). FIN No. 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. FIN No. 47 is effective for us no later than December 31, 2005. We do not expect that the adoption of FIN No. 47 will have a material impact on our financial condition or results of operations.
 
Note 1.    In May 2005,   the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3” (“SFAS No. 154”).  SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable.  APB Opinion No. 20 “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  This statement is effective for our Company as of January 1, 2006. The Company does not believe that the adoption of SFAS No. 154 will have a material impact on our financial statements.

31

 
In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Instruments. This standard amends the guidance in FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. Management is currently evaluating the impact FASB 155 will have on our consolidated financial statements.

 In September 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-8, "Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature." EITF Issues No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," and No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments," provide guidance on how companies should bifurcate convertible debt issued with a beneficial conversion feature into a liability and an equity component. For income tax purposes, such an instrument is only recorded as a liability. A question has been raised as to whether a basis difference results from the issuance of convertible debt with a beneficial conversion feature and, if so, whether the basis difference is a temporary difference. We do not expect the provisions of this consensus to have a material impact on our financial position, results of operations or cash flows.

In November 2004, the Emerging Issues Task Force or EITF reached final consensus on Issue 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share." Contingently convertible debt instruments, commonly referred to as Co-Cos, are structured financial transactions that combine the features of contingently issuable shares with a convertible debt instrument. Co-Cos are convertible into common shares of the issuer after the common stock price has exceeded a predetermined threshold for a specified time period (market price trigger). The issue is when the dilutive effect of Co-Cos should be included in diluted earnings per share. Management does not expect the implementation of this new standard to have a material impact on our financial position, results of operations and cash flows.

In September 2005, the Emerging Issues Task Force or EITF discussed Issue 05-4, The Effect of a Liquidated Damages Clause on a Freestanding Instrument Subject to EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." Issuance of a registration rights agreement with a liquidated damages clause is common when equity instruments, stock purchase warrants, and financial instruments that are convertible into equity securities are issued. The agreement requires the issuer to use its "best efforts" to file a registration statement for the resale of the equity instruments or the shares of stock underlying the stock purchase warrant or convertible financial instrument and have it declared effective by the end of a specified grace period. The issuer may also be required to maintain the effectiveness of the registration statement for a period of time or pay a liquidated damage penalty to the investor each month until the registration statement is declared effective. Given the potential significance of the penalty, a question arises as to the effect, if any this feature has on the related financial instruments if they are subject to the scope of Issue 00-19. We are currently evaluating the effects of EITF 05-4 and have not been able to ascertain, if any, impact to our financial statements.

In September 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Securities and Related Issues." EITF Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments," provides guidance on whether modifications of debt result in an extinguishment of that debt. In certain situations, companies may change the terms of a conversion option as part of a debt modification, which may result in the following circumstances: (a) the change in the conversion option's terms causes the fair value of the conversion option to change but does not result in the modification meeting the condition in Issue 96-19 that would require the modification to be accounted for as an extinguishment of debt, and (b) the change in the conversion option's terms did not result in separate accounting for the conversion option under Statement 133. When both of these circumstances exist, questions have arisen regarding whether (a) the modification to the conversion option, which changes its fair value, should affect subsequent interest expense recognition related to the debt and (b) a beneficial conversion feature related to a debt modification should be recognized by the borrower if the modification increases the intrinsic value of the debt. We do not expect the provisions of this consensus to have a material impact on our financial position, results of operations or cash flows.

32


 In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-2, "The Meaning of "Conventional Convertible Debt Instrument" in EITF Issue 00-19. Paragraph 4 of Issue 00-19 states that "the requirements of paragraphs 12-32 of this issue do not apply if the hybrid contract is a conventional convertible debt instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash (at the discretion of the issuer)". The term "conventional convertible debt instrument" is not defined in Issue 00-19 and, as a result, questions have arisen regarding when a convertible debt instrument should be considered "conventional" for purposes of Issue 00-19. A question has also arisen related to whether conventional convertible preferred stock should be treated similar to conventional convertible debt. We do not expect the provisions of this consensus to have a material impact on our financial position, results of operations or cash flows.

In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do not expect the provisions of this consensus to have a material impact on our financial position, results of operations or cash flows.

In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment"("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements.

Liquidity And Capital Resources

We are financing our operations primarily with the proceeds from our convertible notes and private placement offerings. During the years ended December 31, 2005 and 2004, we raised through these offerings a total of $1,412,000 and $1,123,000, respectively which are described in Notes 2 and 5 to our Financial Statements. To a substantially lesser degree, financing of our operations is provided through grant funding, payments received under license agreements, and interest earned on cash and cash equivalents.

We have incurred substantial net losses each year since inception as a result of research and development and general and administrative expenses in support of our operations. We anticipate incurring substantial net losses in the future.

Cash, cash equivalents, and cash held in escrow at December 31, 2005 and December 31, 2004 were approximately $526,000 and $39,000, respectively. The increase in the current period is the result of closing the financing described above, net of amounts spent for payment of notes and accounts payable, increased legal and accounting fees, and increases in other research and development and general and administrative expenses.

Our cash and cash equivalents are limited. We expect to require substantial additional funding. Our future cash requirements will depend on many factors, including the pace and scope of our research and development programs, the costs involved in filing, prosecuting, maintaining and enforcing patents and other costs associated with commercializing our potential products. We intend to seek additional funding primarily through public or private financing transactions, and, to a lesser degree, new licensing or scientific collaborations, grants from governmental or other institutions, and other related transactions. If we are unable to raise additional funds, we will be forced to either scale back our business efforts or curtail our business activities entirely. We anticipate that our available cash and expected income will be sufficient to finance most of our current activities for at least six to eight months from the date of the financial statements, although certain of these activities and related personnel may need to be reduced. We cannot assure you that public or private financing or grants will be available on acceptable terms, if at all. Several factors will affect our ability to raise additional funding, including, but not limited to, the volatility of our Common Stock.

33

 
LEGAL PROCEEDINGS
 
As of the date of this prospectus, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.
 
MANAGEMENT
 
The following table sets forth the name, age and position of each of our directors, executive officers and significant employees as of June 19, 2006. Except as noted below each director will hold office until the next annual meeting of our stockholders or until his or her successor has been elected and qualified. Our executive officers are appointed by, and serve at the discretion of, the Board of Directors.  
 
Name
 
Age
 
Position
         
I. Richard Garr
 
53
 
Chief Executive Officer, Chief Financial Officer, President, and Director
         
Karl Johe, Ph.D.
 
46
 
Chief Scientific Officer, Chairman of the Board, and Director
         
Malcolm Currie, Ph.D.
 
79
 
Director Elect

 
Mr. I. Richard Garr, JD has been our Chief Executive Office, Chief Financial Officer, President, Board Director & Co-Founder since 1996. Mr. Garr was previously an attorney with Beli, Weil & Jacobs, the B&G Companies, and Circle Management Companies. Mr. Garr is a graduate of Drew University (1976) and the Columbus School of Law, The Catholic University of America (1979). Additionally, he was a founder and current Board member of the First Star Foundation, a children’s charity focused on abused children’s issues; a founder of The Starlight Foundation Mid Atlantic chapter, which focuses on helping seriously ill children; and is a past Honorary Chairman of the Brain Tumor Society.
 
Mr. Karl Johe, Ph.D. has been our Chief Scientific Officer, Chairman & Co-Founder since 1996. Mr. Johe has over 15 years of research and laboratory experience. Dr. Johe is the sole inventor of Neuralstem’s granted stem cell patents and is responsible for strategic planning and development of the Company’s therapeutic products. Dr. Johe received his Bachelor of Arts Degree in Chemistry from the University of Kansas. Dr. Johe also received a Master’s Degree from the University of Kansas and his doctorate was received from the Albert Einstein College of Medicine. From 1993 to January 1997, Dr. Johe served as a Staff Scientist at the Laboratory of Molecular Biology of the National Institute of Neurological Disease and Stroke in Bethesda, Maryland. While holding this position, Dr. Johe conducted research on the isolation of neural stem cells, the elucidation of mechanisms directing cell type specification of central nervous system stem cells and the establishment of an in vitro model of mammalian neurogenesis.
 
Malcolm Currie, Ph.D. was elected by our directors to serve as a board member on January 23 of 2006. Dr. Currie has preliminarily accepted the appointment subject to our stock being listed on a national exchange or traded over-the-counter. Dr. Currie has been the Chairman of the Board of Regal One Corporation since 1995, and the CEO since 2001. From 1969 to 1973, Dr. Currie was the Undersecretary of Research and Engineering for the Office of Defense. From 1973 to 1977, Dr. Currie was President of the Missile Systems Group for Hughes Aircraft Corporation. From 1977 to 1988, Dr. Currie started as Executive Vice President and eventually became Chief Executive Officer and Chairman of the Board of Hughes Aircraft Corporation. From 1992 to present, Dr. Currie has been Chairman Emeritus of Hughes Aircraft Corporation. Dr. Currie is also on the Board of Directors of LSI Logic, Enova Systems, Inamed Corp., and Innovative Micro Technologies. Dr. Currie obtained a graduate MBA from the University of California, Berkeley, and a PhD in Engineering and Physics at the University of California, Berkeley.

34

 
Audit Committee Financial Expert
 
The functions of the Audit and Compensation Committee are: (i) to recommend the engagement of the Company's independent auditors and review with them the plan, scope and results of their audit for each year; (ii) to consider and review other matters relating to the financial and accounting affairs of the Company; and (iii) to review and recommend to the Board of Directors all compensation packages, including the number and terms of stock options, offered to officers and executive employees of the Company. The Company’s entire Board of Directors serves as the Company's Audit Committee and Compensation Committee.
 
Code of Ethics
 
We have adopted a "Code of Ethics for Directors, Officers and Employees" that applies to all employees, including our executive officers. A copy of our Code of Ethics for Directors, Officers and Employees will be filed with the Securities and Exchange Commission as Exhibit 14.1 to this Registration Statement.
 
EXECUTIVE COMPENSATION
  
Summary Compensation Table

The following table sets forth information for the most recent fiscal year concerning the compensation of (i) the Chief Executive Officer and (ii) all other executive officers of Neuralstem, Inc. who earned over $100,000 in salary and bonus in the fiscal year ended December 31, 2005 (together the “Named Executive   Officers”).
 
 
     
Annual Compensation
 
Long-Term
Compensation Awards
 
Name and Principal  Position
 
Year
 
Salary
($)
     
Bonus
($)
 
 
Other Annual
Compensation
($)(3)
 
Restricted
Stock
Awards
($)
 
 
Securities
Underlying
Options
(#)
 
                               
I Richard Garr
Chief Executive Officer
   
2005
 
$
240,000
   
(1 )
 
$
 
$
27,605
 
$
   
1,200,000(4
)
                                             
Karl Johe
Chief Scientific Officer
   
2005
 
$
240,000
   
(2 )
 
$
 
$
23,070
 
$
   
1,200,000(4
)
 

(1)  
Includes $200,000 paid as consulting fees and $40,000 paid pursuant to the November 1, 2005 employment agreement with the Company.
(2)  
Includes $200,000 paid as consulting fees and $40,000 paid pursuant to the November 1, 2005 employment agreement with the Company.
(3)  
Includes, among other things, automobile allowances, perquisites and other personal benefits.
(4)  
The options vest annually at a rate of 300,000 per year and will expire in 10 years if not exercised.

35


Option Grants in Last Fiscal Year
 
The following tables set forth certain information for the Named Executive Officers with respect to grants and exercises in fiscal 2005 of options to purchase our Common Stock:
 
Name
  
Number of Securities
Underlying
Options Granted
(#)
  
% of Total Options
Granted to Employees
in Fiscal Year (1)
 
 
Exercise or
Base Price
($/sh)
  
Expiration
Date
I. Richard Garr
  
1,200,000
  
50 %
 
 
$
.50
  
7/27/2015
Karl Johe
 
1,200,000
  
50 %
 
 
$
.50
  
7/27/2015
 

(1)   The numerator in calculating this percentage includes common share purchase options granted to each named executive officer in fiscal 2005 in his capacity as an officer or employee. The denominator in calculating this percentage is 2,400,000, which represents options granted to all Neuralstem, Inc. employees during fiscal 2005, including those to the named executive officers.
 
Compensation of Directors

For the fiscal year ended December 31, 2005, we paid no compensation to our directors for their services on our board.

Employment Agreements and Change-in-Control Arrangements
 
Employment Agreement with I. Richard Garr     On November 1, 2005, we entered into an amendment to the employment agreement with Richard Garr, our Chief Executive Officer, President and Chief Financial Officer. The agreement provides for annual compensation in the amount of $240,000 and extends his term of employment until October 21, 2012. Additionally, the agreement provides for a $500 monthly automobile allowance and the reimbursement of reasonable business expenses. The agreement also provides for an industry standard bonus upon the formation of a compensation committee by the company.

The agreement also provides for severance (“Termination Provisions”) an amount equal to the greater of: (i) the aggregate compensation remaining on his contract; or (ii) $1,000,000, in the event Mr. Garr is terminated for any reason. In the event of termination, the agreement also provides for the immediate vesting of 100% of stock options granted to Mr. Garr during his term of employment. These termination provisions apply whether employee is terminated for “cause” or “without cause.” Additionally, in the event employee voluntarily terminates his employment following a change in control and material reassignment of duties, he will also be entitled to the termination provisions under the contract.

Mr. Garr’s agreement contains non-solicitation, and confidentiality and non-competition covenants. The agreement may be terminated by either party with or without cause and without prior notice subject to the termination provisions as discussed.

Employment Agreement with Karl Y Johe, Ph.D .     On November 1, 2005, we entered into an amendment to the employment agreement with Karl Y. Johe, Ph.D., our Chief Scientific Office and Chairman of the Board. The agreement provides for a minimum annual compensation in the amount of $240,000 and in no event less than the salary of the Chief Executive Officer. The agreement also extends his term of employment until October 21, 2012. Additionally, the agreement provides for a $500 monthly automobile allowance and the reimbursement of reasonable business expenses. The agreement also provides for an industry standard bonus upon the formation of a compensation committee by the company.

The agreement also provides for severance (“Termination Provisions”) an amount equal to the greater of: (i) the aggregate compensation remaining on his contract; or (ii) $1,000,000, in the event Mr. Johe is terminated for any reason. In the event of termination, the agreement also provides for the immediate vesting of 100% of stock options granted to Mr. Johe during his term of employment. These termination provisions apply whether employee is terminated for “cause” or “without cause.” Additionally, in the event employee voluntarily terminates his employment following a change in control and material reassignment of duties, he will also be entitled to the termination provisions under the contract.

36


Mr. Johe’s agreement contains non-solicitation, and confidentiality and non-competition covenants. The agreement may be terminated by either party with or without cause and without prior notice subject to the termination provisions as discussed.

PRINCIPAL STOCKHOLDERS
 
The following tables set forth certain information regarding the beneficial ownership of our common stock. Beneficial ownership is determined in accordance with the applicable rules of the Securities and Exchange Commission and includes voting or investment power with respect to shares of our common stock. The information set forth below is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares deemed beneficially owned in this table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except, where applicable, to the extent authority is shared by spouses under applicable state community property laws.

The following table sets forth information regarding beneficial ownership of our capital stock as of June 16, 2006 by:
 
·  
each person, or group of affiliated persons, known to us to be the beneficial owner of more than 5% of the outstanding shares of our common stock;
 
·  
each of our directors and named executive officers; and
 
·  
all of our directors and executive officers as a group.
 
   
Common Stock
 
Name
 
Amount
 
 %
 
Stanley Westreich (1)(7)
   
4,321,114
   
16.7
%
Regal One Corporation (3)(9)
   
2,815,287
   
10.9
%
Karl Johe (4)
   
2,084,584
   
8.1
%
Merrill Solomon (5)(10)
2,177,097
8.4
  %
Richard Garr (6)
   
1,810,084
   
7.0
%
JMG Capital Partners, LP/JMG Triton Offshore Fund, Ltd (7)(11)
   
2,006,667
   
7.8
%
Malcolm Currie (3)(12)
   
50,167
   
*
 
Directors & Executive Officers as a Group
   
3,944,835
   
15.3
%
 

* Less than 1%
Pursuant to
 
(1)  
Pursuant to R ules 13d−3 and 13d−5 of the Exchange Act, beneficial ownership includes any shares as to which a shareholder has sole or shared voting power or investment power, and also any shares which the shareholder has the right to acquire within 60 days, including upon exercise of common shares purchase options or warrant. There are 25,820,939 shares of common stock issued and outstanding as of June 16, 2006
(2)  
The address for Stanley Westreich is   9700 Great Seneca Highway, #240, Rockville, MD 20850.
(3)  
The address for Regal One Corporation and Malcolm Currie is 11300 West Olympic Boulevard, Los Angeles, CA 90064.

37


(4)  
The address for Karl Johe is 9700 Great Seneca Highway, #240, Rockville, MD 20850.
(5)  
The address for Merrill Solomon is 9700 Great Seneca Highway, #240, Rockville, MD 20850.
(6)  
The address for I. Richard Garr is 9700 Great Seneca Highway, #240, Rockville, MD 20850.
(7)  
The address for JMG Capital Partners, LP & JMP Triton Offshore Fund, Ltd is 11601 Wilshire Blvd., Suite 2180, Los Angeles, CA 90025.
(8)  
Includes 200,000 common shares issuable upon the exercise of a vested warrant granted to Mr. Westeich in connection with the settlement of a note.
(9)  
Includes 1,000,000 common shares issuable upon the exercise of a vested warrant granted for services.
(10)  
Includes 120,000 common shares issuable upon the exercise of a vested warrant granted to Mr. Solomon’s in connection with the settlement of past due consulting fees.
(11)  
Includes: (i) 501,667 common shares held in the name of JMP Capital Partners, LP; (ii) 501,667 common shares held in the name of JMP Triton Offshore Fund, Ltd; (iii) 250,833 common shares issuable to JMP Capital Partners, LP upon the exercise of class A warrants and 250,833 common shares issuable upon the exercise of class B warrants; and (iv) 250,833 common shares issuable to JMP Triton Offshore Fund, Ltd upon the exercise of class A warrants and 250,833 common shares issuable upon the exercise of class B warrants.
(12)  
Includes: 12,542 common shares issuable upon the exercise of class A warrants; and 12,542 common shares issuable upon the exercise of class B warrants.

TRANSACTIONS AND BUSINESS RELATIONSHIPS WITH
MANAGEMENT AND PRINCIPAL SHAREHOLDERS

Summarized below are certain transactions and business relationships between Neuralstem and persons who are or were an executive officer, director or holder of more than five percent of any class of our securities since January 1, 2003:
 
·  
In late 2004 we issued a note to Stanley Westreich in exchange for $60,000.
 
·  
On March 22, 2005, we converted a note payable to Stanley Westreich in the amount of $60,000, and all accrued interest thereon, into 120,000 shares of our common stock.

·  
On July 7, 2005, we entered into a limited exclusive, licensing agreement relating to the sales, distribution and marketing of our technology by High Med Technologies, Inc. HighMed is owned by Karl Y. Johe, one of our principal shareholders and our Chief Scientific Officer. To date, no fees have been paid under the contract. For further information relating to this agreement, see that section of this prospectus captioned “Our Business —Our Intellectual Property Licensed to Others ”.

·  
On November 1, 2005, we entered into an amendment to the employment agreement with Richard Garr, our Chief Executive Officer, President and Chief Financial Officer. For further information relating to this agreement, see that section of this prospectus captioned “ Executive Compensation—Employment Agreements and Change in Control Arrangements ”.

·  
On November 1, 2005, we entered into an amendment to the employment agreement with Karl Y. Johe, Ph.D., our Chief Scientific Office and Chairman of the Board. The agreement provides for a minimum annual compensation in the amount of $240,000 and in no event less than the salary of the Chief Executive Officer. For further information relating to this agreement, see that section of this prospectus captioned “ Executive Compensation—Employment Agreements and Change in Control Arrangements ”.

·  
On November 7, 2005 we entered into a settlement agreement with Mr. Merrill Solomon regarding unpaid consulting fees. As part of the settlement, we granted Mr. Solomon: (i) 120,000 shares of our common stock; and (ii) an option to purchase 120,000 common shares at $.50.

38

 
·  
On November 7, 2005 we converted a note in the amount of $100,000 payable to Mr. Stanley Westreich. As part of the conversion, we issued Mr. Westreich: (i) 200,000 shares of our common stock; and (ii) an option to purchase 200,000 common shares at $.50.
 
DESCRIPTION OF SECURITIES

General

Our authorized capital consists of (1) 75,000,000 shares of common stock, par value $.001 per share, and (2) 7,000,000 shares of “blank check” preferred stock, par value $.001 per share.

Common Stock

The holders of our common stock are entitled to one vote per share on each matter submitted to a vote at a meeting of our stockholders, except to the extent that the voting rights of our shares of any class or series of stock are determined and specified as greater or lesser than one vote per share in the manner provided by our certificate of incorporation. Our stockholders have no pre-emptive rights to acquire additional shares of our common stock or other securities. Our common stock is not subject to redemption rights and carries no subscription or conversion rights. In the event of liquidation of our company, the shares of our common stock are entitled to share equally in corporate assets after satisfaction of all liabilities. All shares of our common stock now outstanding are fully paid and non-assessable. Our bylaws authorize the board of directors to declare dividends on our outstanding shares. As of June 16, 2006 there are 25,820,939 shares of our common stock issued and outstanding.

Preferred Stock

We may issue our preferred shares from time to time in one or more series as determined by our board of directors. The voting powers and preferences, the relative rights of each series, and the qualifications, limitations and restrictions thereof may be established by our board of directors without any further vote or action by our shareholders. As of June 16, 2006 there were no shares of our preferred stock issued and outstanding.

Options And Warrants Convertible into Common Shares

As of June 16, 2006, there were outstanding common share purchase options or warrants entitling the holders to purchase up to 11,039,667 common shares at exercise prices between $0.05 and $5.00 with an average weighted exercise price of $1.53 per share.

EQUITY COMPENSATION PLAN INFORMATION
 
The following table sets forth information with respect to our 2005 Stock Plan as of June 16, 2006.

   
(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
   
2,400,000
 
$
.50
   
1,600,000
 
Equity compensation plans not approved by security holders
   
N/A
   
N/A
   
N/A
 
Total
   
2,400,000
 
$
.50
   
1,600,000
 
 
39


2005 Stock Plan
 
Our board of directors adopted the 2005 Stock Plan on July 27, 2005, and it was subsequently approved by our stockholders. The 2005 Stock Plan provides for the grant of stock options or stock to our employees, directors, and consultants. As of June 16, 2006 options to purchase a total of 2,400,000 shares of common stock were outstanding under the 2005 Stock Plan at a weighted average exercise price of $.50 per share. At June 16, 2006, 1,600,000 shares of our common stock remained available for future issuance under our 2005 Stock Plan.
 
Administration of the 2005 Stock Plan .    Our board of directors administers our 2005 Stock Plan. The administrator has the power to determine the terms of the awards, including the exercise price (which may be changed by the administrator after the date of grant), the number of shares subject to each award, the exercisability of the awards and the form of consideration payable upon exercise.
 
Options .    A stock option is the right to purchase shares of our common stock at a fixed exercise price for a fixed period of time. The administrator will determine the exercise price of options granted under our 2005 Stock Plan. Notwithstanding, pursuant to the plan, the exercise price of any option granted shall in no event be less than the lesser of: (i) the book value per share of common stock as of the end of the fiscal year immediately preceding the date of such grant; or (ii) fifty percent (50%) of the fair market value per share of the common stock on the date of grant.

Transferability of Awards .    Unless the administrator determines otherwise, our 2005 Stock Plan does not allow for the transfer of awards other than by will or by the laws of descent and distribution, and only the participant may exercise an award during his or her lifetime.
 
Amendment and Termination of Our 2005 Stock Plan .     Our 2005 Stock Plan will automatically terminate in 2010, unless we terminate it sooner. In addition, our board of directors has the authority to amend, suspend or terminate our 2005 Stock Plan without shareholder consent.

MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS  
 
Market Information
 
There exists no market for our common stock. Private sales or transfers are permitted under the respective state and Federal securities laws, subject to compliance with exemptions set forth under the respective statutory guidelines.  As of June 16, 2006, we had 157 shareholders of record.

Dividend Policy

Holders of the Company’s Common Stock are entitled to receive dividends should they be declared by the Board of Directors, out of funds legally available for distribution. Any such dividends may be paid in cash, property or shares of the Company’s common stock. The Company has not paid any dividends since its inception, and it is not likely that dividends on its Common Stock will be declared at any time in the foreseeable future. Any dividends will be subject to the discretion of the Company’s Board of Directors, and will depend upon, among other things, the operating and financial condition of the Company, its capital requirements and general business conditions. Therefore, there can be no assurance that any dividends on the Company’s Common Stock will be paid in the future.

SHARES ELIGIBLE FOR FUTURE SALE
 
To date, there has been no market for our common stock. In the event a public market for our shares develops, future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices from time to time. Further, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future.

40

 
Sales of Restricted Shares
 
As of June 16, 2006, we have issued and outstanding an aggregate of 25,820,939 shares of common stock. Of these shares, the 8,088,667 common shares being registered in this prospectus, excluding those shares issuable upon the exercise of options and warrants, will be freely tradable without restrictions or further registration under the Securities Act, unless one or more of our existing affiliates as that term is defined in Rule 144 under the Securities Act purchases such shares.
 
The remaining 17,732,272 shares of our common stock held by existing stockholders as of June 16, 2006 are restricted shares or are restricted by the contractual provisions described below. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 of the Securities Act, which are summarized below. Of these restricted shares, 12,822,317 shares will be available for resale in the public market in reliance on Rule 144(k). An additional 3,894,668 shares will be available for resale in the public market in reliance on Rule 144. The remaining 1,015,287 shares become eligible for resale in the public market at various dates thereafter. Notwithstanding the foregoing, 6,178,211 shares which would otherwise be subject to Rule 144(k) and 3,894,668 shares which would otherwise be eligible under Rule 144, are restricted by lock up agreement for a period of 12 months.
 
The table below sets forth the approximate number of shares eligible for future sale:

Date
 
Number of Shares
 
On the date of this prospectus
   
14,732,773
 
Between 90 and 180 days after the date of this prospectus
   
14,732,773
 
At various times beginning more than 180 days after the date of this prospectus
   
11,088,166
 

Rule 144

Under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a stockholder who has beneficially owned restricted shares for at least one year and has complied with the requirements described below would be entitled to sell, upon the expiration of the lock-up agreements described below, some of that stockholder’s shares within any three-month period. That number of shares cannot exceed the greater of one percent of the number of shares of our common stock then outstanding, which will equal approximately 258,209 shares immediately after this offering, or the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 reporting the sale. Sales under Rule 144 are also restricted by manner of sale provisions, notice requirements and the availability of current public information about us. Rule 144 also provides that our affiliates who are selling shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares with the exception of the holding period requirement.
 
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Accordingly, these shares may be sold without restriction immediately upon the expiration of the lock-up agreements described below.

Rule 701

Rule 701 provides that the shares of common stock acquired upon the exercise of currently outstanding options or other rights granted under our equity plans may be resold, by persons, other than affiliates, beginning 90 days after the date of this prospectus, restricted only by the manner of sale provisions of Rule 144, and by affiliates in accordance with Rule 144, without compliance with its one-year minimum holding period.

41


Registration Statements

We intend to file one or more registration statements on Form S-8 under the Securities Act following this offering to register all shares of our common stock which have been issued or are issuable upon exercise of outstanding stock options or other rights granted under our equity plans. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will thereupon be eligible for sale in the public market, upon the expiration or release from the terms of the lock-up agreements, to the extent applicable, or subject in certain cases to vesting of such shares.

Lock-up Agreements

As a condition to our March 2006 private placement, certain stockholders and option holders, representing 10,392,879 shares of our common stock on an as converted as exercised basis, have agreed with us not to sell or otherwise dispose of, directly or indirectly, any shares of our common stock (or any security convertible into or exchangeable or exercisable for common stock) for a period of 12 months following the effectiveness of this registration statement without the express consent of T.R. Winston & Company.
 
SELLING SHAREHOLDERS
 
The following table depicts the total number of common shares beneficially owned or acquirable by each of the selling shareholders as of June 16, 2006 , the total number of common shares they may sell under this prospectus, and the number of common shares they will own thereafter assuming the sale of all shares offered under this prospectus and further assuming no other acquisitions or dispositions of common shares. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 and 13d-5 of the Exchange Act which calculates ownership based solely upon sole or shared voting power or investment power, and the information is not necessarily indicative of the beneficial ownership for any other purpose, including the determination of direct or indirect pecuniary ownership. We believe that each individual or entity named has sole investment and voting power with respect to the securities indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted.

The selling shareholders are under no obligation to sell all or any portion of the common shares offered for sale under this prospectus.

The total number of common shares sold under this prospectus may be adjusted to reflect adjustments due to stock dividends, stock distributions, splits, combinations, recapitalizations or the triggering standard of weighted-average and other anti-dilution protective provisions.

Unless otherwise stated below, to our knowledge no selling shareholder nor any affiliate of such shareholder has held any position or office with, been employed by or otherwise has had any material relationship with us or our affiliates during the three years prior to the date of this prospectus.

   
Common Shares
Owned Before Sale (1)
 
Common Shares
Owned After Sale (2)
 
   
Selling Shareholder
 
Held Outright
 
Warrants/ Options (3)
 
Amount
 
% of Class
 
Amount
 
% of Class
 
Andrew M. Lessman
   
250,833
   
250,833
   
501,667
   
1.9
%
 
-
   
-
 
Ariana M. McFadyen
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Arthur M. Margulies
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Aton Select Fund Limited (4)
   
150,500
   
150,500
   
301,000
   
1.2
%
 
-
   
-
 
B&R Richie’s (5)
   
100,333
   
100,333
   
200,667
   
*
   
-
   
-
 
 
42

 
 
 
Common Shares
Owned Before Sale (1)
 
Common Shares
Owned After Sale (2)
 
 
Selling Shareholder
 
Held Outright
 
Warrants/ Options (3)
 
Amount
 
% of Class
 
Amount
 
% of Class
 
Barry Shemaria
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Benjamin G. Wells, Trustee, Wells Family Revocable Trust Dtd. 5- 1-91
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Brendon Myers
   
100,000
   
-
   
100,000
   
*
   
-
   
-
 
Brian Garr
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Bruce & Jacqueline Barron, Joint Ownership
   
50,000
   
-
   
50,000
   
*
   
-
   
-
 
Bruce B. Allen Trustee of the Bruce and Janet Allen Joint Revocable Trust dated 7-31-03
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Chaim Slomluc
   
50,000
   
-
   
50,000
   
*
   
-
   
-
 
Chandrasekhar Polepalle & Suseela Polepalle JTWROS
   
325,417
   
125,417
   
450,834
   
1.7
%
 
-
   
-
 
Charles Abramovitz
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Condor Financial Management S.A. (6)
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Dan R. Hamby and Marianne Hamby
   
40,133
   
40,133
   
80,267
   
*
   
-
   
-
 
David Carl Lustig, III
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Donald L. Stahl
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Equity Communications, LLC (7)
         
330,000
   
330,000
   
1.3
%
 
-
   
-
 
Freddie Bear Partnership(8)
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
G. Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust dtd 1-11-2000
   
112,040
   
12,040
   
124,080
   
*
   
-
   
-
 
Guy Clemente
   
100,000
   
-
   
100,000
   
*
   
-
   
-
 
Harbans L. Gulati & Subhash C. Gulati
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Hawkins Family Trust (9)
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
High Tide, LLC(10)
   
500,000
   
-
   
500,000
   
1.9
%
 
-
   
-
 
Ira Weingarten
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Iroquois Master Fund, Ltd. (11)
   
250,833
   
250,833
   
501,667
   
1.9
%
 
-
   
-
 
J. Leroy and Joan B. Thompson
   
12,040
   
12,040
   
24,080
   
*
   
-
   
-
 
JAG Multi Investments, LLC (12)
   
100,333
   
100,333
   
200,667
   
*
   
-
   
-
 
JAM Capital Associates, LLC (13)
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
James Karanfilian
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
James McCamant
   
50,000
   
-
   
50,000
   
*
   
-
   
-
 
Jay R. Solan & Sandra S. Solan
   
225,417
   
125,417
   
350,834
   
1.4
%
 
-
   
-
 
JMG Capital Partners, LP (14)
   
501,667
   
501,667
   
1,003,333
   
3.9
%
 
-
   
-
 
JMG Triton Offshore Fund, Ltd .(15)
   
501,667
   
501,667
   
1,003,333
   
3.9
%
 
-
   
-
 
John G. Korman
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
John H. Dakin
   
15,050
   
15,050
   
30,100
   
*
   
-
   
-
 
Jonathan Meyers
   
100,333
   
100,333
   
200,667
   
*
   
-
   
-
 
Joseph Giamanco
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Joseph H. Merback & Tema N. Merback Co-TTEE FBO Merback Family Trust UTD 8-30-89
   
100,333
   
100,333
   
200,667
   
*
   
-
   
-
 
Larry E. Roher
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Leonard Cohen
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Louis Albert Lobel
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Martin Hodas
   
100,333
   
100,333
   
200,667
   
*
   
-
   
-
 
 
43


   
Common Shares
Owned Before Sale (1)
 
Common Shares
Owned After Sale
 
Selling Shareholder
 
Held Outright
 
Warrants/ Options (3)
 
Amount
 
% of Class
 
Amount
 
% of Class
 
Michael Berry
   
50,000
   
-
   
50,000
   
*
   
-
   
-
 
Michael Diamant
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Michael J. Garr
   
40,133
   
40,133
   
80,266
   
*
   
-
   
-
 
Michael W. Engmann
   
150,500
   
150,500
   
301,000
   
1.2
%
 
-
   
-
 
Mitchell Sassower
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Nathan Sugerman
   
100,167
   
50,167
   
150,333
   
*
   
-
   
-
 
New Horizon Exploration Inc .(16)
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Omicron Master Trust (17)
   
250,833
   
250,833
   
501,667
   
1.9
%
 
-
   
-
 
Patrick Hund
   
75,083
   
25,083
   
100,167
   
*
   
-
   
-
 
Paul A. Lobel and Laura A. Lobel, Tenants by Entirely
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Phillip S. Sassower Charitable Remainder Annuity Trust ’96 (18)
   
100,333
   
100,333
   
200,667
   
*
   
-
   
-
 
RBC Dain Rauscher Custodian FBO Gregory B. Pepus IRA
   
35,117
   
35,117
   
70,233
   
*
   
-
   
-
 
Regal One Corporation (19)
   
1,815,287
   
1,000,000
   
2,815,287
   
10.9
%
 
1,015,287
   
3.9
%
Richard Friedman
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Richard Green
   
50,000
   
-
   
50,000
   
*
   
-
   
-
 
Richard Hull
   
25,083
   
125,083
   
150,167
   
*
   
100,000
   
*
 
Richard Stone
   
50,000
   
-
   
50,000
   
*
   
-
   
-
 
Robert Cohan
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Robert Lempert
   
20,067
   
20,067
   
40,133
   
*
   
-
   
-
 
Robert R. Kauffman
   
75,250
   
75,250
   
150,500
   
*
   
-
   
-
 
Rubicon Global Value Fund, L.P .(20)
   
145,483
   
145,483
   
290,966
   
1.1
%
 
-
   
-
 
S&J Veal, Inc.(21)
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
S.W. Bach & Company (22)(28)
         
127,050
   
127,050
   
*
   
-
   
-
 
Sachs Investing Co . (23)
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Sam R. Buck
   
131,437
   
131,437
   
262,873
   
1.0
%
 
-
   
-
 
Silpi Polepalle
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
Steven B. Dunn
   
500,000
   
-
   
500,000
   
1.9
%
 
-
   
-
 
Steven Mitchell Sack
   
172,334
   
100,334
   
272,667
   
1.1
%
 
-
   
-
 
Sylvia Johe
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
T.R. Winston & Company, LLC (24)(28)
         
672,950
   
672,950
   
2.6
%
 
-
   
-
 
The JD Group, LLC (25)
         
1,000,000
   
1,000,000
   
3.9
%
 
-
   
-
 
Thomas E. Genna
   
150,167
   
50,167
   
200,333
   
*
   
-
   
-
 
Thomas R. Smith
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
Univest Management Employee Profit Sharing Plan (26)
   
50,167
   
50,167
   
100,333
   
*
   
-
   
-
 
VAR Growth Corp .(27)
   
100,000
   
-
   
100,000
   
*
   
-
   
-
 
William John Reininger
   
25,083
   
25,083
   
50,167
   
*
   
-
   
-
 
                                       
Total
   
9,103,954
   
8,246,666
   
17,350,620
   
67.2
%
 
1,115,287
   
4.3
%
 

 
* Less Than 1%
 
(1)
Pursuant to Rules 13d−3 and 13d−5 of the Exchange Act, beneficial ownership includes any common shares as to which a shareholder has sole or shared voting power or investment power, and also any common shares which the shareholder has the right to acquire within 60 days, including upon exercise of common shares purchase options or warrants. There were 25,820,939 common shares outstanding as of June 16, 2006.
(2)
Assumes the sale of all common shares offered under this prospectus.

44


(3)
Unless otherwise stated, shares underlying warrants/options constitute common shares issuable upon the exercise of Class A and B warrants in ratio of 50/50.
(4)
Dr. Keicher is the person with voting and dispositive power of Aton Select Fund Limited.
(5)
Mr. Bradley Ross is the person with voting and dispositive power of B&R Richie’s.
(6)
Mr. Engelhardt Schreiber is the person with voting and dispositive power of Condor Financial Management S.A.
(7)
Mr. Ira Weingarten is the person with voting and dispositive power of Equity Communications, LLC.
(8)
Mr. Malcolm R. Currie is the person with voting and dispositive power of Freddie Bear Partnership.
(9)
Mr. Arthur L. Hawkins is the Trustee and person with voting and dispositive power of the Hawkins Family Trust.
(10)
Mr. Tyler Runnels is the person with voting and dispositive power of High Tide, LLC.
(11)
Mr. Joshua Silverman is the person with voting and dispositive power of Iroquois Master Fund, Ltd.
(12)
Mr. Alexander M. Goren is the person with voting and dispositive power of JAG Multi Investments, LLC
(13)
Mr. Leonard Pearlman is the person with voting and dispositive power of JAM Capital Associates, LLC
(14)
Mr. Jonathan Glaser is the person with voting and dispositive power of JMG Capital Partners, LP
(15)
Mr. Jonathan Glaser is the person with voting and dispositive power of JMG Triton Offshore Fund, Ltd.
(16)
Mr. Rex E. Gifford is the person with voting and dispositive power of New Horizon Exploration.
(17)
Mr. Bruce Bernstein is the person with voting and dispositive power of Omicron Master Trust.
(18)
Mr. Phillip S. Sassower is the Trustee and person with voting and dispositive power of the Philip S. Sassower Charitable Remainder Annuity Trust ‘96.
(19)
The people with voting and dispositive with regard to the shares is the board of directors of Regal One, Inc.
(20)
Mr. Steven Shum is the person with voting and dispositive power of Rubicon Global Value Fund, L.P.
(21)
Mr. Scott Turriff is the person with voting and dispositive power of S&J Veal, Inc.
(22)
Mr. Clemente is the person with voting and dispositive power of S.W. Bach & Company.
(23)
Mr. Marvin Sach is the person with voting and dispositive power of Sachs Investment Co.
(24)
Mr. Tyler Runnels is the person with voting and dispositive power of T.R. Winston & Company, LLC.
(25)
Mr. John Davies is the person with voting and dispositive power of the JD Group, LLC.
(26)
Mr. Frank Gerardi is the person with voting and dispositive power of Univest Management Employee Profit Sharing Plan.
(27)
Ms. Doris Sutz is the person with voting and dispositive power of VAR Growth Corp.
(28)
Warrants received as part of compensation pursuant to a placement agency agreement between us and the selling shareholders. Accordingly, such shares are restricted in accordance with Rule 2710(g)(1) of the NASD Conduct Rules.
 
REGISTRATION RIGHTS
 
The holders of 5,016,667 shares of our common stock and the holders of 8,146,667 shares of our common stock issuable upon exercise of warrants and options are entitled to rights with respect to the registration of their shares under the Securities Act of 1933. These registration rights are contained in the registration rights agreements entered into with certain investors as well as embedded in agreements detailing the holders’ rights under their individually granted warrants and options. In addition to the common shares to be registered pursuant to the registration rights agreement, we are also voluntarily registering 3,072,000 common shares and common shares issuable upon the exercise of certain options and warrants issued to our investors, consultants and advisors.


From January 8 through March 8 2006, we raised $5,000,000 in gross proceeds from the private placement of units consisting of one share of common stock, ½ class ‘A’ warrant, and ½ class ‘B’ warrant, to 64 investors. The offering was effected through T.R. Winston & Company, a registered broker−dealer, as placement agent, pursuant to which we sold:

·  
5,000,000 common shares;

·  
2,500,000 class ’A’ warrants, each warrant entitling the holder to purchase one share of common stock for $1.50; and

·  
2,500,000 class ’B’ warrants, each warrant entitling the holder to purchase one share of common stock for $2.00;

45


In connection with the offering, we issued to T.R. Winston & Company and S.W. Bach & Company as placement agent’s purchase warrants entitling them to purchase a total of 800,000 common shares at $1.10 per share.

As part of the private placement, we entered into a registration rights agreements with the investors under which we agreed to file the registration statement of which this prospectus is a part in order to register (1) the common shares issued in the private placement; and (2) the common shares issuable upon the exercise of the class ’A’ and ‘B’ warrants. The registration rights agreement required us to use our best efforts to file the registration statement as soon as reasonably practicable after the first closing for the offering, but in no event more than 30 days following the closing of the minimum offering amount, which closing occurred on February 23, 2006. If we failed to do so: (i) the shares underlying the ‘A’ and ‘B’ warrants would be increased by one percent (1%) for each 30 day period; and (ii) we would be obligated to issue additional shares equal to one percent (1%) for each 30 day period of the common shares sold in the offering. The registration rights agreement also requires us to use our best efforts to have the registration agreement declared effective with 180 days after the minimum closing and maintain the registration statement continuously effective until the date that the shares covered by this prospectus may be sold pursuant to Rule 144 of the Securities Act without any restrictions.

We filed our initial registration statement as required under the registration rights agreement on March 31, 2006 after hours and it has a filing date of April 3, 2006. Accordingly, we are already obligated to issue additional shares in the amount of 33,333.
 
PLAN OF DISTRIBUTION
 
The selling shareholders and each of their respective donees, transferees, pledges or other successors in interest (to the extent permitted under this plan of distribution as described below) may, from time to time, sell any or all of their shares of common stock offered for sale under this prospectus on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling shareholders may use any one or more of the following methods when selling shares:
 
·  
ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser;
 
·  
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
·  
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
·  
an exchange distribution in accordance with the rules of the applicable exchange;
 
·  
privately-negotiated transactions;
 
·  
short sales that are not violations of the laws and regulations of any state or the United States;
 
·  
broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share;
 
·  
through the writing of options on the shares;
 
·  
a combination of any such methods of sale; and
 
·  
any other method permitted pursuant to applicable law.
 
The selling shareholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this Prospectus unless they entered into the lock-up agreement. The selling shareholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

46

 
The selling shareholders may also engage in puts, calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades.
 
The selling shareholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling shareholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the market price. The selling shareholders cannot assure that all or any of the shares offered in this Prospectus will be issued to, or sold by, the selling shareholders.  Further, the other selling shareholders and any brokers, dealers or agents, upon affecting the sale of any of the shares offered in this Prospectus, will be deemed to be "underwriters." Accordingly, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling shareholders, but excluding brokerage commissions or underwriter discounts.
 
The selling shareholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.
 
The shares of common stock underlying the warrants issued to those selling shareholders who, as indicated in the Selling Shareholder table above, received such warrants as part of compensation pursuant to a placement agency agreement between us and such selling shareholders are restricted in accordance with Rule 2710(g)(1) of the NASD Conduct Rules. Accordingly, those selling shareholders shall not directly or indirectly offer, sell, agree to offer or sell, transfer, assign, pledge, hypothecate or subject to hedging, short sale, derivative, put or call transaction such shares for a period of 180 days after the effective date of this registration statement.
 
The selling shareholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling shareholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by the selling shareholders or any other such person. In the event that the selling shareholders are deemed affiliated purchasers or distribution participants within the meaning of Regulation M, then the selling shareholders will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In regards to short sells, the selling stockholder can only cover its short position with the securities they receive from us upon conversion. In addition, if such short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.
 
We have agreed to indemnify the selling shareholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling shareholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.

47

 
If the selling shareholders notify us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this Prospectus is a part, and file a Prospectus supplement to describe the agreements between the selling shareholders and the broker-dealer.
 
TRANSFER AGENT

The transfer agent for our common shares is American Stock Transfer, 59 Maiden Lane, Plaza Level, New York, NY 10038. We act as our own transfer agent with regard to our outstanding common share purchase options and warrants.
 
LEGAL MATTERS
 
The validity of the shares of common stock being offered hereby will be passed upon for us by Dieterich & Associates, Los Angeles, California. Christopher Dieterich, principal of Dieterich & Associates, is a shareholder of Regal One Corporation and, as such, will receive a portion of the shares pursuant to the dividend declared by Regal One.
 
EXPERTS
 
Our financial statements as of December 31, 2005 and the related condensed consolidated statements of operations, shareholders' deficit and cash flows for the period from January 1, 2004 through December 31, 2005 appearing in this Prospectus and registration statement have been audited by George Brenner, independent registered public accountant, as set forth on this report thereon appearing elsewhere in this Prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. George Brenner has no interest in the shares being registered in this filing.
 
INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
The Corporation Laws of the State of Delaware and the Company's Bylaws provide for indemnification of the Company's Directors for expenses actually and necessarily incurred by them in connection with the defense of any action, suit or proceeding in which they, or any of them, are made parties, or a party, by reason of having been Director(s) or Officer(s) of the corporation, or of such other corporation, except, in relation to matter as to which any such Director or Officer or former Director or Officer or person shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of duty.  Furthermore, the personal liability of the Directors is limited as provided in the Company's Articles of Incorporation.
 
 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the SEC a registration statement on Form SB−2 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information about us and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1−800−SEC−0330 for further information about the public reference room. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.

48


FINANCIAL INFORMATION

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Neuralstem, Inc.

I have audited the accompanying balance sheets of Neuralstem, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits.

I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Neuralstem, Inc. as of December 31, 2005 and 2004 and the results of its operations, stockholders’ deficit and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 9 to the financial statements, the Company has restated its financial statements for the years ended December 31, 2005 and 2004 for not properly accounting for certain options for common stock granted and shares issued which were not accounted for as deemed interest.

George Brenner, CPA
Los Angeles, California
March 29, 2006 (except for Note 9, June 7, 2006)

F-1


NEURALSTEM, INC.

BALANCE SHEETS

   
December 31,
2005
 
December 31,
2004
 
   
(Restated)
 
(Restated)
 
ASSETS
   
CURRENT ASSETS
             
Cash
 
$
526,381
 
$
39,054
 
Total current assets
   
526,381
   
39,054
 
Property and equipment, net
   
29,138
   
61,069
 
Intangible assets, net
   
14,327
   
15,980
 
Total assets
   
569,846
   
116,103
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
   
CURRENT LIABILITIES
             
Notes payable to bank including accrued interest
 
$
116,255
 
$
118,000
 
Note payable, current portion
   
8,946
   
-
 
Accounts payable and accrued expenses
   
683,803
   
683,118
 
Deferred compensation
   
192,620
   
202,620
 
Total current liabilities
   
1,001,624
   
1,003,738
 
Notes payable, stockholder
   
-
   
60,000
 
Note payable, long-term portion
   
28,395
   
-
 
Total liabilities
   
1,030,019
   
1,063,738
 
STOCKHOLDERS’ DEFICIT
             
Preferred stock: $0.01 par value; authorized 7,000,000 shares; issued and outstanding and 6,254,402 shares at December 31, 2005 and 2004, respectively
 
$
-
 
$
62,544
 
Common stock: $0.01 par value; authorized 75,000,000 shares; issued and outstanding: 20,608,272 and 2,016,586 shares at December 31, 2005 and 2004, respectively
   
206,083
   
20,166
 
Additional paid-in capital
   
31,387,894
   
30,184,463
 
Common stock payable for 226,000of unissued shares of common stock
   
113,000
   
-
 
Accumulated deficit
   
(32,167,150
)
 
(31,214,808
)
Total stockholders’ deficit
   
(460,173
)
 
(947,635
)
Total liabilities and stockholders’ deficit
 
$
569,846
 
$
116,10
 

See Accompanying Notes to Financial Statements.

F-2


NEURALSTEM, INC.

STATEMENTS OF OPERATIONS

   
Year ended December 31,
 
   
2005
 
2004
 
   
(Restated)
 
(Restated)
 
Revenues
 
$
309,142
 
$
125,457
 
Operating expenses
             
Research and development costs
   
568,299
   
428,402
 
General, selling and administrative expenses
   
640,610
   
555,080
 
Depreciation and amortization
   
51,923
   
155,555
 
     
1,260,832
   
1,139,037
 
Operating loss
   
(951,690
)
 
(1,013,580
)
Nonoperating income (expense)
             
Interest
   
7,888
   
4,233
 
Other income
   
-
   
2,702
 
Forgiveness of debt
   
10,735
   
-
 
Loss on sale of assets
   
-
   
(842,719
)
Interest expense
   
(19,275
)
 
(5,255,060
)
Net loss
 
$
(952,342
)
$
(7,104,424
)
Net loss per share, basic
 
$
(0.09
)
$
(3.53
)
Average number of shares  of common stock outstanding
   
10,417,300
   
2,016,586
 

See Accompanying Notes to Financial Statements.

F-3


NEURALSTEM, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

   
 
 
 
 
 
 
 
 
Common
 
Additional
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Stock
 
Paid-In
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Payable
 
Capital
 
Deficit
 
Total
 
                                   
Balance, December 31, 2003
   
2,272,177
 
$
22,722
   
2,016,586
 
$
20,166
   
-
 
$
23,691,569
 
$
(24,110,384
)
$
(375,927
)
Beneficial conversion feature of convertible notes payable
   
-
   
-
   
-
   
-
   
-
   
6,207
   
-
   
6,207
 
Conversion of convertible notes payable which includes 3,125,000 preferred series C shares issued and accounted for as deemed interest valued at $5,000,000 or $1.60 per share
   
4,026,385
   
40,269
   
-
   
-
   
-
   
6,486,240
   
-
   
6,526,509
 
Net loss, December 31, 2004
   
-
   
-
   
-
   
-
   
-
   
-
   
(7,104,424
)
 
(7,104,424
)
Balance, December 31, 2004 (Restated)
   
6,298,562
   
62,991
   
2,016,586
   
20,166
   
-
   
30,184,016
   
(31,214,808
)
 
(947,635
)
Conversion of preferred stock
   
(6,298,562
)
 
(62,991
)
 
14,182,399
   
141,824
   
-
   
(78,833
)
 
-
   
-
 
Issuance of common stock for satisfaction of note payable totaling $60,000
   
-
   
-
   
120,000
   
1,200
   
-
   
58,800
   
-
   
60,000
 
Issuance of common stock for services, $0.50 per share
   
-
   
-
   
120,000
   
1,200
   
-
   
58,800
   
-
   
60,000
 
Issuance of common stock for services, $0.50 per share
   
-
   
-
   
78,000
   
780
   
-
   
38,220
   
-
   
39,000
 
Issuance of common stock at $0.50 per share, includes 1,845,287 shares issued for offering related expense
   
-
   
-
   
4,091,287
   
40,913
   
-
   
1,082,087
   
-
   
1,123,000
 
Warrants for 1,599,000 shares of common stock granted for services
   
-
   
-
   
-
   
-
   
-
   
44,804
   
-
   
44,804
 
Common stock payable for 226,000 shares of unissued common stock at $0.50 per share and warrants for 200,000 shares of common stock with an exercise price of $0.50 per share
   
-
   
-
   
-
   
-
   
113,000
   
-
   
-
   
113,000
 
Interest on notes receivable from stockholders
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Net loss, December 31, 2005
   
-
   
-
   
-
   
-
   
-
   
-
   
(952,342
)
 
(952,342
)
Balance, December 31, 2005 (Restated)
   
-
   
-
 
$
20,608,272
 
$
206,083
 
$
113,000
 
$
31,387,894
 
$
(32,167,150
)
$
(460,173
)

See Accompanying Notes to Financial Statements.

F-4


NEURALSTEM, INC.
STATEMENTS OF CASH FLOWS

   
Year ended December 31,
 
   
2005
 
2004
 
   
(Restated)
 
(Restated)
 
Cash Flows From Operating Activities
             
Net loss
 
$
(952,342
)
$
(7,104,424
)
Adjustments to reconcile net loss to cash used in operating activities:
             
Depreciation and amortization
   
51,923
   
155,555
 
Loss on disposition of assets
   
-
   
842,719
 
Non-cash interest on notes payable related party
   
-
   
(2,427
)
Interest expense stock based
   
-
   
5,000,000
 
Interest amortization of beneficial conversion feature
   
-
   
220,341
 
Stock and warrant based compensation
   
143,804
   
-
 
Changes in assets and liabilities
             
Accounts receivable
   
-
   
17,882
 
Prepaid expenses
   
-
   
52,193
 
Other assets
   
-
   
10,840
 
Accounts payable and accrued expenses
   
38,026
   
82,741
 
Deferred compensation
   
(10,000
)
 
253,871
 
Accrued interest on convertible notes
   
-
   
34,506
 
Net cash used in operating activities
   
(728,589
)
 
(436,203
)
Cash Flows From Investing Activities
             
Purchase of property and equipment
   
(18,339
)
 
-
 
Proceeds from sale of property and equipment
   
-
   
100,857
 
Net cash provided by investing activities
   
(18,339
)
 
100,857
 
Cash Flows From Financing Activities
             
Issuance of common stock
   
1,123,000
   
-
 
Proceeds from notes payable
   
-
   
60,000
 
Proceeds from common stock payable
   
113,000
   
-
 
Proceeds from convertible notes payable
   
-
   
361,000
 
Payments on notes payable
   
(1,745
)
 
(47,568
)
Net cash provided by financing activities
   
1,234,255
   
373,432
 
Net increase (decrease) in cash
   
487,327
   
38,086
 
Cash, beginning of period
   
39,054
   
968
 
Cash, end of period
 
$
526,381
 
$
39,054
 
Supplemental Information
             
Beneficial conversion feature on issuance of debt
 
$
-
 
$
6,207
 
Preferred stock issued for debt
 
$
-
 
$
479,987
 
Issuance of 120,000 shares of common stock for debt
 
$
60,000
 
$
-
 
Conversion of 6,254,402 shares of preferred stock to 14,182,399 shares of common stock
 
$
62,544
 
$
 
Conversion of notes payable to preferred stock
 
$
-
 
$
1,526,509
 
Conversion of note payable to convertible note payable
 
$
-
 
$
40,000
 
Conversion of an accrued liability into a note payable
 
$
37,341
 
$
-
 
 
See Accompanying Notes to Financial Statements.
 
F-5

Note 1.   Nature of Business and Significant Accounting Policies
 
Nature of business:

Neuralstem, Inc. (“Company”) is a biopharmaceuticals company that is utilizing its proprietary human neural stem cell technology to create a comprehensive platform for the treatment of central nervous system diseases. The Company will commercialize this technology as a tool for use in the next generation of small-molecule drug discovery and to create cell therapy biotherapeutics to treat central nervous system diseases for which there are no cures. The Company was founded in 1996 and currently occupies lab and office space in Gaithersburg, Maryland.

Inherent in the Company’s business are various risks and uncertainties, including its limited operating history, the fact that Neuralstem’s technologies are new and may not allow the Company or its customers to develop commercial products, regulatory requirements associated with drug development efforts and the intense competition in the genomics industry. The Company’s success depends, in part, upon successfully raising additional capital, prospective product development efforts, the acceptance of the Company’s solutions by the marketplace, and approval of the Company’s solutions by various governmental agencies.

The Company has incurred cumulative losses of approximately $32,167,000 since inception and reported a net loss of approximately $952,000 for the year ended December 31, 2005. In order to further its research and develop its products, the Company will require additional financing until such time that revenue streams are of sufficient volume to generate positive cash flow from operations. Possible sources of funds are strategic alliances, additional equity offerings, grants and contracts, and research and development funding from third parties. Management intends to raise additional capital and remains committed to taking all appropriate and necessary actions to effect timely cost reductions and cash preservation measures in the event anticipated revenue and cash flow expectations are not substantially met. Subsequent to December 31, 2005, the Company had raised $4,540,000 in equity funding (see Note 8).

A summary of the Company’s significant accounting policies is as follows:

Estimates

The preparation of financial statements in conformity 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. Actual results could differ from those estimates.

Cash and Equivalents

For the Statements of Cash Flows, all highly liquid investments with maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of December 31, 2005 and December 31, 2004.

F-6

 
Note 1.   Nature of Business and Significant Accounting Policies (continued)
 
Property and Equipment

Property and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives ranging from three to seven years. Expenditures for maintenance and repairs are charged to operations as incurred.

Recoverability of Long-Lived Assets and Identifiable Intangible Assets

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Fair Value of Financial Instruments

The fair values of financial instruments are estimated based on market rates based upon certain market assumptions and information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts payable and notes payable. Fair values were assumed to approximate carrying values for cash and payables due to the short-term nature or that they are payable on demand.

Revenue Recognition

To date, revenue has been derived primarily from providing treated samples for gene expression data from stem cell experiments and from providing services under a federal grant program sponsored by the Defense Advanced Research Projects Agency (DARPA) $70,000 and $125,000 in 2005 and 2004, respectively. 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 costs are charged to operations when incurred.

F-7

 
Note 1.   Nature of Business and Significant Accounting Policies (continued)
 
Income taxes

Income taxes are provided for using the liability method of accounting in accordance with SFAS No. 109 “Accounting for Income Taxes.” A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

Stock - Based Compensation

The Company recognizes expenses for stock-based compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, “ Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any. 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 Good 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.

Comprehensive Loss

Statement of Financial Accounting Standard (SFAS) No. 130 “Reporting Comprehensive Income,” requires the presentation of comprehensive income or loss and its components as part of the financial statements. For the years ended December 31, 2005 and 2004, the Company’s net loss reflects comprehensive loss and, accordingly, no additional disclosure is required.
 
Recent Accounting Pronouncements
 
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recorded as current period charges and that the allocation of fixed production overheads to inventory be based on the normal capacity of the production facilities. SFAS No. 151 becomes effective for our Company on January 1, 2006. The Company does not believe that the adoption of SFAS No. 151 will have a material impact on our financial statements.

F-8

 
Note 1.   Nature of Business and Significant Accounting Policies (continued)
 
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaced SFAS No. 123 and superseded Accounting Principles Board Opinion No. 25. SFAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statements. On April 14, 2005, the Securities and Exchange Commission issued an announcement amending the compliance dates for the FASB's SFAS 123R that addresses accounting for equity based compensation arrangements. Under SFAS 123R registrants would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. The Commission's new rule will allow companies to implement SFAS 123R at the beginning of the next fiscal year after June 15, 2005. The Company anticipates adopting SFAS 123R in the first quarter 2006. The Company does not believe that the adoption of SFAS No. 123R will have a material impact on our financial statements.
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 became effective for our Company as of July 1, 2005. The Company will apply the requirements of SFAS No. 153 on any future nonmonetary exchange transactions.

In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47 "Accounting for Conditional Asset Retirement Obligations—an Interpretation of FASB Statement No. 143" ("FIN No. 47"). FIN No. 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. FIN No. 47 is effective for us no later than December 31, 2005. We do not expect that the adoption of FIN No. 47 will have a material impact on our financial condition or results of operations.

In May 2005,   the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3” (“SFAS No. 154”).  SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable.  APB Opinion No. 20 “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  This statement is effective for our Company as of January 1, 2006. The Company does not believe that the adoption of SFAS No. 154 will have a material impact on our financial statements.

F-9

 
Note 2.   Stockholders’ Deficit
 
Common stock

The authorized stock of the Company consists of 7,000,000 shares of preferred stock with a par value of $0.01 and 75,000,000 shares of common stock with par value of $0.01. The preferred stock is divided into A, B, and C Series.

In November 2004, the Company effectuated a reverse stock split, where three (3) shares of common stock were issued for every ten (10) shares of common stock previously owned. The prior information has been adjusted to reflect the reverse stock split. In conjunction with the conversion of the preferred stock, the Company amended the Articles of Incorporation to authorize 75,000,000 shares of common stock, without reauthorization of the preferred shares.

During the year ended December 31, 2005, the Company sold 2,246,000 shares of common stock for a total consideration of $1,123,000 or $0.50 per share. In conjunction with the sale of these shares, the Company issued 1,845,287 shares of common stock and options for 1,000,000 shares of common stock with an exercise price of $5.00 per share to a company as a finders fee and other services performed related to capital raised. The 1,845,287 shares and related options have been treated as an offering expense and have been netted against the total proceeds raised of $1,123,000.

Preferred Series A & B Stock

The Company issued 1,047,588 shares of Series A Preferred Stock and 719,895 shares of Series B Preferred Stock as of December 31, 2005 and 2004. The holders of the Series A and B Preferred Stock are entitled to noncumulative dividends of 8% per annum, on the original issue price of $7.64 per share, when and if declared by the board of directors. The preferred stockholders have a liquidation preference above all other classes of stock equal to $7.64 per share plus all declared and unpaid dividends. The liquidation price per share is subject to adjustment for certain dilutive events, as defined.

At any time, a preferred stockholder has the option to convert their shares into shares of common stock on a basis of three preferred shares for one common share. The conversion rate is subject to adjustment for certain dilutive events, as defined. Shares of Series A & B Preferred Stock automatically converts into common stock upon the closing of an underwritten public offering in which the Company’s per share price is at least $3.00 and the gross proceeds to the Company exceed $7.5 million or upon the election of a majority of the preferred stockholders.

The preferred stockholders are entitled to the number of votes that equals the number of shares of common stock into which such shares could be converted, as defined. The vote or written consent of the majority of the preferred stockholders is required to (i) effect of validate a change in the authorized number of shares of preferred; (ii) a redeem, repurchase, pay dividends or make any other distribution to common stockholders; or (iii) effect any action resulting in the payment or declaration of dividends on any class of stock.

F-10

 
Note 2.   Stockholders’ Deficit (continued)
 
Preferred Series C Shares

During 2003, the Company issued 504,694 Series C Preferred Stock at $1.60 per share. Each share of Series C Preferred Stock is convertible to 3 shares of common stock. Stock issuance costs of $27,506 were offset against the additional paid in capital from the sale of stock.

On October 6, 2003, the Company issued “Option Promissory Notes” (Notes) totaling $605,000. The Notes are convertible to Series C Preferred Stock at the same terms and conditions as the Series C Preferred Stock outstanding on the effective date of the Notes, at any time before the Due Date, in lieu of cash repayment. The current terms are to convert the Notes at $1.60 per share of Series C Preferred Stock.

Additionally, the Notes granted the holder the option to acquire their pro rata share, based on the principal balance of the Note as a percentage of the Aggregate Note, if any, of up to $5 million of equity in Neuralstem, Inc. under the same terms and conditions as the Series C Preferred Stock of an exercise price of $1.60 per share on or before October 6, 2008 (the Option). The price per share of the equity to be purchased under the Option shall increase by 10% on every six month anniversary starting after April 6, 2004. The option may be exercised in whole or in part at any time during the period between the date of the Note and the expiration date of the Option at the Holder’s discretion. The options were valued using the Black-Scholes model for option valuation. The $5 million of equity equates to 3,125,000 shares of Series C Preferred Stock. A beneficial conversion feature of the Notes of $224,712 was recorded to additional paid in capital on October 6, 2003. Interest expense of $10,577 was recorded for the period ended December 31, 2003. The entire beneficial conversion feature was expensed as interest expense in November 2004, as the convertible debt was converted to Preferred Series C shares.

In October 2004, the Company issued additional Notes to officers of the Company in lieu of $479,988 in accrued salary and consulting fees. The new Notes had the same terms and conditions and Options as the Notes issued in 2003 which included the option to acquire their pro rata share of the 3,125,000 shares of the Series C Preferred Stock. The Options for the Notes issued in 2004 were also valued using the Black-Scholes model. The pro-rata portion of the $5 million, 1,093,480 shares of the 3,125,000 are allocated to the new Notes. The beneficial conversion feature allocated to these Notes recorded $6,207 to additional paid in capital on October 25, 2004. This conversion feature was converted to interest expense in November 2004, as the convertible debt was converted to Preferred Series C shares.

In November 2004, the Board of Directors approved the conversion of all Notes to Series C Preferred Stock. In consideration of monthly accrued interest on the Notes and as an incentive for the noteholders to convert the Notes into Series C Preferred Stock, the Company agreed to issue the shares offered in the Option totaling 3,125,000, without consideration which the Company recorded deemed interest expense of $5,000,000 equal to what would otherwise should have been received in cash by the Company if it had not forego the exercise price of such Options. A total of 4,531,079 shares of Series C Preferred Stock were issued in the conversion of the Notes and the Options.

F-11

 
Note 2.   Stockholders’ Deficit (continued)
 
Preferred shares were allocated as follows:
 
 
   
Preferred 
   
Conversion Factor
   
Common
 
Series A
   
1,047,588
   
3-for-1
   
349,197
 
Series B
   
719,895
   
3-for-1
   
239,965
 
Series C
   
4,531,079
   
1-for-3
   
13,593,237
 
     
6,298,562
         
14,182,399
 
 
In 2005, the shareholders of preferred series A, B and C, totaling 6,298,562 shares were converted into 14,182,399 shares of common stock. As of December 31, 2005, there were no outstanding preferred shares.

Stock Options

In 1997, the Company adopted a stock incentive plan (the Plan) to provide for the granting of stock awards, such as stock options and restricted common stock to employees, directors and other individuals as determined by the Board of Directors. The Company reserved 2.7 million shares of common stock for issuance under the Plan. At December 31, 2002, 816,084 options were outstanding with 216,040 options exercisable. During 2003, the Company reduced operations and terminated employment with all employees. The Plan was discontinued, terminating all options outstanding.

In July 2005, the Company granted options for 2,400,000 shares of common stock to two of its officers with an exercise price of $0.50 vesting annually on the anniversary grant date over a four year period with a ten year life which non were vested as of December 31, 2005. The fair value of these options under the Black-Scholes option pricing model totaled $0.03 per share. The assumptions used in arriving at the fair value of these options under the Black-Scholes option pricing model include stock price of $0.50 at the date of grant; expected life of 1.5 years; volatility of 1%; and discount rate of 4.1%.

Stock Warrants

During the year ended December 31, 2005, the Company issued options to various consultants for 455,000 shares of common stock with an exercise price of $0.50 expiring September 1, 2010. The options were issued for consulting services performed which had been valued at approximately $10,000 and expensed for the year ended December 31, 2005. The options were valued using the Black Scholes option pricing model based on the following assumptions: stock price of at date of issuance of $0.50; expected life of 1.5 years; volatility rate of 1%; and discount rate of 4.1%.

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

F-12

 
Note 2.   Stockholders’ Deficit (continued)
 
The following table summarizes information about stock warrants at December 31, 2005 which all are currently exercisable:
     
Exercise Price
   
Outstanding Warrants
   
Expiration Date
 
$10.00
   
100,000
   
2006
 
$ 0.50
   
1,000,000
   
2007
 
$ 0.50
   
320,000
   
2008
 
$ 0.50
   
330,000
   
2010
 
$ 0.05
   
49,000
   
2015
 
$ 2.00
   
100,000
   
2015
 
$ 5.00
   
1,000,000
   
2016
 

Net loss per common share

Net loss per share is calculated in accordance with SFAS No. 128, “ Earnings Per Share. ” The weighted-average number of common shares outstanding during each period is used to compute basic loss per share. Diluted loss per share is computed using the weighted averaged number of shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. Dilutive loss per share is excluded from the calculation because the effect would be anti-dilutive.
 
Note 3.   Property and Equipment
 
The major classes of property and equipment   consist of the following:

   
2005
 
2004
 
Computers and office equipment
 
$
301,892
 
$
300,053
 
Lab equipment
   
524,336
   
507,836
 
   
$
826,228
 
$
807,889
 
Less accumulated depreciation and amortization
   
(797,090
)
 
(746,820
)
Property and equipment, net
 
$
29,138
 
$
61,069
 
 
Depreciation expense for the years ended December 31, 2005 and 2004 was $50,270 and $153,800, respectively. During year ended December 31, 2004, the Company sold certain lab equipment which resulted in a loss totaling $842, 719 and has been reflected in the accompanying statements of operation within nonoperating income (loss).

F-13

 
Note 4.   Intangible Assets
 
The Company holds patents related to its stem cell research. Patent filing costs were capitalized and are being amortized over the life of the patents. The company has determined that the intangibles purchased have a seventeen year useful life. The provisions of SFAS No. 142 “Goodwill and Other Intangible Assets”   require the completion of an annual impairment test with any impairments recognized in current earnings. The Company determined that no impairment to the assigned values had occurred. The Company’s intangible assets and accumulated amortization consisted of the following at December 31, 2005 and 2004:
 
   
2005
 
2004
 
 
   
Gross 
   
Accumulated Amortization
   
Gross
   
Accumulated Amortization
 
                           
Patent filing fees
 
$
24,796
 
$
(10,469
)
$
24,796
 
$
(8,816
)

 
Amortization expense for the years ended December 31, 2005 and 2004 was $1,653 and $1,755, respectively.
 
Note 5.   Notes payable
 
As described in Note 2, on October 6, 2003, the Company issued “Option Promissory Notes” (Notes) totaling $605,000, convertible to Series C Preferred Stock. The Notes carry a stated interest rate of 5%, payable quarterly beginning January 1, 2004. Fifty percent of the principal was due on October 3, 2004 and fifty percent due on October 3, 2005. The shares were converted to Series C Preferred Stock in November 2004, without payments of principal or interest on the Notes. As of December 31, 2005, the Note was fully paid.

In April 2005, the Company received a notice from the Department of Economic Development (“DED”) from the County of Montgomery, Alabama whereby provisions of a $40,000 grant received in 2001 were not fully satisfied. As a result, the Company is required to return the grant. In 2004, the Company recorded an accrued liability for this amount. In 2005, the Company reclassified the accrued liability as a note payable since the notice from DED provided provisions for the grant funds to be returned over a five year period, in monthly payments of both principal and interest, interest rate of 5% and maturing in May 2010. As of December 31, 2005, the balance related to this note totaled $37,341.

In November 2001, the Company entered into an agreement with a bank to borrow $625,000. The note was renegotiated in May 2002 to require principal payments of $25,000 per month beginning August 2002 and to accrue interest at the prime rate plus 1.5% with the balance of principal and accrued interest due on December 9, 2002. The note was renegotiated in December 2002 to require principal payments of $25,000 per month through February 2003, increasing to $40,000 per month starting March 2003, and to accrue interest at the prime rate plus 1.5% with the balance of principal and accrued interest due on June 20, 2003. Substantially all of the Company’s assets provide collateral for the borrowings. As of December 31, 2005 and 2004, the balance related to this note totaled $116,255 and $118,000, respectively. The note was paid in 2006, see Note 8.

F-14

 
Note 5.   Notes payable (continued)
 
As of December 31, 2004, stockholder note payable totaling $60,000 is unsecured, bearing no interest and due on demand. In January 2005, the Company satisfied full payment of this note with 120,000 shares of its common stock at $0.50 per share.

Notes payable at December 31, 2005 and 2004 are as follows:
 
   
2005
 
2004
 
Note payable to Bank, interest at prime rate plus $1.5%, due June 20, 2003, collateralized by all assets of the Company and guaranteed by an officer of the Company
 
$
116,255
 
$
118,000
 
Note payable, stockholder
   
-
   
60,000
 
Note payable
   
37,341
   
-
 
     
153,596
   
178,000
 
Current portion of note payable
   
(125,201
)
 
118,000
 
               
Long-term portion of note payable
 
$
28,395
 
$
60,000
 
 
Note 6.   Income Taxes
 
We did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have experienced operating losses since inception. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carryforwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carryforward period.
 
The tax effects (computed at a 35% effective tax rate) of significant temporary differences representing deferred tax assets for December 31, 2005 and 2004 are as follows:
 
   
2005
 
2004
 
Deferred tax assets:
             
Net operating loss carryforward
 
$
8,425,356
 
$
8,118,339
 
Research and development
   
361,860
   
361,860
 
Start-up costs
   
6,276
   
8,368
 
Depreciation
   
30,092
   
30,092
 
Stock Compensation Expense
   
450,318
   
425,659
 
Deferred liabilities
   
47,532
   
47,532
 
Other
   
140,328
   
139,003
 
               
Deferred tax liabilities
   
9,461,762
   
9,130,853
 
Net deferred tax assets
   
-
   
-
 
Valuation allowance
   
(9,461,762
)
 
(9,130,853
)
Net deferred tax asset
 
$
0
 
$
0
 
 
F-15

 
At December 31, 2005, the Company has net operating loss carryforwards of approximately $24.1 million. The Company has also reported certain other tax credits, the benefit of which has been deferred. The Company’s NOL carryforwards and credits will begin to expire in the tax year 2012. The timing and manner in which these net operating loss carryforwards and credits may be utilized in any year by the Company will be limited to the Company’s ability o generate future earning and also may be limited by certain provision of the U.S. tax code.
 
Note 7.   Commitments and Contingencies

In February 2004, the Company entered into a new license agreement (lease) for facilities in Montgomery County Maryland. The term of the license agreement is effective from March 1, 2004 through January 31, 2005. The Company has an option to request renewal of the license for two (2) additional terms of one year each.

The monthly payments for the agreement are for $3,530 per month for the initial term of the agreement. The two renewal terms have monthly payments of $4,271.

On November 1, 2005, the Company amended and extended its employment agreements dated January 1, 1997 with Richard Garr and Karl Johe for an additional seven (7) years which includes a base salary of $240,000 per year for each officer. On July 28, 2005, the Company granted both Mr. Garr and Mr. Johe stock options for 1,200,000 shares of the Company’s common stock each vesting annually over a four year period with an exercise price of $0.50 per share.

Note 8.   Subsequent Events

From January 2006 through February 2006, the Company raised $4,540,000 (net of offering expenses of $460,000) through a Limited Offering Memorandum. Each Unit sold consisted of one share of common stock, ½ “A” Warrant to Purchase A share of Common Stock at $1.50 per share, and ½ ‘B” Warrant to Purchase A Share of Common Stock at $2.00 per share.

In March 2006, the Company paid off in full a note payable totaling $116,255 as of December 31, 2005, plus interest accrued during 2006, as described in Note 5.

Note 9.   Restatements

For the year ended December 31, 2005, the Company did not account for options for common stock to four consultants resulting in additional expenses of $73,350 to operations.

For the year ended December 31, 2004, the Company did not appropriately account for 3,125,000 shares issued to Option Promissory Notes holder which resulted in an additional $5,000,000 of deemed interest expense to operations as discussed in Note 2.

F-16

 
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Indemnification Of Directors & Officers
 
 The Corporation Laws of the State of Delaware and the Company's Bylaws provide for indemnification of the Company's Directors for expenses actually and necessarily incurred by them in connection with the defense of any action, suit or proceeding in which they, or any of them, are made parties, or a party, by reason of having been Director(s) or Officer(s) of the corporation, or of such other corporation, except, in relation to matter as to which any such Director or Officer or former Director or Officer or person shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of duty.  Furthermore, the personal liability of the Directors is limited as provided in the Company's Articles of Incorporation.
 
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
 
Other Expenses of Issuance & Distribution  
 
The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered:
 
SEC Registration Fee
 
$
2,505.18
 
Financial Printer to EDGARize and Print Registration Statement
   
3,000.00
*  
Tranfer Agent Fees, including Printing and Engraving Stock Certificates
   
1,000.00
*  
Legal Fees and Expense
   
0.00
(1)
Accounting Fees and Expenses
   
15,000.00
*  
Miscellaneous
   
2,000.00
*  
Total
 
$
23,505.18
*  
 
*Estimated
(1)
Legal Fees and Expenses associated with the filing of this registration are being paid for by Regal One Corporation pursuant to their agreement with the Company.
 
Recent Sales of Unregistered Securities
 
The following information is given with regard to unregistered securities sold during the preceding three years, to June 16, 2006, including the dates and amounts of securities sold, the persons to whom we sold the securities, the consideration received in connection with such sales and, if the securities were issued or sold other than for cash, the description of the transaction and the type and amount of consideration received.  
 
·  
On October 6, 2003, we sold “Option Promissory Notes” totaling $605,000 to a group of accredited investors. The notes are convertible into series C preferred stock at any time before the maturity date. The notes also contain an option allowing the holder to purchase up to $5 million of equity under the same terms and conditions as the series C preferred stock.
 
49

 
·  
In October of 2004, we issued additional “Option Promissory Notes” in lieu of $479,988 in accrued salary and consulting fees to our officers, directors and consultants.
 
·  
In late 2004 we issued a note to Stanley Westreich in exchange for $60,000.
 
·  
In November of 2004, we effectuated a 10 for 3 reverse split. The split resulted in an adjustment to the conversion price of the Option Promissory Note and in the conversion rates of the preferred stock. At this time, we also completed the exchange of all the outstanding Option Promissory Notes in shares of our series C preferred stock. At the time, the series C preferred stock was convertible into shares of common stock on a 1 for 3 basis. After the exchange, there were no Option Promissory Notes outstanding.
 
·  
In early 2005, we completed the exchange of all our outstanding preferred shares (Series A, B & C) into shares of common stock. The exchange ratio was as follows:
 
Series
 
Conversion Ratio
 
Common Shares Issued
Preferred A
 
3-for-1
 
     349,197
Preferred B
 
3-for-1
 
     239,965
Preferred C
 
1-for -3
 
13,593,237
 
After the exchange, there were no shares of preferred stock outstanding.
 
·  
On March 21, 2005, we issued Thomas Freeman, M.D. an option to purchase 49,000 common shares at $.05 per shares pursuant to a scientific advisory letter of agreement. These options vest as follows: (i) 25,000 options vest immediately; and (ii) 24,000 options vest monthly at a rate of 2,000 per month for so long as Mr. Freedman continues to provide us services. The option will expire if not exercised within 12 years.

·  
On March 22, 2005, we converted a note payable to Stanley Westreich in the amount of $60,000, and all accrued interest thereon, into 120,000 shares of our common stock.

·  
On May 23, 2005, we granted Richard A. Hull, PhD warrants to purchase 100,000 common shares at $2.00 per share as consideration for services to be provided pursuant to a business advisory services contract. The warrants allow for cashless exercise and contain certain anti-dilution and price adjustment provisions for stock splits, dividends and recapitalizations. The warrants are fully vested on the grant date and expire if not exercised 10 years after the Company’s securities start trading on a national exchange or over the counter.
 
·  
On July 28, 2005, we issued to Karl Johe, our Chief Scientific Officer, options to purchase 1,200,000 common shares at $.50 per share. These options vest annually at a rate of 300,000 per year and will expire if not exercised within ten years. Additionally, these options are subject to certain accelerated vesting conditions more fully described in Mr. Johe’s employment agreement attached as an exhibit to this prospectus.

·  
On July 28, 2005, we issued to I. Richard Garr, our Chief Executive Officer, options to purchase 1,200,000 common shares at $.50 per share. These options vest annually at a rate of 300,000 per year and will expire if not exercised within ten years. Additionally, these options are subject to certain accelerated vesting conditions more fully described in Mr. Garr’s employment agreement attached as an exhibit to this prospectus.
 
  ·  
On September 15, 2005, we issued Regal One Corporation, 1,845,287 shares of our common stock and a warrant to purchase an additional 1,000,000 common shares at $5.00 per share. The shares and warrant were issued in exchange for services as well as Regal One Corporation’s commitment to finance certain costs and expense relating to our funding and the filing of this registration statement.
 
·  
On September 26, 2005, we completed the private placement of 1,272,000 common shares to a group of investors at a per share price of $.50. Gross proceeds from the offering totaled $636,000.
 
50

 
·  
On October 15, 2005, we granted the J.D. Group, LLC warrants to purchase 1,000,000 common shares at $.50 per share as consideration for services to be provided pursuant to a business advisory services contract. The warrants allow for cashless exercise and contain certain anti-dilution and price adjustment provisions for stock splits, dividends and recapitalizations. The warrants are fully vested on the granted date and expire 9 months after the Company’s common shares begin trading on a national exchange or over the counter.

·  
On November 1, 2005, we issued Equity Communications, LLC an option to purchase 330,000 common shares at $.50 per share pursuant to an amended financial public relations service agreement. These options vest immediately and expire if not exercised by November 1, 2010.

·  
On November 7, 2005, we issued to a consultant 120,000 shares of our common stock in fully satisfaction of consulting fees earned and not paid, including interest thereon, in the amount of $60,000. As additional consideration, we also issued the consultant an option to purchase 120,000 shares at $.50 per share. The option is fully vested and expires three years from the grant date if not exercised.

·  
On November 7, 2005, we converted a note in the amount of $100,000 to 200,000 shares of our common stock. As additional consideration, we also issued the note holder an option to purchase 200,000 shares at $.50 per share. The option is fully vested and expires three years from the grant date if not exercised.
 
·  
On November 14, 2005, we issued Einhorn Associates 78,000 common shares pursuant to a settlement agreement related to fees and services performed.
 
·  
On December 23, 2005, we completed the private placement of 1,000,000 common shares to a group of investors at a per share price of $.50. Gross proceeds from the offering totaled $500,000.
 
·  
On March 3, 2006, we completed a private placement through T.R. Winston & Company pursuant to which we sold 5,000,000 units to 64 investors at a price of $1.00 per unit, for gross proceeds of $5,000,000. Each unit sold consists of:

·  
1 common share;
·  
½ class “A” warrant to purchase common shares; and
·  
½ class “B” warrant to purchase common shares.

In total, we issued 5,000,000 common shares and 2,500,000 class “A” warrants and 2,500,000 class “B” warrants. The class “A” warrants are exercisable at $1.50 per share and the class “B” warrants are exercisable at $2.00 per share. Both class “A” and “B” warrants are redeemable by the company upon the occurrence of certain events.

·  
On March 3, 2006, under the terms of our selling agent agreement with T.R. Winston & Company, we issued a placement agent warrant to purchase 800,000 common shares at $1.10 per share.

51

 
Exhibits  
 
        The following exhibits are included as part of this Form SB-2. References to "the Company" in this Exhibit List mean Neuralstem, Inc., a Delaware corporation.

Exhibit Number
 
  Description
3.1
 
Articles of Incorporation of Neuralstem, Inc., as amended
3.2
 
Corporate Bylaws for Neuralstem, Inc.
4.1
 
Option & Promissory Note Agreement between Neuralstem, Inc. and Stanley Westreich, dated October 6, 2003
4.2
 
2005 Stock Option Plan
4.3
 
Form of Stock Lockup Agreement
4.4
 
Non-qualified Stock Option Agreement between Neuralstem, Inc. and Richard Garr, dated July 28, 2005
4.5
 
Non-qualified Stock Option Agreement between Neuralstem, Inc. and Karl Johe, dated July 28, 2005
4.6
 
Equity Investment and Share Purchase Agreement between Neuralstem, Inc. and Regal One Corporation, effective June 22, 2005 and amended September 15, 2005
4.7
 
Form of $5.00 Option
4.8
 
September 2005 Stock Subscription Agreement
4.9
 
Consulting Fee Conversion Agreement and Stock Option Grant between Neuralstem, Inc. and Merrill Solomon, dated November 7, 2005
4.10
 
Debt Conversion Agreement and Stock Option Grant between Neuralstem, Inc. and Stanley Westreich , dated November 7, 2005.
4.11
 
Common Stock Purchase Agreement between Neuralstem, Inc. and High Tide, LLC and Steven B. Dunn, dated December 23, 2005
4.12
 
March 5, 2006 Private Placement Memorandum
4.13
 
Form of Placement Agent Warrant
4.14
 
Form of $1.50 Warrant (Series “A”)
4.15
 
Form of $2.00 Warrant (Series “B”)
5.1
 
Legal opinion and consent of Dieterich and Associates
10.1
 
Employment Agreement between CNS Stem Cell Technology, Inc. and I. Richard Garr, dated January 1, 1997 and Amendment, dated November 1, 2005
10.2
 
Employment Agreement between CNS Stem Cell Technology, Inc. and Karl Johe, dated January 1, 1997 and Amendment, dated November 1, 2005
 
52

 
10.3
 
Material Transfer and Research Agreement between Neuralstem, Inc. and the Regents of the University of John Hopkins, dated March 2, 2001
10.4
 
Research Agreement between Neuralstem, Inc. and the Regents of the University of California, San Diego, dated May 15, 2002
10.5
 
License Agreement between Neuralstem, Inc. and the Maryland Economic Development Corporation, dated Febraury 1, 2004, and Amendment, dated March 14, 2004
10.6
 
Non-Exclusive Limited License and Material Transfer Agreement between Neuralstem, Inc. and A-T Children’s Project, dated December 22, 2004
10.7
 
Exclusive License Agreement between Neuralstem, Inc. and Biomedical Research Models, Inc., dated February 7, 2005 and Amendment, dated May 20, 2006
10.8
 
Scientific Advisory Letter & Stock Option Agreement between Neuralstem, Inc. and Thomas Freemen, dated March 21, 2005
10.9
 
Laboratory Services and Confidentiality Agreement between Neuralstem, Inc. and Biopharmaceutical Services, a division of Charles River Laboratories, dated May 11, 2005
10.10
 
Business Advisory Services and Warrant Agreement between Neuralstem, Inc. and Richard A. Hull, PhD, dated May 23, 2005
10.11
 
Limited Exclusive License Agreement between Neuralstem, Inc. and High Med Technologies, Inc., dated July 7, 2005
10.12
 
Consulting Agreement for Financial Public Relations Services and Non-Qualified Stock Option as Amended between Neuralstem, Inc. and Equity Communications, LLC, dated August 29, 2005 and November 1, 2005
10.13
 
Research Agreement between Neuralstem, Inc. and the Regents of the University of Southern Florida, dated September 21, 2005
10.14
 
Business Advisory Services and Warrant Agreement between Neuralstem, Inc. and the J.D. Group, LLC, dated October 15, 2005
10.15
 
Consulting Fee Conversion Agreement between Neuralstem, Inc. and Einhorn Associates, Inc., dated November 14, 2005
10.16
 
Lease of Vivarium Room between Neuralstem Inc. and Perry Scientific, dated February 14, 2006
10.17
 
Research Agreement between Neuralstem, Inc. and the Regents of the University of Central Florida, dated March 1, 2006
14.1
 
Neuralstem Code of Ethics
23.1
 
Consent of Dieterich & Associates (included with Exhibit 5.1)
23.2
 
Consent of Neuralstem’s Auditors
99.1
 
Grant Number 1 R43 MH071958-01A2 from the National Institute of Mental Health to Neuralstem, Inc., issued September 30, 2005
99.2
 
Grant Number 3 R43 MH071958-01A2S1 from the National Institute of Mental Health to Neuralstem, Inc., issued November 22, 2005
99.3
 
Award Conditions and Information for National Institute of Health Grants
  
53

 
Undertakings
 
The undersigned registrant hereby undertakes to:
 
(1)     File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:   
 
        (i) Include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act");
 
        (ii) Reflect in the Prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and 
 
        (iii) Include any additional or changed material information on the plan of distribution.   
 
(2)     For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
 
(3)     File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.   
 
(4)     For purposes of determining any liability under the Securities Act, treat the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective.   
 
(5)     For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of Prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.   
 
        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.   
 
        In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
54

 
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB−2 and authorizes this registration statement to be signed on its behalf by the undersigned on June 19, 2006.
     
  NEURALSTEM, INC.
 
 
 
 
 
 
  By:   /s/  I Richard Garr
 
I. Richard Garr
Chief Executive Officer and Chief Financial Officer
(principal accounting and financial officer)
   

55


 





CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
NEURALSTEM
(Incorporated under the laws of the State of Delaware on February 28, 2001)
 
Neuralstem, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
 
FIRST : The name of the corporation is; Neuralstem, Inc.  ("Corporation"').
 
SECOND :  The Certificate of Incorporation of the Corporation, as amended, is hereby amended by striking out Article IV, Paragraph A thereof and by substituting in lieu   of said Article IV Paragraph A the following new Article IV Paragraph A:
 
The total number of shares of capital stock   which the Corporation shall have authority to issue is Eighty-Two million (82,000,000) shares consisting of Seventy-Five Million (75,000,000) shares of Common Stock, par value one cent ($.01) per share and Seven Million (7,000,000) shares of Preferred Stock, par value One cent ($.01) per share."
 
THIRD:   This amendment has been consented to and authorized by the holders of a majority of the issued and outstanding stock entitled to vote . by written consent given in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware.
 
FOURTH:   This amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware.
 
IN WITNESS WHEREOF, this corporation has caused this Certificate of Amendment to be signed by I. Richard Garr, its Chief Executive officer, the 27 day of June 2005.
 

 
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF DESIGNATIONS OF
SERIES C PREFERRED STOCK
OF
NEURALSTEM, INC.
 
NEURALSTEM. INC., a corporation organized and existing under the General Corporation  Law of the State of Delaware (the” DGCL” ),  DOES HEREBY CERTIFY THAT:
 
FIRST:   The name of the corporation is NEURALSTEM, INC. (the "Corporation")
 
SECOND:   This Certif i cate of Amendment (this "Certificate of Amendment”) to Certificate of Designations”   of Series C Preferred Stock of the Corporation (the “Certificate of Designations”) has been duly approved  by the Board of Directors of the Corporation, acting in accordance with the provisions  of Sections 141 and 242 of the DGCL.
 
THIRD:   The holders of a majority of the Corporation's Series C Convertible Preferred Stock, par value $0.01 per share waived notice of the time, place and purpose of special meeting of the stockholders and duly approved this Certificate of Amendment by written consent in accordance with Sections 228 and 242 of The DGCL.
 
FOURTH:   The Certificate of Designations of the Corporation is hereby amended by striking out the second paragraph thereof and by substituting in lieu of said second paragraph   the following new paragraph:
 
"RESOLVED,  that of the 7,000,000 shares of Preferred Stock authorized to be issued by the Company, 4,600,000 of such shares are hereby designated as Series C Preferred Stock, per value one cent ($0.01) per share (such series being hereinafter called the "Series C Preferred”), and the designation,  preferences. qualifications, privileges,  limitations, options, conversion rights and other special rights, in addition to those set forth in the Company's Certificate of Incorporation, as amended, of the Series C Preferred are hereby fixed as follows:"
 
FIFTH: The Certificate of Designations of the Corporation is hereby amended by adding the following section as a new Section 4(i)(iv)(7) immediately following Section 4(i)(iv)(6) of the Certificate of Designations:
 
"(7) shares of Common Stock   and/or options, warrants or  other Common Stock purchase rights (and the Common Stock issued pursuant to such options, warrants or other rights) issued pursuant to agreements approved by holders of at least a majority of the outstanding shares of the Series C  Preferred
 
IN WITNESS WHEREOF.   Neuralstem, Inc. has caused this Certificate . of Amendment to be executed by 1. Richard Garr, its President and Chief Executive officer. this 27   day or June, 2005.
 

 
NEURALSTEM, INC.
 
The Undersigned  President  of Neuralstem, Inc, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows;
 
I.         The name of the Corporation is Neuralstem, Inc.
 
II.        The date the Corporation filed its original  Certificate  of Incorporation with the Secretary of State of the State of Delaware   was February 28, 2001.
 
III.      This Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware (the “DGCL”) . The    written consent of the stockholders of the Corporation was obtained pursuant to Section 228 of the DGCL.
 
IV.      Effective as of the date and time this Amended and Restated Certificate of Incorporation is filed with the Secretary of State of the State of Delaware, every ten (10) shares of the  Company’s Common Stock outstanding shall be combined into three (3) shares of Common  Stock described herein (the "Reverse Split”). No fractional shares of Common Stock shall be issued in connection with the Reverse Split.  All shares of Common Stock s0 combined that are held by stockholder shall be aggregated subsequent to the foregoing Reverse Split.  In lieu of any interest in a fractional share of Common Stock resulting from such aggregation, the Company shalt pay a cash amount to such stockholder equal to the fair value of such fractional share (as determined in good faith by the Board of Directors), rounded up to the  nearest whole $0.01.
 
V.        The text of the Certificate of Incorporation is hereby amended and restated in entirety to read as follows:
 
The name of this corporation is Neuralstem, Inc.
 
The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, New Castle County, Wilmington, DE. 19801, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company.
 
The. purpose of Ibis corporation is to engage in any lawful act or activity for which a corporation may be organized under fiber Delaware General Corporation Law ("DGCL”).
 
iv
 
A.         The total  number of shares of capital stock which  the Corporation shall have authority to issue is eighty two million (82,000,000) shares consisting  of Seventy five Million (75,000,000) shares of Common Stock, par value one cent ($.01) per share and Seven Million (7.000,000) shares of Preferred Stock, par value one cent ($0.01) per share.
 

 
B.        The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares of Common Stock then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation (voting together on an as-if-converted basis).
 
C.         The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated, in this Certificate of Incorporation, to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued  series of Preferred Stock. and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series prior or subsequent to the issue of shares of that series, but not below the number of such     series then outstanding.  In case the number of shares of any series shall be so decreased, the shares constituting such a decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.
 
A.        The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by the Board of Directors in the manner provided in the Bylaws.
 
B.
 
C.        The board of Directors is expressly empowered to adopt, amend  or repeal the Bylaws of the corporation, The stockholders shall also have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that in addition to any vote of the holders of any class or series of stock of the corporation required by law or by this Certificate or Incorporation, the affirmative vote of the holders of at least a majority of the voting power or all of the then-outstanding shares of the capital stock of  the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the corporation.
 
vi
 
A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. If the DGCL Is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.
 
B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.
 
VII
 
The corporation reserves the right to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, In the manner now or hereafter prescribed by statute, and all rights conferred
upon the stockholders herein are granted subject to this reservation.
 
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
 
3.

 
The undersigned further affirms, under   penalties of perjury, that this instrument is his act and deed or the act and deed of the Corporation and that the facts set forth in this Amended and Restated Certificate of incorporation are true and correct.
 

 

























































































EQUITY INVESTMENT AND
SHARE PURCHASE AGREEMENT

This Equity Investment and Share Purchase Agreement (the 'Agreement') originally effective June 22, 2005, (the "Closing Date"), is hereby amended and restated this 15 th day of September, 2005 by and between REGAL ONE CORPORATION, a corporation organized under the laws of Florida ("RONE"), having its principal offices at 11300 West Olympic Blvd., Suite 800, Los Angeles, California 90064, and NEURALSTEM, INC., a Delaware corporation ("NEURALSTEM"), having its principal offices at 9700 Great Seneca Highway, Rockville, Maryland 20850.

RECITALS:
 
NEURALSTEM is a development stage company engaged in stem cell research and the therapeutic application of stem cells; and
 
To further its business plans and raise needed capital, NEURALSTEM is seeking to sell its common shares in a private placement and to accelerate the registration of its shares for public trading through an SB-2 Registration filing with the SEC, and
 
It is the intention of the parties hereto that RONE shall either directly or through its assigns acquire equity interests in NEURALSTEM for a minimum of $500,000 in cash, payable according to a pre-agreed share purchase schedule and other good and valuable consideration, and
 
The boards of directors of RONE and NEURALSTEM deem it to be in the best interest of RONE and NEURALSTEM to proceed with these actions.
 
NOW, THEREFORE, in consideration of the mutual   covenants, agreements , representations and warranties contained in this Agreement, the parties hereto agree as follows:
 
SECTION 1.   PURCHASE OF SHARES AND OTHER CONSIDERATIONS

1. Purchase of   Shares
 
 
1.1
On or before September 20, 2005, RONE or other investors facilitated by RONE, shall purchase between $200,000 and $500,000 of NEURALSTEM common stock at a price of fifty cents per share, following a forward split of NEURALSTEM common stock to create 16,607,588 issued and outstanding shares

 
1.2
Upon the closing of this Agreement, NEURALSTEM will transfer to RONE 1,845,287 shares (10% of the total of 18,452,875 shares which will then be shown as issued and outstanding   at the closing), in exchange for facilitating and paying for the SB-2 Registration and for arranging investments in   NEURALSTEM by the investment community.

1.3
In addition, RONE will be granted a warrant to purchase 1,000,000 shares of NEURALSTEM at a purchase price of $5.00 per share; this warrant will be valid for ten years from the earlier of i) the date the SB-2 statement is effective, or ii) December 31, 2006. NEURALSTEM agrees to grant RONE unlimited piggy back registration. The warrants shall also contain a provision making them callable by the Company in the event that the shares trade at a price of at least $6.00 per share for ten (10) consecutive trading days.

 
1.4
Prior to the date of filing the registration, RONE or other investors facilitated by RONE intend to invest an overall minimum amount of $3,000,000 in NEURALSTEM stock . The purchase price for shares purchased after those described in Section 1.1 is anticipated to be $1.00 per share; however , both parties agree that NEURALSTEM will sell these shares at a lower price if required, to achieve at least $2,000,000 of investment prior to the SB-2 filing.
 
1.5
Restricted Securities. The Common Stock issued by NEURALSTEM has not been registered under the Securities Act of 1933, as amended (the “Securities Act"), and may not be re-sold unless the resale thereof is registered under the Securities Act or an exemption from such registration is available. Each certificate representing the Common Stock will have a legend thereon in substantially the following form:
 

 
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT''), OR ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED UNLESS REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE LAW OR PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
 
 
1.6
Board of Directors. RONE shall have the right, but not the obligation, to occupy a seat on the Board of Directors of NEURALSTEM   for one three-year term.
 
1.7
Employment Contracts. Other Consideration. Richard Garr and Dr. Karl Johe will sign seven year employment contracts with non-compete provisions.

SECTION 2.   REPRESENTATIONS AND WARRANTIES OF NEURALSTEM AND SHAREHOLDERS
 
NEURALSTEM hereby represents and warrants on or before the First Closing date as follows :
 
 
2.1  
Organization and Good Standing. NEURALSTEM is an entity, duly organized, validly existing and in good standing under the laws of Delaware. The company has the corporate power and authority to carry on its business as presently conducted, and is qualified to do business in all jurisdictions where the failure to be so qualified would have a material adverse effect on its business.

 
2.2
Corporate Authority. NEURALSTEM has the power to operate as a corporation and to perform any corporate obligations hereunder. The execution and delivery of this Agreement by NEURALSTEM, and the consummation of the transactions contemplated hereby, do not violate any State, Governmental or corporate restrictions governing these transactions, The execution and performance of this Agreement, will not constitute a breach of any agreement, indenture, mortgage, license or other instrument or document to which NEURALSTEM is a party and will not violate any judgment, decree, order, writ, rule, statute, or regulation applicable to NEURALSTEM or its properties. The execution and performance of this Agreement will not violate or conflict with any provision of the laws of the State of Delaware.

 
2.3
Capitalization and the NEURALSTEM Shares. The total authorized capital of NEURALSTEM consists of 75,000,000 shares of common stock, of which 18,452,875 shares are issued (including RONE fee of 1,845,287 shares) and outstanding and 7,000,000 shares of preferred stock, of which none is issued and outstanding. There are no options , warrants, or other rights to equity interests outstanding other than those disclosed in the accompanying option table. NEURALSTEM reserves the right to implement stock compensation plans and traditional ESOP programs for new additions to its Board of Directors, Advisory Board members, and key executive hires.

 
2.4  
Receipt of Corporate Information, Independent Investigation, Access . RONE information is available to NEURALSTEM via the EDGAR website. NEURALSTEM acknowledges that they, in making the decision to go forward as set forth in this Agreement, have relied upon independent investigations made by them or their representatives, if any, and they have been given access to and the opportunity to examine all material contracts and documents relating to this Agreement and an opportunity to ask questions of, and to receive information from, RONE or any person acting on its behalf concerning the terms and conditions of this Agreement. NEURALSTEM and its advisors, if any, have received complete and satisfactory answers to any such inquiries.

2.5
Financial Statements: Books and Records . NEURALSTEM will provide unaudited financial statements of the Company as of June 30, 2005 (the NEURALSTEM Financial Statements"). These NEURALSTEM Financial Statements will be attached as Schedule 2.5 and shall fairly represent the financial position of NEURALSTEM at those dates and the results of their operations for the periods then ended. The NEURALSTEM Financial Statements will be prepared in accordance with generally accepted GAAP accounting standards.
 

 
 
2.6
Approvals. No approval, authorization, consent, order or other action of, or filing with, any person, firm or corporation or any court, administrative agency or other governmental authority is required in connection with the execution and delivery of this Agreement by NEURALSTEM.

2.7
No Material Adverse Changes. Since June 30, 2005 there has not been:
 
(i) any material adverse change in the financial position of NEURALSTEM except changes arising in the ordinary course of business, which changes will in no event materially and adversely affect the financial position of NEURALSTEM;
 
(ii) any damage, destruction or loss materially affecting the assets, prospective business, operations or condition (financial or otherwise) of NEURALSTEM whether or not covered by insurance;
 
(iii) any declaration, setting aside or payment of any dividend or distribution with respect to any redemption or repurchase of NEURALSTEM capital interests;
 
(iv) any sale of an asset (other than in the ordinary course of business) or any mortgage or pledge by NEURALSTEM of arty properties or assets; Or
 
(v) adoption of any pension, profit sharing, retirement, stock bonus, stock option or similar plan, or arrangement, except those listed in the Schedule attached to this Agreement and/or delivered to RONE.

 
2.8
No Breach. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not:
 
(i) violate any provision of the Articles of Incorporation or the Bylaws of NEURALSTEM;
 
(ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time, or both constitute) a default under any contract or other agreement to which NEURALSTEM is a party or by or to which it or any of its assets or properties may be bound or subject;
 
(iii) violate any order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body against, or binding upon, NEURALSTEM or upon the properties or business of NEURALSTEM; or
 
(iv) violate any statute , law or regulation of any jurisdiction applicable to the transactions contemplated herein which could have a material, adverse effect on the business or operations of NEURALSTEM.
 
 
2.9
Actions and   Proceedings. NEURALSTEM is not   a party to any material pending litigation or, to the knowledge of the shareholders, after reasonable inquiry, any governmental investigation or proceeding not reflected in the NEURALSTEM Financial Statements and, to their best knowledge, no material litigation, claims, assessments or non-governmental proceedings are threatened against NEURALSTEM.

2.10
Operations of NEURALSTEM. From the date of the Financial Statement through the Date of Closing, NEURALSTEM has not and will not, outside of the ordinary course of business, have:
 
(i) incurred any indebtedness or borrowed money; except as disclosed in the exhibits hereto,
 
(ii) declared or paid any dividend or declared or made any distribution of any kind to any Shareholder, or made any direct or indirect redemption, retirement, purchase or other acquisition of any interests in its capital structure;
 
(iii) made any loan or advance to any shareholder, officer, director, employee, consultant, agent or other representative or made any other loan or advance;
 

 
(iv) disposed of any assets of NEURALSTEM ;
 
(v) materially increased the annual level of compensation of any executive employee of NEURALSTEM;
 
(vi) increased, terminated, amended or otherwise modified any plan for the benefit of employees of NEURALSTEM;
 
(vii) issued any equity securities or rights to acquire such equity securities except as listed in the attached Schedule; or entered into or modified any contract, agreement or transaction, outside of the ordinary business of the Company.
 
SECTION 3 . COVENANTS
 
3.1
Corporate Examinations and Investigations. Prior to the Closing Date, the parties acknowledge that they have been entitled, through their employees and representatives, to make such investigation of the assets, properties, business and operations, books, records and financial condition of the other as they each may reasonably require. No investigations, by a party hereto shall, however, diminish or waive any of the representations, warranties, covenants or agreements of the party under this Agreement

 
3.2
Further Assurances. The parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry our the provisions hereof and the transactions contemplated hereby. Each such party shall use its best efforts to fulfill or obtain the fulfillment of the conditions to the Closing, including, without limitation, the execution and delivery of any documents or other papers, the execution and delivery of which are necessary or appropriate to the Closing.

 
3.3
Confidentiality. In the event the transactions contemplated by this Agreement are not consummated, RONE and NEURALSTEM agree to keep confidential any information disclosed to each other in connection therewith for a period of one (1) year from the date hereof; provided however, such obligation shall not apply to information which:
 
(i) at the time of the disclosure was public knowledge;
 
(ii) after the time of disclosure becomes public knowledge (except due to the action of the receiving party); or
 
(iii) the receiving party had within its possession at the time of disclosure: or
 
(iv) is ordered disclosed by a Court of proper jurisdiction

SECTION 4. SURVIVAL OF REPRESENTATIONS AND WARRANTEES
 
Notwithstanding any right of either party to investigate the affairs of the other party and   its Shareholders, each party has the right to rely fully upon representations, warranties, covenants and agreements of the other party and its Shareholders contained in this Agreement or in any document delivered to one by the other or any of their representatives, in connection with the transactions contemplated by this Agreement. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof and the closing hereunder for one year following the Closing.

SECTION 5. MISCELLANEOUS
 
 
5.1
Waivers.   The waiver of a breach of this Agreement or the failure of any party hereto to exercise any right under this Agreement shall in no way constitute waiver as to future breach whether similar or dissimilar in nature or as to the exercise of any further right under this Agreement.

5.2
Amendment. This Agreement may he amended or modified only by an instrument of equal formality signed by the   parties or the duly authorized representatives of the respective parties.


 
5.3
Assignment . This Agreement is not assignable except by operation of law.

5.4
Notice. Until otherwise specified in writing, the mailing addresses and fax numbers of the parties of this Agreement shall be as follows;

TO: REGAL ONE CORPORATION :
c/o Malcolm Currie
28780 Wagon Road
Agoura CA 91301
Fax: (818) 707-6409
Email; mrcurrie@sbcglobal.net
 
with copy to;
Christopher Dieterich
11300 West Olympic Boulevard, Suite 80C) Los Angeles, California 9006.1
Fax: (310) 312-6680
Email: venturelaw @ gmail,com

To: NEURALSTEM:
Richard Garr, President
Neuralstem, Inc.
9700 Great Seneca Highway Rockville MD 20850
Email: irgarr@neuraIstem.com

Any notice or statement given under this Agreement shall be deemed to have been given if sent   by registered mail addressed to the other party at the address indicated above or at such other address which shall have been furnished in writing to the addressor.

 
5.5
Governing Law. This Agreement shall be construed, and the legal relations between the parties determined, in accordance with the laws of the State of California, thereby precluding any choice of law rules which   may direct the application of the laws of any other jurisdiction.

 
5.6
Publicity. No publicity release or announcement concerning this Agreement or the transactions contemplated hereby shall be issued by either party hereto at any time from the signing hereof without advance approval in writing of the   form and substance by the other party.

 
5.7
Entire Agreement. This Agreement and the collateral agreements executed in connection with the consummation of the transactions contemplated herein contain the entire agreement among the parties with respect to the purchase and issuance of the shares and options and related transactions, and supersede all prior agreements, written or oral , with respect thereto.

5.8
Headings. The headings in this Agreement are for reference purposes only and shall not in any way affect   the meaning or interpretation of this Agreement.

5.9
Severability of Provisions . The invalidity or unenforceability of any term, phrase, clause, paragraph, restriction, covenant, agreement or provision of this Agreement shall in no way affect the validity or enforcement of any other provision or any part thereof.

5.10
Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed, shall constitute an original copy hereof, but all of which together shall consider but one and the same document.
 

 
5.11
Binding Effect. This Agreement shall be binding upon the parties hereto and inure to the benefit of the parties, their respective heirs, administrators, executors, successors ad assigns.

5.12
Tax Treatment. Each party acknowledges that they each have been represented by their own tax advisors in connection , in connection with this transaction; that none of them has made a representation or warranty to any of the other parties with respect to the tax treatment accorded this transaction, or the effect individually or corporately on any party under the applicable tax laws, regulations, or interpretations; and that no opinion of counsel or private revenue ruling has been obtained with respect to the effects of this transaction under the Code.

5.13
Press Releases. The parties will mutually agree as to the   wording and timing of any informational releases concerning this transaction prior to and through Closing.

IN WITNESS WHEREOF, the   parties have executed this Agreement on the date first above written :
 
REGAL ONE CORPORATION     NEURALSTEM, INC.
       
       
By:
 

    By:
 

Malcolm Currie,
President/CEO
   
I. Richard Garr
President/CEO
 

 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), HOWEVER THE SHARES THAT WOULD ISSUE HAVE BEEN REGISTERED.   SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.

Option to Purchase

1,000,000 SHARES

NEURALSTEM, INC.

(Incorporated under the laws of the State of Delaware)

OPTION CERTIFICATE FOR THE PURCHASE OF SHARES OF THE $.0001
PAR VALUE
COMMON STOCK OF NEURALSTEM, INC..

VOID FORTY-FIVE DAYS
AFTER  
EFFECTIVE DATE OF INITIAL REGISTRATION STATEMENT

1.    Neuralstem, Inc.. (the "Company'), hereby certifies that, for value received, Regal One Corporation, (referred to herein as the "Holder"), is entitled to purchase, subject to the terms and conditions hereinafter set forth, at anytime from and after the date of this agreement , and on or before the date which is ten (10) years after the execution date of this Agreement or September 15, 2015   (the "Option Period"), up to 1,000,000   shares of the $.001 par value common stock ("Common Stock") of the Company. This Option may be exercised in whole or in part. Such exercise shall be accomplished by tender to the Company of the purchase price of $5.00 per share (the "Option Price"'), either in cash or by certified check or bank cashier's check, payable to the order of the Company, together with presentation and surrender to the Company of this Option with an executed subscription in substantially the form attached hereto as Exhibit A. Fractional shares of the Company's Common Stock will not be issued upon the exercise of this Option. Upon twenty (20) days' prior written notice to all holders of the Options, the Company shall have the right to reduce the exercise price and/or extend the term of the Options.

2.    The Company agrees at all times to reserve and hold available out of the aggregate of its authorized but unissued Common Stock the number of shares of its Common Stock issuable upon the exercise of this and all other Options of like tenor then outstanding. The Company further covenants and agrees that all shares of Common Stock that may be delivered upon the exercise of this Option will, upon delivery, be fully paid and non-assessable and free from all taxes, liens and charges with respect to the purchase thereof hereunder.

3.    This Option does not entitle the Holder to any voting rights or other rights as a shareholder of the Company, nor to any other rights whatsoever except the rights herein set forth, and no dividend shall be payable or accrue by reason of this Option or the interest represented hereby, or the shares purchasable hereunder, until or unless, and except to the extent that, this Option is exercised.
 


4.    The Option Price and the number of shares purchasable upon the exercise of this Option are subject to adjustment from time to time upon the occurrence of any of the events specified in this Section 4.

(a).  
In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its shares of Common Stock other securities of the Company, the number of shares of Common Stock purchasable upon exercise of this Option immediately prior thereto shall be adjusted so that the Holder of this Option shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Company that he would have owned or have been entitled to receive after the happening of any of the events described above, had such Option been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

(b).  
Whenever the number of shares of Common Stock purchasable upon the exercise of this Option is adjusted, as herein provided, the Option Price shall be adjusted by multiplying such Option Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Common Stock purchasable upon the exercise of this Option immediately prior to such adjustment, and of which the denominator shall be the number of shares of Common Stock so purchasable immediately thereafter.

(c).  
For the purpose of this Section 4, the term shares of Common Stock shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Option, or (ii) any other class of stock resulting from successive changes or value to no par value, or from no par value to par value.

(d).  
If during the Option Period the Company consolidates with or merges into another corporation or transfers all or substantially all of its assets the Holder shall thereafter be entitled upon exercise hereof to purchase, with respect to each share of Common Stock purchasable hereunder immediately prior to the date upon which such consolidation or merger becomes effective, the securities or property to which a holder of shares of Common Stock is entitled upon such consolidation or merger, without any change in, or payment in addition to the Option Price in effect immediately prior to such merger or consolidation, and the Company shall take such steps in connection with such consolidation or merger as may be necessary to ensure that all of the provisions of this Option shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or property thereafter deliverable upon the exercise of this Option.
 


(e).  
Irrespective of any adjustments pursuant to this Section 4 to the Option Price or to the number of shares or other securities or other property obtainable upon exercise of this Option, this Option may continue to state the Option Price and the number of shares obtainable upon exercise, as the same price and number of shares stated herein.

5.    The Holder hereby agrees that the resale of the shares of Common Stock issuable upon exercise hereof may be subject to a "lock-up" pursuant to any restrictions reasonably required by any underwriter, if applicable, and to the extent the Company undertakes a secondary offering.

6.    The Company may cause the following legend or one similar thereto to be set forth on each certificate representing the Option unless counsel for the Company is of the opinion as to any such certificate that such legend is unnecessary:

The Options represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act") and are "restricted securities" as that term is defined in Rule 144 under the Act. The Options may not be offered for sale, sold, or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company.

7.    In the event that the Company proposes to file a registration statement under the Act which relates to a current offering of Securities of the Company (except in connection with an offering on Form S-8 or S-4 or any other inappropriate form), such registration statement (and the prospectus included therein) shall also, at the written request to the Company by the Holder, relate to and meet the requirements of the Act with respect to any public offering of the Option Stock shares so as to permit the public sale of all or some portion of the Option Stock. The Company shall give written notice to the Holder of its intention to file a registration statement under the Act relating to a current offering of securities of the Company not less than fifteen (15) days prior to the filing of such registration statement. Any written request of the holder to include the Option Stock shares held by the Holder shall be given to the Company not less than five (5) days prior to the date specified in the notice as the date on which such registration statement is intended to be filed with the Securities and Exchange Commission. Neither the delivery of such notice by the Company nor of such request by the Holder shall obligate the Company to file such registration statement and notwithstanding the filing of such registration statement, the Company may, at any time prior to the effective date thereof, determine to withdraw such registration statement and not offer the securities intended to be offered by the Company to which the registration statement relate, without liability to Holder on account thereof.
 

 
IN WITNESS WHEREOF, the Company has caused this Option to be executed by its duly authorized officers, and the corporate seal hereunto affixed.

DATED: October 15, 2005

NEURALSTEM, INC..
 
By:
I. Richard Garr
President, CEO




SUBSCRIPTION FORM

(To be Executed by the Registered Holder to Exercise the Rights to Purchase Common Stock Evidenced by the Within Option) I, the undersigned, hereby irrevocably subscribe for,  shares (the "Stock") of the Common Stock of Neuralstem, Inc.., (the "Company"') pursuant to and in accordance with the terms and conditions of the attached Option and hereby make payment of $         ($5.00 per share) therefor, and request that a certificate for such securities be issued in the name of the undersigned and be delivered to the undersigned at the address stated below. If such number of securities is not all of the securities purchasable pursuant to the attached Option, the undersigned requests that a new Option of like tenor far the balance of the remaining securities purchasable thereunder be delivered to the undersigned at the address stated below. In connection with the issuance of the securities, I hereby represent to the Company that I am acquiring the securities for my own account for investment and not with a view to, or for resale in connection with, a distribution of the securities within the meaning of the Securities Act of 1933, as amended (the "Act'). I also understand that the Company has registered the Stock under the Act.

Date:

Signed:

Address:

THE SIGNATURE(S) TO THIS SUBSCRIPTION FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE OPTION IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER, AND SUCH SIGNATURE(S) MUST BE GUARANTEED IN ACCORDANCE WITH PRACTICES PREVAILING IN THE SECURITIES INDUSTRY AT THE TIME SUCH SIGNATURE IF PRESENTED TO THE COMPANY.


 





































Common Stock Purchase Agreement

    This Common Stock Purchase Agreement (“Agreement”) is made as of the 23 rd day December of 2005, between Neuralstem, Inc., a Delaware corporation (the “Company”), and the individuals and entities listed on Schedule A (the “Purchaser”).

    WHEREAS, the Company is willing to sell to the Purchaser, and the Purchaser desires to purchase, 1,000,000 shares of the Company's Common Stock, all according to the terms and conditions hereof;

    Now, therefore, the parties agree as follows:

    1.   Sale of Stock.     The Company hereby agrees to sell and issue to the Purchaser, and the Purchaser hereby agrees to purchase from the Company, for a purchase price of $ .50 per share, 1,000,000 shares (the “Shares”) of the Company's Common Stock. The total purchase price to be paid by the Purchaser for the Shares shall be U.S. $ 500,000.

    2.   Payment of Purchase Price .     The purchase price for the Shares shall be due and payable by the Purchaser prior to the transfer of the Shares.

    3.   Issuance of Shares .     Upon receipt by the Company of the purchase price specified above, the Company shall promptly cause the issuance and delivery of a duly executed certificate in the name of the Purchaser evidencing the Shares.

    4.   Representations, Warranties and Agreements of the Purchaser.

      4.1   Authorization .     The Purchaser represents and warrants that this Agreement, when executed and delivered by it, will constitute a valid and legally binding obligation of such Purchaser.

      4.2   Purchase for Own Account .     The Purchaser represents that it is acquiring the Shares solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention. The Purchaser also represents that the entire legal and beneficial interest of Shares it is purchasing is being purchased for the account of the Purchaser only and neither in whole nor in part for any other person, and that any transfer of the Shares will be made in compliance with the Securities Act of 1933, as amended (the “Act”), the California Corporate Securities Law of 1968, as amended, and all other applicable securities laws.

      4.3   Information and Sophistication .     The Purchaser is aware of the Company's business affairs and financial condition, and acknowledges that it has received all the information it has requested from the Company and considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and to obtain any additional information necessary to verify the accuracy of the information given the Purchaser. The Purchaser further represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of this investment.

      4.4   Ability to Bear Economic Risk .   The Purchaser acknowledges that investment in the Shares involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the Shares for an indefinite period of time and to suffer a complete loss on its investment.

    4.5   Restricted Securities .

    (a)   The Purchaser understands that the Shares it is purchasing are not registered under the Act, inasmuch as they are being acquired from the Company in a transaction not involving a public offering, and that such securities may not be resold, transferred or otherwise disposed of without registration under the Act or an exemption therefrom, and further, that the Company is under no obligation to register such securities. The Purchaser understands that the Shares have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of its investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission (the “SEC”), the statutory basis for such exemption may be unavailable if its representation was predicated solely upon a present intention to hold the shares for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Shares, or for a period of one year or any other fixed period in the future.
 

 
    (b)   The Purchaser represents that it is familiar with Rule 144, as presently in effect, which in substance permits limited public resale of “restricted securities” acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, including, among other things: (1) the availability of certain public information about the Company; (2) the resale occurring not less than one year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (3) in the case of an affiliate, or of a non-affiliate who has held the securities less than two years, the sale being made through a broker in an unsolicited “broker's transaction” or in a transaction directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further understands that at the time it may wish to sell the Shares there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, the Purchaser would be precluded from selling the shares under Rule 144 even if the one-year minimum holding period had been satisfied. Notwithstanding the fact that Rule 144 is not exclusive, the Purchaser understands that the staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk.

    4.6   Limitation on Disposition .

    (a)   Without limiting the foregoing, the Purchaser agrees that it will in no event make any disposition of any of the Shares unless and until:

      (i)   there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with said registration statement; or

      (ii)   the Purchaser shall have notified the Company of the details of the proposed disposition and, if the Company so requests, shall have provided the Company with an opinion of counsel satisfactory to the Company to the effect that such disposition will not require registration of the Shares under the Act.

    (b)   The Purchaser understands that the Company's stock transfer records will be noted to reflect the restrictions on transferability of the Shares and that certificates evidencing such securities may bear, in addition to any legend imposed or required pursuant to applicable state securities law, a legend in substantially the following form:
 
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.”
 
2


 
5.   Miscellaneous .

      5.1   Governing Law .     This Agreement shall be governed in all respects by the laws of the State of California, without reference to provisions regarding conflicts of laws.

      5.2   Entire Agreement . This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof and supersedes all prior agreements between the parties with respect to the subject matter hereof. No party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein.

      5.3   Counterparts . This Agreement may be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
[Remainder of Page Intentionally Left Blank]

 
3


In Witness Whereof, the undersigned has executed this Common Stock Purchase Agreement as of the date set forth above.
     
 
NEURALSTEM, INC.
 
 
 
 
 
 
  By:  
 
I. Richard Garr
 
(Signature Page to Common Stock Purchase Agreement)

 
     
Purchasers: High Tide, LLC
 
 
 
 
 
 
  By:  
   
Title: 

   

     
Steven B. Dunn
 
By:  
   
Title: 

   
 
(Signature Page to Common Stock Purchase Agreement)

 
Schedule A

Schedule of Purchasers

Name and Address of Purchaser
 
Accredited Investor
 
Number of Shares
 
Amount of Investment
 
Form of Consideration
                 
High Tide, LLC
1999 Ave of the Stars, Suite 2530
Los Angeles, CA 90067
 
Yes
 
500,000
 
$250,000
 
Cash
                 
Steven B. Dunn
2069 Coldwater Canyon Dr. ,
Beverly Hills , CA 90210
 
Yes
 
500,000
 
$250,000
 
Cash
                 
TOTAL
     
1,000,000
 
$500,000
   
























































































































































 
FORM OF PLACEMENT AGENT WARRANT
 
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
 
NEURALSTEM, INC.
 
Warrant To Purchase Common Stock
 
Warrant No.:
Number of Shares:
 
Date of Issuance: February 23, 2006

Neuralstem, Inc., a Delaware corporation (the “ Company ”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, (insert name of holder ) (“Holder”), the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) ____________   fully paid and nonassessable shares of Common Stock (as defined herein) of the Company (the “ Warrant Shares ”) at the exercise price per share provided in Section 1(b) below or as subsequently adjusted.
 
(a)           This Warrant is the common stock purchase warrant (the “ Warrant ”) issued pursuant to the Subscription Agreement (“ Subscription Agreement ”) dated the date hereof between the Company and the Holder.

(b)            Definitions .  The following words and terms as used in this Warrant shall have the following meanings:

(i)           “ Approved Stock Plan ” means any employee benefit plan which has been approved by the Board of Directors of the Company, pursuant to which the Company’s securities may be issued to any employee, officer or director for services provided to the Company.

1


(ii)           “ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.

(iii)           “ Closing Bid Price ” means the closing bid price of Common Stock as quoted on the Principal Market (as reported by Bloomberg Financial Markets (“ Bloomberg ”) through its “Volume at Price” function).

(iv)           “ Common Stock ” means (i) the Company’s common stock, par value $0.001 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock.

(v)           “ Event of Default ” means an event of default under the Subscription Agreement.

(vi)           “ Excluded Securities ” means, provided such security is issued at a price which is greater than or equal to the arithmetic average of the Closing Bid Prices of the Common Stock for the ten (10) consecutive trading days immediately preceding the date of issuance, any of the following: (a) any issuance by the Company of securities in connection with a strategic partnership or a joint venture (the primary purpose of which is not to raise equity capital), (b) any issuance by the Company of securities as consideration for a merger or consolidation or the acquisition of a business, product, license, or other assets of another person or entity and (c) options to purchase shares of Common Stock, provided (I) such options are issued after the date of this Warrant to employees of the Company within thirty (30) days of such employee’s starting his employment with the Company, and (II) the exercise price of such options is not less than the Closing Bid Price of the Common Stock on the date of issuance of such option.

(vii)           “ Expiration Date ” means the date five (5) years from the Issuance Date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the City of New York or the State of New York or on which trading does not take place on the Principal Exchange or automated quotation system on which the Common Stock is traded (a “ Holiday ”), the next date that is not a Holiday.

(viii)           “ Issuance Date ” means the date hereof.

(ix)           “ Options ” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

(x)           “ Other Securities ” means (i) those options and warrants of the Company issued prior to, and outstanding on, the Issuance Date of this Warrant, (ii) the shares of Common Stock issuable on exercise of such options and warrants, provided such options and warrants are not amended after the Issuance Date of this Warrant and (iii) the shares of Common Stock issuable upon exercise of this Warrant.

(xi)           “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

2


(xii)           “ Principal Market ” means the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, whichever is at the time the principal trading exchange or market for such security, or the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg or, if no bid or sale information is reported for such security by Bloomberg, then the average of the bid prices of each of the market makers for such security as reported in the “pink sheets” by the National Quotation Bureau, Inc.

(xiii)           “ Securities Act ” means the Securities Act of 1933, as amended.  

(xiv)           “ Warrant ” means this Warrant and all Warrants issued in exchange, transfer or replacement thereof.  

(xv)           “ Warrant Exercise Price ” shall be $1.10 or as subsequently adjusted as provided in Section 8 hereof.  

(xvi)           “ Warrant Shares ” means the shares of Common Stock issuable at any time upon exercise of this Warrant.  

(c)           Other Definitional Provisions.  

(i)           Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company’s successors and (B) to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time.  

(ii)           When used in this Warrant, the words “ herein ”, “ hereof ”, and “ hereunder and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words “ Section ”, “ Schedule ”, and “ Exhibit ” shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified.  

(iii)           Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa.  

Section 2.             Exercise of Warrant .  

(a)           Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, pro rata as hereinafter provided, at any time on any Business Day on or after the opening of business on such Business Day, commencing with the first day after the date hereof, and prior to 11:59 P.M. Eastern Time on the Expiration Date (i) by delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto (the “ Exercise Notice ”), of such holder’s election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, payment to the Company of an amount equal to the Warrant Exercise Price(s) applicable to the Warrant Shares being purchased, multiplied by the number of Warrant Shares (at the applicable Warrant Exercise Price) as to which this Warrant is being exercised (plus any applicable issue or transfer taxes) (the “ Aggregate Exercise Price ”) in cash or wire transfer of immediately available funds and the surrender of this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) to a common carrier for overnight delivery to the Company as soon as practicable following such date (“ Cash Basis ”) or (ii) if at the time of exercise, the Warrant Shares are not subject to an effective registration statement or if an Event of Default has occurred, by delivering an Exercise Notice and in lieu of making payment of the Aggregate Exercise Price in cash or wire transfer, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (the “ Cashless Exercise ”):  


3


Net Number = (A x B) - (A x C)
                                      B

For purposes of the foregoing formula:

A = the total number of Warrant Shares with respect to which this Warrant is then being exercised.

B = the Closing Bid Price of the Common Stock on the date of exercise of the Warrant.

C = the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2, the Company shall on or before the fifth (5th) Business Day following the date of receipt of the Exercise Notice, the Aggregate Exercise Price and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) and the receipt of the representations of the holder specified in Section 6 hereof, if requested by the Company (the “ Exercise Delivery Documents ”), and if the Common Stock is DTC eligible, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder’s or its designee’s balance account with The Depository Trust Company; provided, however, if the holder who submitted the Exercise Notice requested physical delivery of any or all of the Warrant Shares, or, if the Common Stock is not DTC eligible  then the Company shall, on or before the fifth (5 th ) Business Day following receipt of the Exercise Delivery Documents, issue and surrender to a common carrier for overnight delivery to the address specified in the Exercise Notice, a certificate, registered in the name of the holder, for the number of shares of Common Stock to which the holder shall be entitled pursuant to such request.  Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in clause (i) or (ii) above the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised.  In the case of a dispute as to the determination of the Warrant Exercise Price, the Closing Bid Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the holder the number of Warrant Shares that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within one (1) Business Day of receipt of the holder’s Exercise Notice.  
 
(b)           If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price or arithmetic calculation of the Warrant Shares within one (1) day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via facsimile (i) the disputed determination of the Warrant Exercise Price or the Closing Bid Price to an independent, reputable investment banking firm or (ii) the disputed arithmetic calculation of the Warrant Shares to its independent, outside accountant.  The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations.  Such investment banking firm’s or accountant’s determination or calculation, as the case may be, shall be deemed conclusive absent manifest error.

4


(c)           Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than five (5) Business Days after any exercise and at its own expense, issue a new Warrant identical in all respects to this Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised.

(d)           No fractional Warrant Shares are to be issued upon any pro rata exercise of this Warrant, but rather the number of Warrant Shares issued upon such exercise of this Warrant shall be rounded up or down to the nearest whole number.

(e)           If the Company or its Transfer Agent shall fail for any reason or for no reason to issue to the holder within ten (10) days of receipt of the Exercise Delivery Documents, a certificate for the number of Warrant Shares to which the holder is entitled or to credit the holder’s balance account with The Depository Trust Company for such number of Warrant Shares to which the holder is entitled upon the holder’s exercise of this Warrant, the Company shall, in addition to any other remedies under this Warrant or the Placement Agent Agreement or otherwise available to such holder, pay as additional damages in cash to such holder on each day the issuance of such certificate for Warrant Shares is not timely effected an amount equal to 0.025% of the product of (A) the sum of the number of Warrant Shares not issued to the holder on a timely basis and to which the holder is entitled, and (B) the Closing Bid Price of the Common Stock for the trading day immediately preceding the last possible date which the Company could have issued such Common Stock to the holder without violating this Section 2.

Section 3.             Covenants as to Common Stock .  The Company hereby covenants and agrees as follows:

(a)           This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued.

(b)           All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof.

(c)           During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least one hundred percent (100%) of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price.  If at any time the Company does not have a sufficient number of shares of Common Stock authorized and available, then the Company shall call and hold a special meeting of its stockholders within sixty (60) days of that time for the sole purpose of increasing the number of authorized shares of Common Stock.

5


(d)           If at any time after the date hereof the Company shall file a registration statement, the Company shall include the Warrant Shares issuable to the holder, pursuant to the terms of this Warrant and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Warrant Shares from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system.

(e)           The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant.  The Company will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.

(f)           This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets.

Section 4.             Taxes .  The Company shall pay any and all taxes, except any applicable withholding, which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.

Section 5.             Warrant Holder Not Deemed a Stockholder .  Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of capital stock of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.  Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders.

6


Section 6.             Representations of Holder .  The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.  The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an “accredited investor” as such term is defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an “ Accredited Investor ”).  Upon exercise of this Warrant  the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the holder’s own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale and that such holder is an Accredited Investor.  If such holder cannot make such representations because they would be factually incorrect, it shall be a condition to such holder’s exercise of this Warrant that the Company receive such other representations as the Company considers reasonably necessary to assure the Company that the issuance of its securities upon exercise of this Warrant shall not violate any United States or state securities laws.

Section 7.             Ownership and Transfer .

(a)           The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee.  The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant.

Section 8.             Adjustment of Warrant Exercise Price and Number of Shares .  The Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows:

(a)            Adjustment of Warrant Exercise Price and Number of Shares upon Issuance of Common Stock .  If and whenever on or after the Issuance Date of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than (i) Excluded Securities and (ii) shares of Common Stock which are issued or deemed to have been issued by the Company in connection with an Approved Stock Plan or upon exercise or conversion of the Other Securities) for a consideration per share less than a price (the “ Applicable Price ”) equal to the Warrant Exercise Price in effect immediately prior to such issuance or sale, then immediately after such issue or sale the Warrant Exercise Price then in effect shall be reduced to an amount equal to such consideration per share.  Upon each such adjustment of the Warrant Exercise Price hereunder, the number of Warrant Shares issuable upon exercise of this Warrant shall be adjusted to the number of shares determined by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment.

7


(b)            Effect on Warrant Exercise Price of Certain Events .  For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable:

(i)            Issuance of Options .  If after the date hereof, the Company in any manner grants any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any convertible securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section 8(b)(i), the lowest price per share for which one share of Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option or upon conversion or exchange of any convertible security issuable upon exercise of such Option.  No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such convertible securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such convertible securities.

(ii)            Issuance of Convertible Securities .  If the Company in any manner issues or sells any convertible securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such convertible securities for such price per share.  For the purposes of this Section 8(b)(ii), the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the convertible security and upon conversion or exchange of such convertible security.  No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such convertible securities, and if any such issue or sale of such convertible securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale.

8


(iii)            Change in Option Price or Rate of Conversion.  If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any convertible securities, or the rate at which any convertible securities are convertible into or exchangeable for Common Stock changes at any time, the Warrant Exercise Price in effect at the time of such change shall be adjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or convertible securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of Warrant Shares issuable upon exercise of this Warrant shall be correspondingly readjusted.  For purposes of this Section 8(b)(iii), if the terms of any Option or convertible security that was outstanding as of the Issuance Date of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or convertible security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment pursuant to this Section 8(b) shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect.

(c)            Effect on Warrant Exercise Price of Certain Events .  For purposes of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the following shall be applicable:

(i)            Calculation of Consideration Received .  If any Common Stock, Options or convertible securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefore will be deemed to be the net amount received by the Company therefore.  If any Common Stock, Options or convertible securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the market price of such securities on the date of receipt of such securities.  If any Common Stock, Options or convertible securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefore will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or convertible securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding.  If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “ Valuation Event ”), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10 th ) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding.  The determination of such appraiser shall be final and binding upon all parties and the fees and expenses of such appraiser shall be borne jointly by the Company and the holders of Warrants.

9


(ii)            Treasury Shares .  The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock.

(iii)            Record Date .  If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in convertible securities or (2) to subscribe for or purchase Common Stock, Options or convertible securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(d)            Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock .  If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, any Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased.  If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, any Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant will be proportionately decreased.  Any adjustment under this Section 8(d) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(e)            Distribution of Assets .  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or other similar transaction) (a “ Distribution ”), at any time after the issuance of this Warrant, then, in each such case:

(i)           any Warrant Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled   to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Warrant Exercise Price by a fraction of which (A) the numerator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (B) the denominator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date; and
(ii)           either (A) the number of Warrant Shares obtainable upon exercise of this Warrant shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding clause (i), or (B) in the event that the Distribution is of common stock of a company whose common stock is traded on a national securities exchange or a national automated quotation system, then the holder of this Warrant shall receive an additional warrant to purchase Common Stock, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the amount of the assets that would have been payable to the holder of this Warrant pursuant to the Distribution had the holder exercised this Warrant immediately prior to such record date and with an exercise price equal to the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding clause (i).

10


(f)            Certain Events .  If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided, except as set forth in section 8(d),that no such adjustment pursuant to this Section 8(f) will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8.

(g)            Notices .

(i)           Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment.

(ii)           The Company will give written notice to the holder of this Warrant at least ten (10) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined below), dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.

(iii)           The Company will also give written notice to the holder of this Warrant at least ten (10) days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.

Section 9.             Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale .

(a)           In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “ Purchase Rights ”), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.


11


(b)           Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company’s assets to another Person or other transaction in each case which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “ Organic Change .”  Prior to the consummation of any (i) sale of all or substantially all of the Company’s assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor resulting from such Organic Change (in each case, the “ Acquiring Entity ”) a written agreement (in form and substance satisfactory to the holders of Warrants representing at least two-thirds (iii) of the Warrant Shares issuable upon exercise of the Warrants then outstanding) to deliver to each holder of Warrants in exchange for such Warrants, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to this Warrant and satisfactory to the holders of the Warrants (including an adjusted warrant exercise price equal to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and exercisable for a corresponding number of shares of Common Stock acquirable and receivable upon exercise of the Warrants without regard to any limitations on exercise, if the value so reflected is less than any Applicable Warrant Exercise Price immediately prior to such consolidation, merger or sale).  Prior to the consummation of any other Organic Change, the Company shall make appropriate provision (in form and substance satisfactory to the holders of Warrants representing a majority   of the Warrant Shares issuable upon exercise of the Warrants then outstanding) to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the Warrant Shares immediately theretofore issuable and receivable upon the exercise of such holder’s Warrants (without regard to any limitations on exercise), such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of Warrant Shares which would have been issuable and receivable upon the exercise of such holder’s Warrant as of the date of such Organic Change (without taking into account any limitations or restrictions on the exercisability of this Warrant).

Section 10.             Lost, Stolen, Mutilated or Destroyed Warrant .  If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking (or, in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed.

Section 11.             Notice .  Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of receipt is received by the sending party transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same.  The addresses and facsimile numbers for such communications shall be:

12



   
If to Holder:
c/o T.R. Winston & Company
 
1999 Avenue of the Stars, Suite 2530
 
Los Angeles, California 90067
 
Attention:     Tyler Runnels
 
Telephone:     (310) 229-2139
 
Facsimile:     (310) 201-2712
 
 
With Copy to:
Lawrence Rosenbloom
 
370 Lexington Avenue
 
New York, New York 10017
 
Telephone:     (212) 370-1300
 
Facsimile:     (212) 370-7889
 
 
 
 
If to the Company, to:
Neuralstem, Inc.
 
9700 Great Seneca Highway
 
Rockville, Maryland 20850
 
Attention:      I. Richard Garr
 
Telephone:      (301) 366-4841
 
Facsimile:      (301)
 
 
With a copy to:
Dieterich & Associates
 
11300 W. Olympic Blvd.
 
Los Angeles, CA 90064
 
Attention:     Chris Dieterich, Esq.
 
Telephone:     (310) 312-6888
 
Facsimile:      (310) 312-6680

If to a holder of this Warrant, to it at the address and facsimile number set forth on Exhibit C hereto, with copies to such holder’s representatives as set forth on Exhibit C , or at such other address and facsimile as shall be delivered to the Company upon the issuance or transfer of this Warrant.  Each party shall provide five days’ prior written notice to the other party of any change in address or facsimile number.  Written confirmation of receipt (A) given by the recipient of such notice, consent, facsimile, waiver or other communication, (or (B) provided by a nationally recognized overnight delivery service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
 
Section 12.             Date .  The date of this Warrant is set forth on page 1 hereof.  This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 8(b) shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant.

13


Section 13.             Amendment and Waiver .  Except as otherwise provided herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the holders of Warrants representing at least two-thirds of the Warrant Shares issuable upon exercise of the Warrants then outstanding; provided that, except for Section 8(d), no such action may increase the Warrant Exercise Price or decrease the number of shares or class of stock obtainable upon exercise of any Warrant without the written consent of the holder of such Warrant.

Section 14.             Descriptive Headings; Governing Law .  The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant.  The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders.  All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in New York City, for the adjudication of any dispute hereunder or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  
Section 15.             Waiver of Jury Trial .   AS A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS WARRANT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.


14



IN WITNESS WHEREOF , the Company has caused this Warrant to be signed as of the date first set forth above.
 
   
 
NEURALSTEM, INC.
 
 
 
By:
 
Name:   I. Richard Garr
 
Title:    President and Chief Executive Officer
 

15

 
EXHIBIT A TO WARRANT
 
EXERCISE NOTICE
 
TO BE EXECUTED
BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
 
NEURALSTEM, INC.
 
The undersigned holder hereby exercises the right to purchase ______________ of the shares of Common Stock (“ Warrant Shares ”) of Neuralstem, Inc. (the “ Company ”), evidenced by the attached Warrant (the “ Warrant ”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
 
Specify Method of exercise by check mark:
 
1.  ___           Cash Exercise

 
(a) Payment of Warrant Exercise Price . The holder shall pay the Aggregate Exercise Price of $______________ to the Company in accordance with the terms of the Warrant.  
 
(b) Delivery of Warrant Shares .  The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.  
 
2.  ___           Cashless Exercise

 
(a) Payment of Warrant Exercise Price .  In lieu of making payment of the Aggregate Exercise Price, the holder elects to receive upon such exercise the Net Number of shares of Common Stock determined in accordance with the terms of the Warrant.  
 
(b) Delivery of Warrant Shares .  The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.  
 
Date: _______________ __, ______

Name of Registered Holder

By:
Name:
Title:

A-1


 
EXHIBIT B TO WARRANT
 
 
FORM OF WARRANT POWER
 
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of Neuralstem, Inc. represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation.  The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises.
 

 
   
Dated:
 
 
 
 
By:
 
Name:
 
Title:
 
 



 
B-1


 
FORM OF SERIES “A” WARRANT
 
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
 
 
NEURALSTEM, INC.
 
 
Series “A”
 
 
Warrant To Purchase Common Stock
 
Warrant No.: _______
Number of Shares: ________________

Date of Issuance: ______________, 2006

Neuralstem, Inc., a Delaware corporation (the “ Company ”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ___________________ (“Holder”), the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) __________ (_,_____,____) fully paid and nonassessable shares of Common Stock (as defined herein) of the Company (the “ Warrant Shares ”) at the exercise price per share provided in Section 1(a) below or as subsequently adjusted.
 
Section 1 .           This Warrant is the common stock purchase warrant (the “ Warrant ”) issued pursuant to the Subscription Agreement (“ Subscription Agreement ”) dated the date hereof between the Company and the Holder.

(a)            Definitions .  The following words and terms as used in this Warrant shall have the following meanings:

(i)           “ Approved Stock Plan ” means any employee benefit plan which has been approved by the Board of Directors and stockholders of the Company, pursuant to which the Company’s securities may be issued to any employee, officer or director for services provided to the Company at exercise prices of not less than $1.50.

 
1

 

(ii)           “ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.

(iii)           “ Closing Bid Price ” means the closing bid price of Common Stock as quoted on the Principal Market (as reported by Bloomberg Financial Markets (“ Bloomberg ”) through its “Volume at Price” function).

(iv)           “ Common Stock ” means (i) the Company’s common stock, par value $0.001 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock.

(v)           “ Excluded Securities ” means, provided such security is issued at a price which is greater than or equal to the arithmetic average of the Closing Bid Prices of the Common Stock for the ten (10) consecutive trading days immediately preceding the date of issuance, any of the following: (a) any issuance by the Company of securities in connection with a strategic partnership or a joint venture (the primary purpose of which is not to raise equity capital), (b) any issuance by the Company of securities as consideration for a merger or consolidation or the acquisition of a business, product, license, or other assets of another person or entity and (c) options to purchase shares of Common Stock, provided (I) such options are issued after the date of this Warrant to employees of the Company within thirty (30) days of such employee’s starting his employment with the Company, and (II) the exercise price of such options is not less than the Closing Bid Price of the Common Stock on the date of issuance of such option.

(vi)           “ Expiration Date ” means the date five (5) years from the Issuance Date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the City of New York or the State of New York or on which trading does not take place on the Principal Exchange or automated quotation system on which the Common Stock is traded (a “ Holiday ”), the next date that is not a Holiday.

(vii)           “ Issuance Date ” means the date hereof.

(viii)           “ Options ” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

(ix)           “ Other Securities ” means (i) those options and warrants of the Company issued prior to, and outstanding on, the Issuance Date of this Warrant, (ii) the shares of Common Stock issuable on exercise of such options and warrants, provided such options and warrants are not amended after the Issuance Date of this Warrant and (iii) the shares of Common Stock issuable upon exercise of this Warrant.

(x)           “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

 
2

 

(xi)           “ Principal Market ” means the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, whichever is at the time the principal trading exchange or market for such security, or the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg or, if no bid or sale information is reported for such security by Bloomberg, then the average of the bid prices of each of the market makers for such security as reported in the “pink sheets” by the National Quotation Bureau, Inc.

(xii)           “ Securities Act ” means the Securities Act of 1933, as amended.  

(xiii)           “ Warrant ” means this Warrant and all Warrants issued in exchange, transfer or replacement thereof.  

(xiv)           “ Warrant Exercise Price ” shall be $1.50 or as subsequently adjusted as provided in Section 8 hereof.  

(xv)           “ Warrant Shares ” means the shares of Common Stock issuable at any time upon exercise of this Warrant.  

(b)           Other Definitional Provisions.  

(i)           Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company’s successors and (B) to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time.  

(ii)           When used in this Warrant, the words “ herein ”, “ hereof ”, and “ hereunder and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words “ Section ”, “ Schedule ”, and “ Exhibit ” shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified.  

(iii)           Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa.  

Section 2.             Exercise of Warrant .  

(a)           Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, pro rata as hereinafter provided, at any time on any Business Day on or after the opening of business on such Business Day, commencing with the first day after the date hereof, and prior to 11:59 P.M. Eastern Time on the Expiration Date: (i) by delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto (the “ Exercise Notice ”), of such holder’s election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, payment to the Company of an amount equal to the Warrant Exercise Price(s) applicable to the Warrant Shares being purchased, multiplied by the number of Warrant Shares (at the applicable Warrant Exercise Price) as to which this Warrant is being exercised (plus any applicable issue or transfer taxes) (the “ Aggregate Exercise Price ”) in cash or wire transfer of immediately available funds and the surrender of this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) to a common carrier for overnight delivery to the Company as soon as practicable following such date (“ Cash Basis ”) or (ii) on a “cashless” basis if, at the time of exercise, the Warrant Shares have not been subject to an effective registration statement for a 45 consecutive day period, by delivering an Exercise Notice and in lieu of making payment of the Aggregate Exercise Price in cash or wire transfer, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (the “ Cashless Exercise ”):  

 
3

 

Net Number = (A x B) - (A x C)
                                      B

For purposes of the foregoing formula:

A = the total number of Warrant Shares with respect to which this Warrant is then being exercised.

B = the Closing Bid Price of the Common Stock on the date of exercise of the Warrant.

C = the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2, the Company shall on or before the fifth (5th) Business Day following the date of receipt of the Exercise Notice, the Aggregate Exercise Price and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) and the receipt of the representations of the holder specified in Section 6 hereof, if requested by the Company (the “ Exercise Delivery Documents ”), and if the Common Stock is DTC eligible, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder’s or its designee’s balance account with The Depository Trust Company; provided, however, if the holder who submitted the Exercise Notice requested physical delivery of any or all of the Warrant Shares, or, if the Common Stock is not DTC eligible  then the Company shall, on or before the fifth (5 th ) Business Day following receipt of the Exercise Delivery Documents, issue and surrender to a common carrier for overnight delivery to the address specified in the Exercise Notice, a certificate, registered in the name of the holder, for the number of shares of Common Stock to which the holder shall be entitled pursuant to such request.  Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in clause (i) or (ii) above the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised.  In the case of a dispute as to the determination of the Warrant Exercise Price, the Closing Bid Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the holder the number of Warrant Shares that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within one (1) Business Day of receipt of the holder’s Exercise Notice.  
 
(b)           If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price or arithmetic calculation of the Warrant Shares within one (1) day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via facsimile (i) the disputed determination of the Warrant Exercise Price or the Closing Bid Price to an independent, reputable investment banking firm or (ii) the disputed arithmetic calculation of the Warrant Shares to its independent, outside accountant.  The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations.  Such investment banking firm’s or accountant’s determination or calculation, as the case may be, shall be deemed conclusive absent manifest error.

 
4

 

(c)           Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than five (5) Business Days after any exercise and at its own expense, issue a new Warrant identical in all respects to this Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised.

(d)           No fractional Warrant Shares are to be issued upon any pro rata exercise of this Warrant, but rather the number of Warrant Shares issued upon such exercise of this Warrant shall be rounded up or down to the nearest whole number.

(e)           If the Company or its Transfer Agent shall fail for any reason or for no reason to issue to the holder within ten (10) days of receipt of the Exercise Delivery Documents, a certificate for the number of Warrant Shares to which the holder is entitled or to credit the holder’s balance account with The Depository Trust Company for such number of Warrant Shares to which the holder is entitled upon the holder’s exercise of this Warrant, the Company shall, in addition to any other remedies under this Warrant or the Placement Agent Agreement or otherwise available to such holder, pay as additional damages in cash to such holder on each day the issuance of such certificate for Warrant Shares is not timely effected an amount equal to 0.025% of the product of (A) the sum of the number of Warrant Shares not issued to the holder on a timely basis and to which the holder is entitled, and (B) the Closing Bid Price of the Common Stock for the trading day immediately preceding the last possible date which the Company could have issued such Common Stock to the holder without violating this Section 2.

Section 3.             Covenants as to Common Stock .  The Company hereby covenants and agrees as follows:

(a)           This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued.

(b)           All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof.

(c)           During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least one hundred percent (100%) of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price.  If at any time the Company does not have a sufficient number of shares of Common Stock authorized and available, then the Company shall call and hold a special meeting of its stockholders within sixty (60) days of that time for the sole purpose of increasing the number of authorized shares of Common Stock.

(d)           If at any time after the date hereof the Company shall file a registration statement, the Company shall include the Warrant Shares issuable to the holder, pursuant to the terms of this Warrant and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Warrant Shares from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system.

(e)           The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant.  The Company will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, and will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.

(f)           This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets.

Section 4.             Taxes .  The Company shall pay any and all taxes, except any applicable withholding, which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.

Section 5.             Warrant Holder Not Deemed a Stockholder .  Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of capital stock of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.  Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders.


 
5

 

Section 6.             Representations of Holder .  The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.  

Section 7.             Ownership and Transfer .The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee.  The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant.

Section 8.             Adjustment of Warrant Exercise Price and Number of Shares .  The Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows:

(a)            Adjustment of Warrant Exercise Price .  If and whenever on or after the Issuance Date of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than (i) Excluded Securities and (ii) shares of Common Stock which are issued or deemed to have been issued by the Company in connection with an Approved Stock Plan or upon exercise or conversion of the Other Securities) for a consideration per share less than a price (the “ Applicable Price ”) equal to the Warrant Exercise Price in effect immediately prior to such issuance or sale, then immediately after such issue or sale the Warrant Exercise Price then in effect shall be reduced to an amount equal to such consideration per share.  Upon each such adjustment of the Warrant Exercise Price hereunder, the number of Warrant Shares issuable upon exercise of this Warrant shall not be adjusted.

(b)            Effect on Warrant Exercise Price of Certain Events .  For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable:

(i)            Issuance of Options .  If after the date hereof, the Company in any manner grants any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any convertible securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section 8(b)(i), the lowest price per share for which one share of Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option or upon conversion or exchange of any convertible security issuable upon exercise of such Option.  No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such convertible securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such convertible securities.


 
6

 

(ii)            Issuance of Convertible Securities .  If the Company in any manner issues or sells any convertible securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such convertible securities for such price per share.  For the purposes of this Section 8(b)(ii), the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the convertible security and upon conversion or exchange of such convertible security.  No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such convertible securities, and if any such issue or sale of such convertible securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale.

(iii)            Change in Option Price or Rate of Conversion.  If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any convertible securities, or the rate at which any convertible securities are convertible into or exchangeable for Common Stock changes at any time, the Warrant Exercise Price in effect at the time of such change shall be adjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or convertible securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of Warrant Shares issuable upon exercise of this Warrant shall be correspondingly readjusted.  For purposes of this Section 8(b)(iii), if the terms of any Option or convertible security that was outstanding as of the Issuance Date of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or convertible security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment pursuant to this Section 8(b) shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect.

 
7

 

(c)            Effect on Warrant Exercise Price of Certain Events .  For purposes of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the following shall be applicable:

(i)            Calculation of Consideration Received .  If any Common Stock, Options or convertible securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefore will be deemed to be the net amount received by the Company therefore.  If any Common Stock, Options or convertible securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the market price of such securities on the date of receipt of such securities.  If any Common Stock, Options or convertible securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefore will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or convertible securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding.  If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “ Valuation Event ”), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10 th ) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding.  The determination of such appraiser shall be final and binding upon all parties and the fees and expenses of such appraiser shall be borne jointly by the Company and the holders of Warrants.

(ii)            Treasury Shares .  The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock.

(iii)            Record Date .  If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in convertible securities or (2) to subscribe for or purchase Common Stock, Options or convertible securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(d)            Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock .  If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, any Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased.  If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, any Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant will be proportionately decreased.  Any adjustment under this Section 8(d) shall become effective at the close of business on the date the subdivision or combination becomes effective.

 
8

 

(e)            Distribution of Assets .  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or other similar transaction) (a “ Distribution ”), at any time after the issuance of this Warrant, then, in each such case:

(i)           any Warrant Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled   to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Warrant Exercise Price by a fraction of which (A) the numerator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (B) the denominator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date; and

(ii)           either (A) the number of Warrant Shares obtainable upon exercise of this Warrant shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding clause (i), or (B) in the event that the Distribution is of common stock of a company whose common stock is traded on a national securities exchange or a national automated quotation system, then the holder of this Warrant shall receive an additional warrant to purchase Common Stock, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the amount of the assets that would have been payable to the holder of this Warrant pursuant to the Distribution had the holder exercised this Warrant immediately prior to such record date and with an exercise price equal to the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding clause (i).

(f)            Certain Events .  If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided, except as set forth in section 8(d),that no such adjustment pursuant to this Section 8(f) will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8.

 
9

 

(g)            Notices .

(i)           Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment.

(ii)           The Company will give written notice to the holder of this Warrant at least ten (10) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined below), dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.

(iii)           The Company will also give written notice to the holder of this Warrant at least ten (10) days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.

Section 9.             Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale .

(a)           In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “ Purchase Rights ”), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(b)           Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company’s assets to another Person or other transaction in each case which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “ Organic Change .”  Prior to the consummation of any (i) sale of all or substantially all of the Company’s assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor resulting from such Organic Change (in each case, the “ Acquiring Entity ”) a written agreement (in form and substance satisfactory to the holders of Warrants representing at least two-thirds (iii) of the Warrant Shares issuable upon exercise of the Warrants then outstanding) to deliver to each holder of Warrants in exchange for such Warrants, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to this Warrant and satisfactory to the holders of the Warrants (including an adjusted warrant exercise price equal to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and exercisable for a corresponding number of shares of Common Stock acquirable and receivable upon exercise of the Warrants without regard to any limitations on exercise, if the value so reflected is less than any Applicable Warrant Exercise Price immediately prior to such consolidation, merger or sale).  Prior to the consummation of any other Organic Change, the Company shall make appropriate provision (in form and substance satisfactory to the holders of Warrants representing a majority   of the Warrant Shares issuable upon exercise of the Warrants then outstanding) to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the Warrant Shares immediately theretofore issuable and receivable upon the exercise of such holder’s Warrants (without regard to any limitations on exercise), such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of Warrant Shares which would have been issuable and receivable upon the exercise of such holder’s Warrant as of the date of such Organic Change (without taking into account any limitations or restrictions on the exercisability of this Warrant).

 
10

 

Section 10.             Lost, Stolen, Mutilated or Destroyed Warrant .  If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking (or, in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed.

Section 11.             Notice .  Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of receipt is received by the sending party transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same.  The addresses and facsimile numbers for such communications shall be:

   
If to the Placement Agent:
T.R. Winston & Company
 
1999 Avenue of the Stars, Suite 2530
 
Los Angeles, California 90067
 
Attention:           Tyler Runnels
 
Telephone:          (310) 229-2139
 
Facsimile:             (310) 201-2712
 
 
With Copy to:
Ellenoff Grossman & Schole LLP
 
370 Lexington Avenue
 
New York, New York 10017
 
Attention: Douglas S. Ellenoff, Esq.
 
Telephone:          (212) 370-1300
 
Facsimile:             (212) 370-7889


 
11

 


 
   
If to the Company, to:
Neuralstem, Inc.
 
9700 Great Seneca Highway
 
Rockville, Maryland 20850
 
Attention:            I. Richard Garr
 
Telephone:          (301) 366-4841
 
Facsimile:             (301)
 
 
With a copy to:
Dieterich & Associates
 
11300 W. Olympic Blvd.
 
Los Angeles, CA 90064
 
Attention:           Chris Dieterich, Esq.
 
Telephone:          (310) 312-6888
 
Facsimile:             (310) 312-6680

If to a holder of this Warrant, to it at the address and facsimile number set forth on Exhibit C hereto, with copies to such holder’s representatives as set forth on Exhibit C , or at such other address and facsimile as shall be delivered to the Company upon the issuance or transfer of this Warrant.  Each party shall provide five days’ prior written notice to the other party of any change in address or facsimile number.  Written confirmation of receipt (A) given by the recipient of such notice, consent, facsimile, waiver or other communication, (or (B) provided by a nationally recognized overnight delivery service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
 
Section 12.             Date .  The date of this Warrant is set forth on page 1 hereof.  This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 8(b) shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant.

Section 13.             Amendment and Waiver .  Except as otherwise provided herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the holders of Warrants representing at least two-thirds of the Warrant Shares issuable upon exercise of the Warrants then outstanding; provided that, except for Section 8(d), no such action may increase the Warrant Exercise Price or decrease the number of shares or class of stock obtainable upon exercise of any Warrant without the written consent of the holder of such Warrant.

Section 14.             Descriptive Headings; Governing Law .  The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant.  The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders.  All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in New York City, for the adjudication of any dispute hereunder or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  

 
12

 

Section 15.             Waiver of Jury Trial .   AS A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS WARRANT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.

Section 16.             Company’s Right to Redeem Warrant .  Once the shares that would be issued upon exercise of this warrant are subject to an effective registration statement, then this Warrant may be redeemed by the Company, upon thirty (30) days prior within notice (“ Notice Period ”) by the Company, at a redemption price of $.01 per Warrant Share (the “ Redemption Price ”), so long as the following conditions are met:

(a)           The Company’s Closing Bid Price for the shares must have been in excess of $4.00 per share for the 20 consecutive days preceding the notice of demand for exercise;

(b)           The volume of trading in the Company’s shares must have a daily average minimum over the preceding 10 trading days (preceding the notice of demand) of 100,000 shares per day; and

(c)           The registration statement covering the resale of the Warrant Shares shall have remained effective during the entire Notice Period.

Upon notice to the Holder hereof, and only if the conditions have been met, then the Holder will have thirty (30) days in which to exercise the Warrants being redeemed or accept the Redemption Price.

Notwithstanding the foregoing, this Warrant may not be redeemed by the Company if, during the preceding 180 days prior to the Notice Period, the Company has redeemed its Series “B” Warrants which were issued in the same offering as this Warrant.

 
13

 

IN WITNESS WHEREOF , the Company has caused this Series A Warrant to be signed as of the date first set forth above.
 

   
 
NEURALSTEM, INC.
 
 
 
By:
 
      Name: I. Richard Garr
 
      Title:   President and Chief Executive Officer


 
14

 


 
EXHIBIT A TO WARRANT
 
 
EXERCISE NOTICE
 
 
TO BE EXECUTED
 
 
BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
 
 
NEURALSTEM, INC.
 
The undersigned holder hereby exercises the right to purchase ______________ of the shares of Common Stock (“ Warrant Shares ”) of Neuralstem, Inc. (the “ Company ”), evidenced by the attached Warrant (the “ Warrant ”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
 
Specify Method of exercise by check mark:
 
1.  ___           Cash Exercise
(a) Payment of Warrant Exercise Price . The holder shall pay the Aggregate Exercise Price of $______________ to the Company in accordance with the terms of the Warrant.  
 
(b) Delivery of Warrant Shares .  The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.  
 

 
2.  ___           Cashless Exercise
(a) Payment of Warrant Exercise Price .  In lieu of making payment of the Aggregate Exercise Price, the holder elects to receive upon such exercise the Net Number of shares of Common Stock determined in accordance with the terms of the Warrant.  
 
(b) Delivery of Warrant Shares .  The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.  
 

Date: _______________ __, ______

Name of Registered Holder

By:
Name:
Title:

 
A-1

 


 
EXHIBIT B TO WARRANT
 
 
FORM OF WARRANT POWER
 
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of Neuralstem, Inc. represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation.  The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises.
 

 
   
Dated:
 
 
 
 
By:
 
Name:
 
Title:
 
 


 
B-1

 


EXHIBIT C TO WARRANT

HOLDER’S ADDRESS





 
 
 
 
 
 


 
C-1

 


WARRANT
 
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
 
NEURALSTEM, INC.
 
Series “B”
 
Warrant To Purchase Common Stock
 
Warrant No.: _______
Number of Shares: ________________

Date of Issuance: ______________, 2006

Neuralstem, Inc., a Delaware corporation (the “ Company ”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ___________________ (“Holder”), the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) __________ (_,_____,____) fully paid and nonassessable shares of Common Stock (as defined herein) of the Company (the “ Warrant Shares ”) at the exercise price per share provided in Section 1(a) below or as subsequently adjusted.
 
Section 1 .           This Warrant is the common stock purchase warrant (the “ Warrant ”) issued pursuant to the Subscription Agreement (“ Subscription Agreement ”) dated the date hereof between the Company and the Holder.
 
(a)            Definitions . The following words and terms as used in this Warrant shall have the following meanings:
 
(i)           “ Approved Stock Plan ” means any employee benefit plan which has been approved by the Board of Directors and stockholders of the Company, pursuant to which the Company’s securities may be issued to any employee, officer or director for services provided to the Company at exercise prices of not less than $1.50.
 
1

 
 
(ii)           “ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.
 
(iii)           “ Closing Bid Price ” means the closing bid price of Common Stock as quoted on the Principal Market (as reported by Bloomberg Financial Markets (“ Bloomberg ”) through its “Volume at Price” function).
 
(iv)           “ Common Stock ” means (i) the Company’s common stock, par value $0.001 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock.
 
(v)           “ Excluded Securities ” means, provided such security is issued at a price which is greater than or equal to the arithmetic average of the Closing Bid Prices of the Common Stock for the ten (10) consecutive trading days immediately preceding the date of issuance, any of the following: (a) any issuance by the Company of securities in connection with a strategic partnership or a joint venture (the primary purpose of which is not to raise equity capital), (b) any issuance by the Company of securities as consideration for a merger or consolidation or the acquisition of a business, product, license, or other assets of another person or entity and (c) options to purchase shares of Common Stock, provided (I) such options are issued after the date of this Warrant to employees of the Company within thirty (30) days of such employee’s starting his employment with the Company, and (II) the exercise price of such options is not less than the Closing Bid Price of the Common Stock on the date of issuance of such option.
 
(vi)           “ Expiration Date ” means the date five (5) years from the Issuance Date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the City of New York or the State of New York or on which trading does not take place on the Principal Exchange or automated quotation system on which the Common Stock is traded (a “ Holiday ”), the next date that is not a Holiday.
 
(vii)           “ Issuance Date ” means the date hereof.
 
(viii)           “ Options ” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.
 
(ix)           “ Other Securities ” means (i) those options and warrants of the Company issued prior to, and outstanding on, the Issuance Date of this Warrant, (ii) the shares of Common Stock issuable on exercise of such options and warrants, provided such options and warrants are not amended after the Issuance Date of this Warrant and (iii) the shares of Common Stock issuable upon exercise of this Warrant.
 
(x)           “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.
 
(xi)           “ Principal Market ” means the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, whichever is at the time the principal trading exchange or market for such security, or the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg or, if no bid or sale information is reported for such security by Bloomberg, then the average of the bid prices of each of the market makers for such security as reported in the “pink sheets” by the National Quotation Bureau, Inc.
 
2

 
 
(xii)           “ Securities Act ” means the Securities Act of 1933, as amended.
 
(xiii)           “ Warrant ” means this Warrant and all Warrants issued in exchange, transfer or replacement thereof.
 
(xiv)           “ Warrant Exercise Price ” shall be $2.00 or as subsequently adjusted as provided in Section 8 hereof.
 
(xv)           “ Warrant Shares ” means the shares of Common Stock issuable at any time upon exercise of this Warrant.
 
(b)           Other Definitional Provisions.
 
(i)           Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company’s successors and (B) to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time.
 
(ii)           When used in this Warrant, the words “ herein ”, “ hereof ”, and “ hereunder and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words “ Section ”, “ Schedule ”, and “ Exhibit ” shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified.
 
(iii)           Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa.
 
Section 2.               Exercise of Warrant .
 
(a)           Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, pro rata as hereinafter provided, at any time on any Business Day on or after the opening of business on such Business Day, commencing with the first day after the date hereof, and prior to 11:59 P.M. Eastern Time on the Expiration Date: (i) by delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto (the “ Exercise Notice ”), of such holder’s election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, payment to the Company of an amount equal to the Warrant Exercise Price(s) applicable to the Warrant Shares being purchased, multiplied by the number of Warrant Shares (at the applicable Warrant Exercise Price) as to which this Warrant is being exercised (plus any applicable issue or transfer taxes) (the “ Aggregate Exercise Price ”) in cash or wire transfer of immediately available funds and the surrender of this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) to a common carrier for overnight delivery to the Company as soon as practicable following such date (“ Cash Basis ”) or (ii) on a “cashless” basis if, at the time of exercise, the Warrant Shares have not been subject to an effective registration statement for a 45 consecutive day period, by delivering an Exercise Notice and in lieu of making payment of the Aggregate Exercise Price in cash or wire transfer, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (the “ Cashless Exercise ”):
 
3

 
 
Net Number = (A x B) - (A x C)
                                       B

 
For purposes of the foregoing formula:

A = the total number of Warrant Shares with respect to which this Warrant is then being exercised.

B = the Closing Bid Price of the Common Stock on the date of exercise of the Warrant.

C = the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2, the Company shall on or before the fifth (5th) Business Day following the date of receipt of the Exercise Notice, the Aggregate Exercise Price and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) and the receipt of the representations of the holder specified in Section 6 hereof, if requested by the Company (the “ Exercise Delivery Documents ”), and if the Common Stock is DTC eligible, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder’s or its designee’s balance account with The Depository Trust Company; provided, however, if the holder who submitted the Exercise Notice requested physical delivery of any or all of the Warrant Shares, or, if the Common Stock is not DTC eligible then the Company shall, on or before the fifth (5 th ) Business Day following receipt of the Exercise Delivery Documents, issue and surrender to a common carrier for overnight delivery to the address specified in the Exercise Notice, a certificate, registered in the name of the holder, for the number of shares of Common Stock to which the holder shall be entitled pursuant to such request. Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in clause (i) or (ii) above the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised. In the case of a dispute as to the determination of the Warrant Exercise Price, the Closing Bid Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the holder the number of Warrant Shares that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within one (1) Business Day of receipt of the holder’s Exercise Notice.
 
(b)           If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price or arithmetic calculation of the Warrant Shares within one (1) day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via facsimile (i) the disputed determination of the Warrant Exercise Price or the Closing Bid Price to an independent, reputable investment banking firm or (ii) the disputed arithmetic calculation of the Warrant Shares to its independent, outside accountant. The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment banking firm’s or accountant’s determination or calculation, as the case may be, shall be deemed conclusive absent manifest error.
 
4

 
 
(c)           Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than five (5) Business Days after any exercise and at its own expense, issue a new Warrant identical in all respects to this Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised.
 
(d)           No fractional Warrant Shares are to be issued upon any pro rata exercise of this Warrant, but rather the number of Warrant Shares issued upon such exercise of this Warrant shall be rounded up or down to the nearest whole number.
 
(e)           If the Company or its Transfer Agent shall fail for any reason or for no reason to issue to the holder within ten (10) days of receipt of the Exercise Delivery Documents, a certificate for the number of Warrant Shares to which the holder is entitled or to credit the holder’s balance account with The Depository Trust Company for such number of Warrant Shares to which the holder is entitled upon the holder’s exercise of this Warrant, the Company shall, in addition to any other remedies under this Warrant or the Placement Agent Agreement or otherwise available to such holder, pay as additional damages in cash to such holder on each day the issuance of such certificate for Warrant Shares is not timely effected an amount equal to 0.025% of the product of (A) the sum of the number of Warrant Shares not issued to the holder on a timely basis and to which the holder is entitled, and (B) the Closing Bid Price of the Common Stock for the trading day immediately preceding the last possible date which the Company could have issued such Common Stock to the holder without violating this Section 2.
 
Section 3.               Covenants as to Common Stock . The Company hereby covenants and agrees as follows:
 
(a)           This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued.
 
(b)           All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof.
 
(c)           During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least one hundred percent (100%) of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. If at any time the Company does not have a sufficient number of shares of Common Stock authorized and available, then the Company shall call and hold a special meeting of its stockholders within sixty (60) days of that time for the sole purpose of increasing the number of authorized shares of Common Stock.
 
(d)           If at any time after the date hereof the Company shall file a registration statement, the Company shall include the Warrant Shares issuable to the holder, pursuant to the terms of this Warrant and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Warrant Shares from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system.
 
5

 
 
(e)           The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. The Company will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, and will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
 
(f)           This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets.
 
Section 4.                Taxes . The Company shall pay any and all taxes, except any applicable withholding, which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.
 
Section 5.               Warrant Holder Not Deemed a Stockholder . Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of capital stock of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders.
 
Section 6.               Representations of Holder . The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.
 
6

 
 
Section 7.               Ownership and Transfer .The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant.
 
Section 8.               Adjustment of Warrant Exercise Price and Number of Shares . The Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows:
 
(a)            Adjustment of Warrant Exercise Price . If and whenever on or after the Issuance Date of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than (i) Excluded Securities and (ii) shares of Common Stock which are issued or deemed to have been issued by the Company in connection with an Approved Stock Plan or upon exercise or conversion of the Other Securities) for a consideration per share less than a price (the “ Applicable Price ”) equal to the Warrant Exercise Price in effect immediately prior to such issuance or sale, then immediately after such issue or sale the Warrant Exercise Price then in effect shall be reduced to an amount equal to such consideration per share. Upon each such adjustment of the Warrant Exercise Price hereunder, the number of Warrant Shares issuable upon exercise of this Warrant shall not be adjusted.
 
(b)            Effect on Warrant Exercise Price of Certain Events . For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable:
 
(i)            Issuance of Options . If after the date hereof, the Company in any manner grants any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any convertible securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 8(b)(i), the lowest price per share for which one share of Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option or upon conversion or exchange of any convertible security issuable upon exercise of such Option. No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such convertible securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such convertible securities.
 
7

 
 
(ii)            Issuance of Convertible Securities . If the Company in any manner issues or sells any convertible securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such convertible securities for such price per share. For the purposes of this Section 8(b)(ii), the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the convertible security and upon conversion or exchange of such convertible security. No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such convertible securities, and if any such issue or sale of such convertible securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale.
 
(iii)            Change in Option Price or Rate of Conversion. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any convertible securities, or the rate at which any convertible securities are convertible into or exchangeable for Common Stock changes at any time, the Warrant Exercise Price in effect at the time of such change shall be adjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or convertible securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of Warrant Shares issuable upon exercise of this Warrant shall be correspondingly readjusted. For purposes of this Section 8(b)(iii), if the terms of any Option or convertible security that was outstanding as of the Issuance Date of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or convertible security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment pursuant to this Section 8(b) shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect.
 
(c)            Effect on Warrant Exercise Price of Certain Events . For purposes of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the following shall be applicable:
 
(i)            Calculation of Consideration Received . If any Common Stock, Options or convertible securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefore will be deemed to be the net amount received by the Company therefore. If any Common Stock, Options or convertible securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the market price of such securities on the date of receipt of such securities. If any Common Stock, Options or convertible securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefore will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or convertible securities, as the case may be. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “ Valuation Event ”), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10 th ) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding. The determination of such appraiser shall be final and binding upon all parties and the fees and expenses of such appraiser shall be borne jointly by the Company and the holders of Warrants.
 
8

 
 
(ii)            Treasury Shares . The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock.
 
(iii)            Record Date . If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in convertible securities or (2) to subscribe for or purchase Common Stock, Options or convertible securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
 
(d)            Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock . If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, any Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, any Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant will be proportionately decreased. Any adjustment under this Section 8(d) shall become effective at the close of business on the date the subdivision or combination becomes effective.
 
(e)            Distribution of Assets . If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or other similar transaction) (a “ Distribution ”), at any time after the issuance of this Warrant, then, in each such case:
 
(i)           any Warrant Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled   to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Warrant Exercise Price by a fraction of which (A) the numerator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (B) the denominator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date; and
 
9

 
 
(ii)           either (A) the number of Warrant Shares obtainable upon exercise of this Warrant shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding clause (i), or (B) in the event that the Distribution is of common stock of a company whose common stock is traded on a national securities exchange or a national automated quotation system, then the holder of this Warrant shall receive an additional warrant to purchase Common Stock, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the amount of the assets that would have been payable to the holder of this Warrant pursuant to the Distribution had the holder exercised this Warrant immediately prior to such record date and with an exercise price equal to the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding clause (i).
 
(f)            Certain Events . If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided, except as set forth in section 8(d),that no such adjustment pursuant to this Section 8(f) will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8.
 
(g)            Notices .
 
(i)           Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment.
 
(ii)           The Company will give written notice to the holder of this Warrant at least ten (10) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined below), dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.
 
(iii)           The Company will also give written notice to the holder of this Warrant at least ten (10) days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.
 
10

 
 
Section 9.               Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale .
 
(a)           In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “ Purchase Rights ”), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
 
(b)           Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company’s assets to another Person or other transaction in each case which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “ Organic Change .” Prior to the consummation of any (i) sale of all or substantially all of the Company’s assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor resulting from such Organic Change (in each case, the “ Acquiring Entity ”) a written agreement (in form and substance satisfactory to the holders of Warrants representing at least two-thirds (iii) of the Warrant Shares issuable upon exercise of the Warrants then outstanding) to deliver to each holder of Warrants in exchange for such Warrants, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to this Warrant and satisfactory to the holders of the Warrants (including an adjusted warrant exercise price equal to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and exercisable for a corresponding number of shares of Common Stock acquirable and receivable upon exercise of the Warrants without regard to any limitations on exercise, if the value so reflected is less than any Applicable Warrant Exercise Price immediately prior to such consolidation, merger or sale). Prior to the consummation of any other Organic Change, the Company shall make appropriate provision (in form and substance satisfactory to the holders of Warrants representing a majority   of the Warrant Shares issuable upon exercise of the Warrants then outstanding) to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the Warrant Shares immediately theretofore issuable and receivable upon the exercise of such holder’s Warrants (without regard to any limitations on exercise), such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of Warrant Shares which would have been issuable and receivable upon the exercise of such holder’s Warrant as of the date of such Organic Change (without taking into account any limitations or restrictions on the exercisability of this Warrant).
 
Section 10.               Lost, Stolen, Mutilated or Destroyed Warrant . If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking (or, in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed.
 
11

 
 
Section 11.               Notice . Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of receipt is received by the sending party transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:
 
If to the Placement Agent:
T.R. Winston & Company
 
1999 Avenue of the Stars, Suite 2530
 
Los Angeles, California 90067
 
Attention:         Tyler Runnels
 
Telephone:        (310) 229-2139
 
Facsimile:           (310) 201-2712
   
With Copy to:
Ellenoff Grossman & Schole LLP
 
370 Lexington Avenue
 
New York, New York 10017
 
Attention: Douglas S. Ellenoff, Esq.
 
Telephone:        (212) 370-1300
 
Facsimile:           (212) 370-7889
If to the Company, to:
Neuralstem, Inc.
 
9700 Great Seneca Highway
 
Rockville, Maryland 20850
 
Attention:          I. Richard Garr
 
Telephone:         (301) 366-4841
 
Facsimile:            (301)
   
With a copy to:
Dieterich & Associates
 
11300 W. Olympic Blvd.
 
Los Angeles, CA 90064
 
Attention:          Chris Dieterich, Esq.
 
Telephone:        (310) 312-6888
 
Facsimile:           (310) 312-6680

If to a holder of this Warrant, to it at the address and facsimile number set forth on Exhibit C hereto, with copies to such holder’s representatives as set forth on Exhibit C , or at such other address and facsimile as shall be delivered to the Company upon the issuance or transfer of this Warrant. Each party shall provide five days’ prior written notice to the other party of any change in address or facsimile number. Written confirmation of receipt (A) given by the recipient of such notice, consent, facsimile, waiver or other communication, (or (B) provided by a nationally recognized overnight delivery service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
 
12

 
 
Section 12.               Date . The date of this Warrant is set forth on page 1 hereof. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 8(b) shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant.
 
Section 13.               Amendment and Waiver . Except as otherwise provided herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the holders of Warrants representing at least two-thirds of the Warrant Shares issuable upon exercise of the Warrants then outstanding; provided that, except for Section 8(d), no such action may increase the Warrant Exercise Price or decrease the number of shares or class of stock obtainable upon exercise of any Warrant without the written consent of the holder of such Warrant.
 
Section 14.               Descriptive Headings; Governing Law . The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in New York City, for the adjudication of any dispute hereunder or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
 
Section 15.               Waiver of Jury Trial . AS A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS WARRANT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.
 
Section 16.               Company’s Right to Redeem Warrant . Once the shares that would be issued upon exercise of this warrant are subject to an effective registration statement, then this Warrant may be redeemed by the Company, upon thirty (30) days prior within notice (“ Notice Period ”) by the Company, at a redemption price of $.01 per Warrant Share (the “ Redemption Price ”), so long as the following conditions are met:
 
13

 
 
(a)           The Company’s Closing Bid Price for the shares must have been in excess of $4.00 per share for the 20 consecutive days preceding the notice of demand for exercise;
 
(b)           The volume of trading in the Company’s shares must have a daily average minimum over the preceding 10 trading days (preceding the notice of demand) of 100,000 shares per day; and
 
(c)           The registration statement covering the resale of the Warrant Shares shall have remained effective during the entire Notice Period.
 
Upon notice to the Holder hereof, and only if the conditions have been met, then the Holder will have thirty (30) days in which to exercise the Warrants being redeemed or accept the Redemption Price.

Notwithstanding the foregoing, this Warrant may not be redeemed by the Company if, during the preceding 180 days prior to the Notice Period, the Company has redeemed its Series “A” Warrants which were issued in the same offering as this Warrant.


IN WITNESS WHEREOF , the Company has caused this Series B Warrant to be signed as of the date first set forth above.
 
 
 
NEURALSTEM, INC.
   
 
By:_________________________________
 
Name: I. Richard Garr
 
Title: President and Chief Executive Officer

 
 

 
14

 


EXHIBIT A TO WARRANT
 
EXERCISE NOTICE
 
TO BE EXECUTED
BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
 
NEURALSTEM, INC.
 
The undersigned holder hereby exercises the right to purchase ______________ of the shares of Common Stock (“ Warrant Shares ”) of Neuralstem, Inc. (the “ Company ”), evidenced by the attached Warrant (the “ Warrant ”). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
 
Specify Method of exercise by check mark:
 
1. ___           Cash Exercise
 
(a) Payment of Warrant Exercise Price . The holder shall pay the Aggregate Exercise Price of $______________ to the Company in accordance with the terms of the Warrant.
 
(b) Delivery of Warrant Shares . The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.
 
 
 
2. ___           Cashless Exercise
 
(a) Payment of Warrant Exercise Price . In lieu of making payment of the Aggregate Exercise Price, the holder elects to receive upon such exercise the Net Number of shares of Common Stock determined in accordance with the terms of the Warrant.
 
(b) Delivery of Warrant Shares . The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.
 

Date: _______________ __, ______

Name of Registered Holder

By:________________________________
Name: __________________________
Title: ___________________________

 
A-1

 


EXHIBIT B TO WARRANT
 
FORM OF WARRANT POWER
 
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of Neuralstem, Inc. represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises.
 
 
 
Dated: ___________________________
_____________________________
   
 
By: ___________________________
 
Name: _________________________
 
Title: __________________________
   




 
B-1

 


EXHIBIT C TO WARRANT




HOLDER’S ADDRESS





 
 
 
 
 

 
 
 
 
C-1

 































































































































NEURALSTEM INC
 
NON EXCLUSIVE LIMITED LICENSE AND MATERIAL TRANSFER AGREEMENT
 
This Non exclusive Limited License and Material Transfer Agreement ("Agreement") is entered into as of 12/22 , 2004 (the "Effective Date") by and among Neuralstem, Inc., ("Neuralstem"), a company incorporated under the laws of the State of Maryland, having an address at 9700 Great Seneca Highway, Suite 240, Rockville, Maryland 20850 on the one side, and A-T Children's Project  ("A-TCP"),  having an address at 668 S. Military Trail, Deerfield Beach, Florida 33442 .
 
Whereas, Neuralstem is the owner of certain patented and proprietary technology relating to production and use of human CNS stem cells, and has created a cerebellar stem cell line designated HCB576 (hereinafter the   "cells");
 
Whereas, Neuralstem desires to provide such cells to A-TCP for research purposes only;
 
Whereas, A-TCP desires to use said cells in a research project to study Ataxia-Telangiectasia ("the disease"); and to develop suitable assay(s) for screening compounds to treat the disease. (`the research"); and
 
The parties therefore agree as follows:
 
Article 1.0    Definitions
 
1.1
"Research Materials" means the Materials, the know-how provided by Neuralstem to PI, and any Progeny and Unmodified or modified Derivative thereof "Materials" means the materials provided by Neuralstem to PT listed in Article 2 below. "Progeny" means an unmodified or modified descendant from the Materials, such as a virus from virus, cell from cell, or organism from organism.
 
1.2
"Research Uses" means experimental in vitro research conducted by A-TCP in its own laboratories and for its own internal use in the performance of the research program described in Article 2.1 (the "Research Program"). No other use of the cells by PI is anticipated or allowed under this agreement.
 
1.3
"Research Results" means the data or records, whether compiled in electronic, written or other form, arising from the use by A-TCP of Research Materials as Limited to the work product as result of the Research Program.
 
1.4
"Neuralstem Patents" means any patents or patent applications together with all patents resulting therefrom in any and all jurisdictions which cover the manufacture, use or sale of human CNS stem cells, and any progeny, derivative, improvement or modification thereof, which are owned or controlled by NeuralStem at the Effective Date, including all licensed patents or patent applications that Neuralstem has the right to sublicense at the Effective Date:
 
Isolation, Propagation, and Directed Differentiation of Stem Cells from Embryonic and Adult Central Nervous System of Mammals (U.S. Patent 5,753,506 issued May 19, 1998, patents pending in Canada and Europe)
 
In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multipotential CNS Stern Cells (U,S. Patent 6,040,180 issued March 21, 2000— continuation-in-part of U,S, Patent 5,753,506, patents pending in Canada and Europe)

 
 

 

 
Stable Neural Stem Cell Lines (U.S. patent pending—continuation-in-part of U.S. Patent 5,753,506, patents pending in Canada, Europe and Japan, patent issued in New Zealand)
 
Article 2. 0        Research Program
 
2.1
The Research Program shall involve the use of HCB576 cell line by A-TCP for the growth and use of the cell line to study the disease ataxia-telangiectasia and to create an assay suitable for screening compounds for treatment of the disease.
 
2.2
A-TCP will designate a principal investigator ("PI") to conduct the research. The designated P1 is Dr. Yosef Shiloh at Tel Aviv University. In the event that Dr. Shiloh is unwilling or unable to conduct the research, the A-TCP has the right to designate a different PI. A-TCP and PI collectively referred to herein as "Recipients".
 
Article 3. 0        Material Transfer and Use Limitations
 
3.1
Upon the execution of this Agreement, Ncuralstem shall provide to A-TCP the cerebellar cell line licensed under this agreement, designated: "HCB576". NISI will transfer no less than 12 frozen vials, each containing approximately 2 million cells of passage 8 to PI in order to allow P1 to establish its own stock, and no more than 15 vials, at NS1 cost. NS1 will also provide necessary protocols and know-how, as deemed necessary by mutual agreement by the parties to expand and maintain the cell line. Neuralstem hereby grants to A-TCP a limited, non exclusive license to use the cells and related Neuralstem technology for the term of this license, for research uses, under the terms and conditions of this agreement.
 
3.2
The Recipients hereby agree that Research Materials will be used under suitable containment conditions in compliance with all government laws and regulations and for approved uses only and recipient agrees to the restrictions provided for in this agreement.
 
3.3
The Recipients agree that Research Materials will remain the sole property of Neuralstem.
 
3.4
The Recipients agree that they will retain control over and will assume all responsibility for the custody of Research Materials. The Recipients further agree that they will return any unused Research Materials to Neuralstem at Neuralstem's expense, should Neuralstem so request, along with a record of all used or spent Research Materials or will dispose of any unused Research Materials as otherwise directed by Neuralstem.
 
3.5
The Recipients agree they will not transfer, sell, give, or otherwise convey in any form whatsoever, Research Materials to any other person or entity, including without limitation any of PI's commercial, non-commercial, joint venture partners or aliases, without the prior, express written permission of Neuralstem. Recipient hereby assigns to Neuralstem any materials and inventions (as defined below) made outside of the permitted research uses.
 
3.6
Neuralstem agrees to render a reasonable amount of technical assistance as may be required by Pl. The determination of what constitutes a reasonable amount of technical assistance will he mutually agreed to by the Parties.
 
3.7
The parties agree that nothing in this Agreement shall be construed in any way as restricting or interfering with Neuralstem's right to distribute Research Materials to any other person or entity.

 
 

 

 
Article 4.0        Payments
 
4.1
In entire consideration for the delivery of the Materials and the License grant from Neuralstem to A-TCP, A-TCP shall pay a single fixed fee payment to Neuralstem in the amount of $37,500. This amount shall be payable within l5 days from the execution of this agreement by both Parties.
 
Article 5.0        Reports And Publication  
 
5.1
PI shall keep a record of its use of Research Materials and shall provide a copy of this record upon request to Neuralstem.
 
5.2
I will provide Neuralstem on a regular basis For the duration of the Research Program, but not less than semi-annually, the Research Results in the form of a written report.  
 
Article 6.0        Representations And Warranties
 
6.1
Neuralstem represents and warrants to the Recipients that, as of the Effective Date, it has the right to transfer Research Materials for the Research Uses to PI under this Agreement.
 
6.2
While Neuralstem confirms that Research Materials are covered under Neuralstem Patents, A-TCP and Neuralstem agree that nothing hereunder shall be construed to represent any license or right under Neuralstem Patents to the Recipients, other than those rights expressly granted under this Agreement.
 
6.3
The Recipients represent to Neuralstem that they have the right to accept the terms and obligations of this Agreement and that they will maintain compliance with all applicable laws in carrying out their obligations under this Agreement.
 
6.4
Each party represents that it has the full right and authority to enter into this Agreement and that the individual executing this Agreement on its behalf has the authority to do so.
 
6.5
The Recipients represent to Neuralstem that they are acting on their own behalf under this Agreement and are not acting in their capacity as a contractor or agent of the United States Government.
 
6.6
THESE RESEARCH MATERIALS ARE PROVIDED "AS IS" WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR ANY OTHER WARRANTY EXPRESS OR IMPLIED. NEURALSTEM MAKES NO REPRESENTATION OR WARRANTY REGARDING THE VALIDITY OR SCOPE OF  NEURALSTEM PATENTS NOR THAT THE RESEARCH MATERIALS OR THEIR USE WILL NOT INFRINGE ANY PATENT OR ANY OTHER PROPRIETARY RIGHT OF ANY THIRD PARTY. IN NO EVENT, OTHER THAN BREACH OF ITS REPRESENTATIONS OR WARRANTIES IN THIS ARTICLE, WILL NEURALSTEM BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE EXERCISE OF THIS AGREEMENT OR THE USE OF RESEARCH MATERIALS.
 
Article 7.0        Confidentiality
 
7.1
As used herein, "Confidential Information" shall mean (a) all trade secrets or confidential or proprietary information which is designated in writing as confidential or proprietary by the disclosing party prior to or at the time of the disclosure thereof; (b) information without such designation if it would be apparent to a reasonable person, familiar with the disclosing party's business and the industry, that such information is of a confidential or proprietary nature; and (c) information disclosed without such designation, if the disclosing party, within thirty (30) days after such disclosure. informs the receiving party in writing of the confidential or proprietary nature of the disclosed information, describing such information and referencing the place and date of the oral, visual or written disclosure and the names of the employees or officers of the receiving party to whom such disclosure was made.

 
 

 
 
7.2
During the term of this Agreement and for a period of five (5) years from any termination or expiration hereof, the parties agree to keep Confidential Information of the other party in confidence, not to disclose Confidential Information of the other party to any third party and not to use Confidential Information of the other party for any purpose, other than as permitted in this Agreement.
 
7.3
The restrictions on the disclosure and use of Confidential Information shall not apply to any Confidential Information which: (i) was known by the receiving party (as evidenced by the receiving party's written records) prior to disclosure by the disclosing party hereunder; (ii) is or becomes part of the public domain through no fault of the receiving party; (iii) is disclosed to the receiving party by a third party having a legal right to make such a disclosure; or (iv) is independently developed by employees or consultants of the receiving party without use or access to the Confidential Information of the disclosing party.
 
7.4
This Agreement shall supersede any other prior agreements regarding the protection of confidential information, and any confidential information disclosed to the other party under such other prior agreements shall be subject to the terms of this Section 7.
 
Article 8.0    Intellectual Property
 
8.1
"Inventions" shall mean Sole Inventions and Joint Inventions based on US patent law. " Sole Invention(s) " shall mean any new and useful invention or discovery conceived by employees or consultants of the Recipients alone in the course of performing the Research Program. " Joint Invention(s) " shall mean any new or useful invention or discovery conceived jointly by an employee or consultant of a Recipient and an employee or consultant of Neuralstem in the course of performing the Research Program. All Inventions shall be owned by A-TCP. Neuralstem shall assign and does hereby assign to A-TCP all right, title and interest in its Sole and Joint Inventions. Neuralstem shall reasonably cooperate in perfecting and enforcing Such rights at A-TCP's expense, including without limitation, by executing any documents necessary for Neuralstem to support the Filing of patent applications.
 
8.2
 A-TCP hereby grants to Neuralstem the tight to negotiate within a 60-day period a non-exclusive, perpetual license to Recipients' Sole Inventions and the Recipients' interest in Joint Inventions that are conceived during the performance of the Research Program. In addition the Recipients hereby grant to Neuralstem the first right to negotiate an exclusive license to Recipients' Sole Inventions and Recipients' rights in any Joint Inventions for which Neuralstem has paid and/or has agreed to pay patent expenses. Such licenses shall be negotiated in good faith with terms considered reasonable and customary in the field for like inventions. Such license shall also provide for the reimbursement by Neuralstem of any future patent expenses incurred by Recipients. The rights to negotiate granted pursuant to this paragraph 8.2 shall be exercisable for a period of thirty (30) days from the date of A-TCP' s notification to Neuralstem of such Sole or Joint Invention. The parties shall enter into a written agreement for each license within sixty (60) days following the notification from Neuralstem to A-TCP of its interest in obtaining the license to the Invention(s). If the parties are unable to agree to terms for the licenses within the stipulated time period, or if Neuralstem ceases to pay patent expenses, A-TCP shall be free to license to others and shall have no further obligations to Neuralstem with respect to such inventions. Invention disclosures and related correspondence shall be directed to the following people:

 
 

 

 
     
For PI:
Yosef Shiloh, PhD Tel Aviv University
 
For Recipient:
Jennifer Thornton Executive Director
 
For Neuralstem:
Richard Garr
 
Article 9    Term and Termination
 
9.1
The term of this Agreement shall go into effect on the date the last party hereto executes this Agreement and shall continue until ten years from the effective date. The terms of Articles 7, 8 and 10 shall survive the termination of this Agreement.
 
Article 10.0     Miscellaneous Provisions
 
10.1
The Recipients shall be excused for failure or delay in performing any of their respective obligations under this Agreement if failure or delay is caused by force majeure, to the extent such failure or delay is caused by said force majeure.
 
10.2
All notices, requests and other communications regarding the terms or performance of this Agreement shall be in writing, shall refer specifically to this Agreement and shall be. personally delivered or sent by registered mail, overnight courier or certified mail, return receipt requested, postage prepaid, or by facsimile or electronic mail, in each case to the address specified below, or as to other such address as may be specified in writing to the other party.
 
N euralstem:
 
Neuralstem, Inc.
9700 Great Seneca Highway, Suite 240 Rockville, Maryland 20850
e-mail: irgarr@neuralstem.com
Attention:Richard Garr
 
Recipients:
 
A-T Children's Project
668 S. Military Trail
Deerfield Beach, FL 33442
e-mail:  jennifer@atcp.org
Attention: Jennifer Thornton
 
Such notices shall be deemed received on the next business day after dispatched in the case of overnight courier or live (5) business days after deposit in the U.S. mail.
 
 
 

 

 
10.3
The rights and obligations under this Agreement are not assignable by A-TCP without the prior written consent of Neuralstem.
 
10.4
This Agreement constitutes the entire agreement between the parties and no provision of this Agreement shall be varied or contradicted by any oral agreement. All prior or contemporaneous understandings or agreements, whether written or oral, between the parties with respect to the subject matter herein are hereby superseded in their entirety by this Agreement. No amendment shall be effective unless made in writing specifically identifying this Agreement and the provision to be amended and signed by the parties.
 
10.5
This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware and all parties hereto, specifically i ncluding P1 agree to such jurisdiction.
 
10.6
If any provision of this Agreement is held unenforceable in any jurisdiction, all other provisions shall remain in full force and effect in such jurisdictions and such unenforceability will not affect the enforceability of the provision in other jurisdictions. To the extent permitted by applicable law, the parties hereby waive any provision of law that would render any provision hereof prohibited or unenforceable in any respect.
 
10.7
This Agreement may be executed in counterparts.
 
Neither party shall use the name of the other or any contraction or derivative thereof or the name(s) of the other party's faculty members, employees, or students, as applicable, in any advertising, promotional, or sales literature without prior written consent from the other party.

 
 
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first stated above.
 
 
Neuralstem, Inc.
A-TCP
 
 
By: /s/ I. Richard Garr
By: /s/ Jennifer Thornton
I. Richard Garr
Jennifer Thornton
President & CEO
Executive Director
 


 
 

 




























































































































 
Limited Exclusive License

Made this 7th day of July, 2005 between Neuralstem, Inc. (NS) and High Med Technologies, Inc. (HM).

Whereas NS is the owner of certain neural stem cell technology, described more fully on exhibit A attached hereto and incorporated by reference herein, and;

Whereas NS desires to contract with HM for services relating to sales, distribution and marketing of its cells for limited purposes, and;

Whereas HM desires to provide these services under the terms and conditions of this agreement, now therefore;

For good and valuable consideration exchanged between the parties, the Parties agree as follows:

Term: The term of the agreement shall be for 5 years. The term of the agreement shall be extended automatically to the life of the patent(s) shown in Exhibit A when the Annual Revenue Target for Year 5 set forth in Exhibit B has been met.

Scope: HM shall, during the term of the agreement, have the exclusive right (outside of Neuralstem itself) to create, manufacture, develop, sublicense, or offer for sale the Neuralstem Technology, described more specifically on exhibit A, or products created using Neuralstem Technology, solely for the purpose(s) of research, and further limited to in vitro research that do not involve injection of the cells or cell-derived materials into live animals or human beings. It is the express intent of the parties that HM may NOT knowingly create, manufacture, develop, sublicense or offer for sale the Neuralstem Technology or products created using Neuralstem Technology for research or research purposes where the cells and cell-derived materials will be used in whole or in part as a therapeutics to treat a disease. HM shall promptly report to Neuralstem any knowledge of a breach of this license limitation by a HM customer.

Limited Exclusivity: During the term of the agreement Neuralstem shall not enter into an agreement with any other entity which would allow the other entity to offer the technology described in exhibit A, for the purposes covered by the scope of this agreement, The parties acknowledge and agree that nothing in this agreement is meant to keep Neuralstem itself, from making any kind of deal with any individual outside. party for any use of any Neuralstem Technology. Neuralstem acknowledges that it has no current plans to establish a similar business "in house", nor to compete with MI in this area during the term of the agreement.

Compensation: During the term of the agreement HM shall pay to Neuralstem the following:

80% of any revenue obtained by HM from a license or other supply deal where HM does not have to manufacture and supply the product to the customer, where revenue means the net proceeds received by HM from the sale of a license or a product minus applicable sales tax, returns, discounts, third party sales commissions, stacking royalties, and third party OEM supplies;

20% of any revenue obtained by HM from a license or other supply deal where HM does have to manufacture and supply the product to the customer, where revenue means the net proceeds received by HM from the sale of a license or a product minus applicable sales tax, returns, discounts, third party sales commissions, stacking royalties, and third party OEM supplies;
 
 

 

In cases where Neuralstem licenses or sells Neuralstem Technology within the scope of this agreement to a buyer who is or has been a customer of HM, Neuralstem shall pay to HM 20% of any revenue obtained from the buyer.

Neuralstem makes no representations or warranties with respect to the product, or intellectual property related to the product and or its use. HM senior management is fully aware of and informed on any and all intellectual property issues surrounding the technology and assumes any risk related thereto, HM shall bear it's own legal costs with respect to any patent related litigation or other proceedings brought against HM .

Revenue Targets: The parties agree that in order for HM to maintain its limited exclusive license, it shall meet or exceed the revenue targets contained on Exhibit B hereto ("Annual Revenue Targets") and incorporated by reference herein.

In the event that HM does not meet Annual Revenue Target, Neuralstem shall have 15 days in which to notify HM that the exclusivity of its license is revoked. Then and in that event, HM shall continue to have a non exclusive license to provide the same services and products, for the same scope of work, as contained in this license, for the remainder of the term.

In the event that Neuralstem does NOT so notify HM, the exclusivity shall continue and the next annual target year shall be assessed independently, not cumulatively.

Sale of HM: In the event of a sale or other disposition of all or substantially all of the assets of HM, or an event in which control of more than 50% of HM's voting stock changes hands, Neuralstem shall have the option of converting the license to a non exclusive license, or of taking a percentage of the sales proceeds as outlined on Exhibit C hereto and incorporated by reference herein,

/s/ I. Richard Garr
Neuralstem Representative
 
I. Richard Garr President & CEO
Name and Title

July 8, 2005

Date

/s/ Karl K. Johe
High Med Technologies Representative

Karl K, Johe President  & CEO
Name and Title
 
July 7, 2005
Date
 
 
 

 






























PRIVATE AND CONFIDENTIAL
 
October 15, 2005

J.D. Group, LLC
1259 Western Avenue
Westfield, MA 01085
 
Re: Business Advisory Services

Dear Mr. Davies:

This letter agreement (“Agreement”) confirms the terms upon which Neuralstem, Inc. (the “Company”), engages The J.D. Group, LLC (“Consultant”), to provide business advisory services to the Company.

This Agreement will be deemed to be effective as of October 15, 2005.
 
1.   Scope of Engagement . The Company hereby engages (the “Engagement”) Consultant as its non-exclusive business advisor to provide advisory services regarding strategic business development, the identification and recruiting of perspective board members, and the identification of strategic partners and related services (collectively, “services”). The Company has the unequivocal right to engage other companies to provide similar and other advisory services.

2.   Scope of Work . In connection with the Engagement, Consultant will: (i) familiarize itself to the extent it deems appropriate, or as otherwise reasonably requested by the Company, with the business, operations, financial condition and prospects of the Company; (ii) identify possible board candidates; (iii) identify possible strategic partners or acquisition targets and (iv) perform such other advisory services within the scope of this engagement as the Company or its board of directors shall reasonably request.

3.   Company Responsibilities, Representations and Warranties .

(a) In connection with the Engagement:

(i)   The Company agrees to use commercially reasonable efforts to cooperate with Consultant and will furnish to Consultant all information and data concerning the Company (the “Information”) which Consultant and the Company reasonably deem appropriate for purposes of Consultant’s rendering of its services hereunder, and will provide Consultant reasonable access to the Company’s officers, directors, employees, contractors, consultants, representatives and advisors during normal business hours of operation applicable to such persons and subject to all applicable confidentiality restrictions;


 
(ii)   The Company represents and warrants to Consultant that all information included or incorporated by reference in any documents or otherwise made available to Consultant by the Company to be communicated to possible candidates in which Consultant is involved: (i) will be complete and correct to the best of the Company’s knowledge and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (ii) any projected financial information or other forward-looking information that the Company provides to Consultant will be made by the Company in good faith based on management estimates, facts and assumptions that the Company believes are reasonable; and

(iii)   The Company agrees to promptly notify Consultant if the Company believes that any information that was previously provided to Consultant has become materially misleading.

(b)   Any advice rendered by Consultant during the Engagement or in meetings with the Company and/ or its Board of Directors, as well as any written materials provided by Consultant, are intended solely for the benefit and confidential use of the Company and will not be reproduced, summarized, described or referred to or given to any other person for any purpose without Consultant’s prior written consent (except for the Company’s accountants, attorneys and similarly employed and/or engaged persons).

(c)   Consultant understands that the Company possesses and will possess Proprietary Information which is important to its business. For purposes of this Agreement, "Proprietary Information" is information that was or will be developed, created, or discovered by or on behalf of the Company, or which became or will become known by, or was or is conveyed to the Company (including, without limitation, "Results" as defined below), which has commercial value in the Company's business. "Proprietary Information" includes, but is not limited to, information about trade secrets, cell lines, reagents, antibodies, computer programs, designs, technology, ideas, know-how, processes, formulas, compositions, data, techniques, improvements, inventions (whether patentable or not), works of authorship, business and product development plans, customers and other information concerning the Company's actual or anticipated business, research or development, or which is received in confidence by or for the Company from any other person, but excludes any information that Consultant can document (i) is, or through no improper action or inaction by Consultant or any affiliate or agent, becomes generally known to the public, (ii) was in Consultant’s possession or known by Consultant prior to using it in performing the Services, (iii) was rightfully disclosed to Consultant by a third party without restriction, or (iv) is required to be disclosed by law, government regulation, or court order. In addition, Proprietary Information does not include information (including "Results") generated by the Consultant unless the information is generated as a direct result of the performance of Services. Consultant understands that the Services arrangement creates a relationship of confidence and trust between Consultant and the Company with regard to Proprietary Information. All Proprietary Information and all title, patents, patent rights, copyrights, trade secret rights, and other intellectual property and rights anywhere in the world in connection therewith (collectively "Rights") shall be the sole property of the Company. Consultant hereby assigns to the Company any Rights Consultant may have or acquire in such Proprietary Information. At all times, both during the term of this Agreement and after its termination, Consultant will keep in confidence and trust and will not use or disclose any Proprietary Information without the prior written consent of an officer of the Company. Consultant acknowledges that any unauthorized disclosure or unauthorized use of Proprietary Information will constitute a material breach of this Agreement and cause substantial harm to the Company for which damages would not be a fully adequate remedy, and, therefore, in the event of any such breach, in addition to other available remedies, the Company shall have the right to obtain injunctive relief without the need to post bond or other security.


 
4.   Fees . As compensation for its services, the Company agrees to issue Consultant upon execution of this agreement, a warrant to purchase One-Million (1,000,000) shares of the Company’s common stock for $.50 per share. If not exercised, this warrant shall expire nine-months after the Company’s stock begins trading on a national exchange or over the counter. The warrant shall be in substantially the same form as attached hereto as Exhibit A .
 
5.   Expenses . The Company will reimburse Consultant for expenses which the Company has pre-approved in writing whether or not any financing is consummated.

6.   Indemnification . The Company agrees to indemnify and hold harmless Consultant and its affiliates (and their respective control persons, directors, officers, employees and agents) to the full extent lawful against any and all claims, losses, damages, liabilities, costs and expenses as incurred (including all reasonable fees and disbursements of counsel and all reasonable travel and other out-of-pocket expenses incurred in connection with investigation of, preparation for and defense of any pending or threatened claim and any litigation or other proceeding arising therefrom) arising out of or related to Consultant’s Engagement hereunder (a “Consultant Claim”), except that the Company shall not be obligated to indemnify, hold harmless and/or pay any fees or expenses to any person for a Consultant Claim if such Consultant Claim arises out of or is based upon any action or failure to act by Consultant, that is found in a judicial determination to constitute bad faith, willful misconduct or gross negligence on the part of Consultant. The Company will not, without the prior written consent of Consultant, settle any litigation relating to Consultant’s Engagement hereunder unless such settlement includes an express, complete and unconditional release of Consultant and its affiliates (and their respective control persons, directors, officers, employees and agents) with respect to all claims asserted in such litigation or relating to Consultant’s Engagement hereunder.

7.   Term and Termination . Consultant’s Engagement hereunder may be terminated, with or without cause, by either the Company or Consultant upon 30 days’ prior written notice to the other party at any time. However, no termination will affect Consultant’s right to (a) expense reimbursement under Section 5 herein, (b) receipt of payment of the fees pursuant to Section 4 herein and (c) the indemnification contained in Section 7 herein.

8.   Governing   Law; Jurisdiction; Waiver of Jury Trial; Optional Arbitration . This Agreement will be deemed made in Massachusetts and will be exclusively governed by the laws of the State of Massachusetts with regards to the conflict of law principles contained therein. Any dispute arising hereunder, if not settled by mutual agreement, shall be settled by arbitration. The arbitration shall be conducted in accordance with the rules then obtaining of the American Arbitration Association by a single arbitrator appointed in accordance with such rules. Arbitration shall take place in Massachusetts. The Company irrevocably submits to the jurisdiction of any court of the State of Massachusetts, for the purpose of any suit, action or other proceeding arising out of this Agreement, or any of the agreements or transactions contemplated hereby, which is brought by or against the Company. Each of the Company and Consultant hereby knowingly, voluntarily and irrevocably waive any right it may have to a trial by jury in respect of any claim based upon, arising out of or in connection with this Agreement and the transactions contemplated hereby.


 
9.   Independent Contractor . The Company acknowledges and agrees that (a) Consultant will act as an independent contractor and is being retained solely to assist the Company in corporate finance and merger and acquisition matters, and that Consultant is not being retained to advise the Company on, or to express any opinion as to, the wisdom, desirability or prudence of consummating any financing; and (b) Consultant is not and will not be construed as a fiduciary of the Company or any affiliate thereof and will have no duties or liabilities to the equity holders or creditors of the Company, and affiliates of the Company or any other person by virtue of this Agreement and the retention of Consultant hereunder, all of which duties and liabilities are hereby expressly waived. Neither equity holders nor creditors of the Company are intended beneficiaries hereunder. The Company confirms that it will rely on its own counsel, accountants and other similar expert advisors for legal, accounting, tax and other similar advice. Consultant agrees to be solely responsible for paying all of its own taxes that accrue from the receipt of compensation from the Company.

10.   Miscellaneous . This Letter Agreement may not be modified or amended except in writing executed in counterparts, each of which will be deemed an original and all of which will constitute one and the same instrument.

If the foregoing correctly sets forth our agreement, please so indicate by signing below and returning an executed copy to Consultant. This Agreement may be executed by the exchange by facsimile/telecopy or e-mail/electronic signature between the parties of signed counterparts of this Agreement. We look forward to working with you and the rest of the management team in a long-term relationship that assists the Company in achieving its business goals.
 
  J.D. GROUP, LLC       NEURALSTEM, INC.
           
           
By:         By:  
 
Name: John Davies          
Title:   Manager
      Name: I. Richard Garr
Title: CEO
           
 






PERRY SCIENTIFIC INC
COMMERCIAL LEASE OF VIVARIUM ROOM
 
This lease is made between Perry Scientific Inc., a Nevada corporation located at 7901 Vickers Street, San Diego California 92111 herein called Lessor, and Neuralstem, Inc. 9700 Great Seneca Highway Rockville, MI) 20850 herein called Lessee.
 
Lessee hereby leases from Lessor portions of the premises situated in the City of San Diego, County of San Diego, Stale of California, de-scribed as a vivarium room at 7901 Vickers Street, San Diego California 92111 ("premises"), upon the following terms and conditions;
 
Term and Rent. Lessor agrees to rent to the Lessee a vivarium room for its exclusive use for a term of   12 months commencing on or about March 2006, at a monthly rental of $5,500 This rent is payable in equal installments in advance on the 1 st day of each month for that months rental, during the term of this lease. All rental payments shall be made (without invoice) to the Lessor, at the address specified above.
 
Research Use. The Lessee shall use and occupy the premises for the use of laboratory animals and research. The premises shall be used for no other purpose. This lease is a commercial lease for space within Perry Scientific's vivarium.
 
Vivarium Services. Exhibit A, which is attached hereto and incorporated herein by this reference, outlines Lessor's and Lessees responsibilities for the care of animals housed in the premises.
 
Care and Maintenance of Premises. Lessee shall he responsible for any damage caused by Lessee and repairs required to repair any such damage. Lessee shall not, without first obtaining written consent of the Lessor, make any alterations to the premises.
 
Employees. During the period of the lease, and for two years afterwards, Lessee agrees riot to hire, or attempt to hire, any employee of the Lessor.
 
Ordinances and Statutes. Lessee shall comply with all statutes, ordinances and requirements of all municipal, state and federal authorities now in force, pertaining to the premises, occasioned by or affecting the use thereof by Lessee.
 
Assignment and Subletting. Lessee shall not assign this lease or sublet any portion of the premises without prior written consent of the Lessor. Any such assignment or subletting without consent shall be void and, at the option of the Lessor, may terminate this lease.
 
Indemnification. Lessee will indemnify and hold harmless Lessor from any claims arising out of Lessee's use of the premises or breach by Lessee of this Lease, except to the extent such churns result from the negligence or willful misconduct of Lessor Lessor will indemnify and hold harmless Lessees from any claims arising out of Lessor's use of the premises or breach by Lessor of this Lease, except to the extent such claims result from The negligence or willful misconduct of Lessee.
 
Lessor's Remedies on Default. If Lessee defaults in the payment of rent, or defaults in the performance of any of the other covenants or conditions hereof, Lessor may give Lessee notice of such default and if Lessee does not cure any such within 7 days, after the giving of such notice, Lessor miry terminate this lease in not less than 7 days notice to Lessee.  On the date specified in such notice the term of this lease shall terminal; and Lessee shall then quit and surrender the premises to Lessor, but Lessee shall remain liable for all rent and other terms and conditions as herein provided. If this lease shall have been so terminated by Lessor, Lessor may at any rim . ; thereafter resume possession of the premises by any lawful means and remove Lessee or other occupants and their effects.  No failure to enforce any term shall be deemed a waver.
 
 

 

Security Deposit. Lessee shall deposit with Lessor on the signing of this lease a sum equal to one month's rent as security for the performance of Lessee's obligations under this lease. It is understood that the security deposit shall not be considered an advance payment of rental or a measure of Lessor's damages In case of default by Lessee. If Lessee is not in default at the termination of this Lease, the Security Deposit shall be returned by Lessor to Lessee.
 
Attorney's Fees. In case suit should be brought for recovery of the premises, or for any sum due hereunder, or because of any act which may arise out of possession of the premises, by either party, the prevailing party shall be entitled to all costs incurred in connection with such action, including a reasonable attorney's fee.
 
Notices.   Any notice that either parry is required to give, shall ho given by certif i ed mail to the Lessee at the address noted above, or b certified mail to the Lessor at the address above, addressed to Andrew Perry, President.
 
Confidentiality.   The parties agree that all data created, collected and in any way related to the studies carried out by Lessor under this agreement belongs entirely to Lessee, and is confidential and shall treated as such by lessor.
 
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
 
LESSEE
LESSOR
By: /s/ I. Richard Garr
By: /s/ Andrew Perry
Name:  I. Richard Garr
Name: Andrew Perry M.D. Ph.D.
Title: Pres & CEO
Title: President
Date: 2-14-06
Date: 2/14/06
 
 
 
 

 




















 
Exhibit 14.1
 
NEURALSTEM, INC.
 
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
 
The conduct of Senior Financial Officers shall be governed by this Code of Ethics, pursuant to Section 406 of the Sarbanes-Oxley Act, in order to deter wrongdoing and to promote:
 
    -    Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
 
    -    Full, fair, accurate, timely and understandable disclosure in reports and documents that company files with, or submits to, the Commission and in other public communications made by the Company;
 
    -    Compliance with applicable governmental laws, rules and regulations;
 
    -    The prompt internal reporting of violations of the Code to the appropriate person or persons identified in the Code; and
 
    -    Accountability for adherence to the Code.
 
1.    The Chief Executive Officer, the Chief Financial Officer, the Controller, and other senior officers performing financial management functions shall maintain the highest standards in performing their duties.
 
Federal law requires the Company to set forth guidelines pursuant to which the principal executive officer and senior financial management employees perform their duties. Employees
subject to this requirement include the chief executive officer, the chief financial officer, controller or chief accounting officer, and any person who performs similar functions. However,
the Company expects that all employees who participate in the preparation of any part of the Company's financial statements should follow these guidelines:
 
    -        Act with honesty and integrity, avoiding violations of the Code, including actual or apparent conflicts of interest with the Company in personal and professional relationships.
 
    -        Disclose to the Governance Compliance Officer any material transaction or relationship that reasonably could be expected to give rise to any violations of the Code, including actual or apparent conflicts of interest with the Company.
 
    -       Provide the Company's other employees, consultants, and advisors with information that is accurate, complete, objective, relevant, timely, and understandable.
 
    -       Endeavor to ensure full, fair, timely, accurate, and understandable disclosure in the Company's periodic reports.
 
    -       Comply with rules and regulations of federal, state, and local governments, and other appropriate private and public regulatory agencies.
 

 
    -       Act in good faith, responsibly, and with due care, competence and diligence, without misrepresenting material facts or allowing your independent judgment to be subordinated.
 
    -       Respect the confidentiality of information acquired in the course of your work except where you have Company approval or where disclosure is otherwise legally mandated. Confidential information acquired in the course of your work will not be used for personal advantage.
 
    -       Maintain skills important and relevant to the Company's needs.
 
    -        Proactively promote ethical behavior among peers in your work environment.
 
    -       Achieve responsible use of and control over all assets and resources employed or entrusted to you.
 
    -       Record or participate in the recording of entries in the Company's books and records that are accurate to the best of your knowledge.
 
2.    All known or suspected violations of the Code of Ethics shall be reported to the Governance Compliance Officer.
 
The Corporate Secretary and Governance Compliance Officer will maintain a record of violations of the Code that are reported and of the disposition of each violation. The Company will maintain if the employee so desires, the anonymity of the employee and the confidentiality of the information that is reported. However, in order to conduct an effective investigation, it may not be possible to maintain confidentiality and anonymity.
 
3.    Senior Financial Officers should assist in any investigation by any regulatory or law enforcement agency, elected officials or others responsible for such matters, concerning matters described in:   
 
    a.        Section 806 of the Sarbanes-Oxley Act, which relates to fraud,        
 
    b.        Section 301 of the Sarbanes-Oxley Act, which relates to questionable accounting, internal controls and auditing matters.
 
    c.        Item 406 of S.E.C. Regulations S-K which relates to conduct that is not honest and ethical, conflicts of interest, and disclosures in SEC reports and other public disclosures that are not full, fair, accurate, timely and understandable, and
 
    d.        Nasdaq listing requirements.
 
4.    The Company will not retaliate against an officer, director or employee who files, causes to be filed, testifies, participates in, or otherwise assists in a proceeding filed or about to be filed regarding any matter covered in paragraph 3, above.
 
5.    Any waivers of the Code for directors or executive officers must be approved by the Board and be promptly disclosed to shareholders.


 
6.    The Company's Audit Committee shall also issue procedures for the reporting to them of complaints regarding accounting, internal accounting controls or auditing matters and submission to them by employees of concerns regarding accounting or auditing matters. Such procedures shall be in addition to, and not in lieu of, any procedures established by this Code of Ethics.
 
7.    The Governance Compliance Officer shall be appointed by the CEO.
 

 
George Brenner , CPA
A Professional Corporation
10680 W. PICO BOULEVARD, SUITE 260
LOS ANGELES, CALIFORNIA 90064
310/202-6445 - Fax 310/202-6494

 
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
 
I hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 for Neuralstem, Inc., of my report dated March 29, 2006, relating to the December 31, 2005 financial statements of Neuralstem, Inc., which appears in such Prospectus.  I also consent to the reference to me under the heading "Experts".
 
 
     
GEORGE BRENNER, CPA  
     
Los Angeles, California
March 29, 2006