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NVIV > SEC Filings for NVIV > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for INVIVO THERAPEUTICS HOLDINGS CORP.

Form 10-K for INVIVO THERAPEUTICS HOLDINGS CORP.


17-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by such forward-looking statements as a result of many important factors, including those set forth in Part I of this Annual Report on Form 10-K under the caption "Risk Factors." Please see "Special Note Regarding Forward-Looking Statements" in Part I above. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report.

The discussion and analysis of our financial condition and results of operations are based on the Company's financial statements, which management has prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base estimates on historical experience and on various other factors that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

As the result of the October 2010 merger with InVivo Therapeutics Corporation and related transactions, InVivo Therapeutics Corporation was considered the accounting acquirer and therefore the financial results of InVivo Therapeutics Corporation are now considered the financial results of the Company on a historical and going-forward basis.

Overview

We develop novel biomaterial technologies for the treatment of spinal cord injuries and hydrogels for therapeutics delivery. Our proprietary technologies incorporate intellectual property that is licensed under an exclusive, world-wide license from Children's Medical Center Corporation ("CMCC") and the Massachusetts Institute of Technology ("MIT"), as well as intellectual property that has been developed internally in collaboration with our advisors and partners. At December 31, 2013, we were considered a "development stage enterprise" and will continue to be so until we commence commercial operations. A development stage enterprise is one in which planned principal operations have not commenced or, if its operations have commenced, there has been no significant revenue from operations. Development stage companies report cumulative costs from the date of inception of the enterprise.

Our development stage started on November 28, 2005 and continued through December 31, 2013. As of December 31, 2013, we have experienced total net losses since inception of approximately $81,909,000. As a development stage enterprise, we expect to incur substantial operating losses in the future and are therefore dependent upon external financing, such as from equity and debt offerings, to finance our operations. Before we can derive revenue or cash inflows from the commercialization of any of our products, we will need to conduct clinical studies and obtain regulatory approval to commercialize our products.

Overall, we expect our R&D expenses to be substantial and to increase for the foreseeable future as we continue the development and clinical investigation of our current and future products. However, expenditures on R&D programs are subject to many uncertainties, including whether we develop our products with a partner or independently or acquire products. At this time, due to the uncertainties and inherent risks involved in our development stage business, we cannot estimate in a meaningful way the duration of, or the costs to complete, our R&D programs or whether, when or to what extent we will generate revenues or cash inflows from the commercialization and sale of any of our products.


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While we are currently focused on advancing our scaffold product, our future R&D expenses will depend on the determinations we make as to the scientific and clinical prospects of each product, as well as our ongoing assessment of the regulatory requirements and each product's commercial potential. In addition, we may make acquisitions of businesses, technologies or intellectual property rights that we believe would be necessary, useful or complementary to our current business. Any investment made in a potential acquisition could affect our results of operations and reduce our limited capital resources, and any issuance of equity securities in connection with a potential acquisition could be substantially dilutive to our stockholders.

There can be no assurance that we will be able to successfully develop or acquire any product, or that we will be able to recover our development or acquisition costs, whether upon commercialization of a developed product or otherwise. We cannot provide assurance that any of our programs under development or any acquired technologies or products will result in products that can be marketed or marketed profitably. If our development-stage programs or any acquired products or technologies do not result in commercially viable products, our results of operations could be materially adversely affected.

We were incorporated on April 2, 2003, under the name of Design Source, Inc. On October 26, 2010, we acquired the business of InVivo Therapeutics Corporation, which was founded in 2005, and continued the existing business operations of InVivo Therapeutics Corporation as our wholly-owned subsidiary. As a result of the merger and related transactions, InVivo Therapeutics Corporation was considered the accounting acquirer and therefore the historical financial results of InVivo Therapeutics Corporation are considered the financial results of the Company on a historical and going- forward basis.

Significant Events

Warrant Exchange Offer. Certain of our issued and outstanding warrants to purchase common stock issued in 2010 contained anti-dilution provisions. As a result, these warrants did not meet the requirements for classification as equity and were recorded as derivative warrant liabilities. In April 2013, we announced our offer to exchange the outstanding warrants containing these anti-dilution provisions for new warrants with the same terms except (i) the expiration date of the new warrants was extended two years and (ii) weighted average anti-dilution provisions were removed from the new warrants (the "Offer"). On May 17, 2013, we completed the Offer and exchanged an aggregate of 3,319,091 the warrants containing the anti-dilution provisions for new warrants to purchase an aggregate of 3,319,091 shares of our common stock.

Warrant Redemption. In addition, in May 2013, we called for the redemption of outstanding investor warrants issued in 2010 in accordance with the terms of those warrants. As a result, during the three months ended June 30, 2013, a total of 11,726,343 warrants were exercised, providing cash proceeds of $15,984,304.

Changes in Executive Leadership. In December 2013, Steven F. McAllister was appointed as Interim Chief Financial Officer. In January 2014, Mark D. Perrin was appointed as Chief Executive Officer and also joined the Company's Board of Directors. In February 2014, we announced the hiring of Thomas R. Ulich, MD as our Chief Scientific Officer.

Critical Accounting Policies and Estimates

Our consolidated financial statements, which appear in Item 8 of this Annual Report on Form 10-K, have been prepared in accordance with accounting principles generally accepted in the United States, which require that the management make certain assumptions and estimates and, in connection therewith, adopt certain accounting policies. Our significant accounting policies are set forth in Note 2 to our consolidated financial statements. Of those policies, we believe that the policies


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discussed below may involve a higher degree of judgment and may be more critical to an accurate reflection of our financial condition and results of operations.

Share-Based Compensation

Stock options are generally granted with an exercise price at fair market value at the date of the grant. The stock options generally expire ten years from the date of grant. Stock option awards vest upon terms determined by the Company's Board of Directors.

We recognize compensation costs resulting from the issuance of stock-based awards to employees, non-employees and directors as an expense in the statement of operations over the service period based on a measurement of fair value for each stock-based award. The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Due to our limited operating history and limited number of sales of our Common Stock, we estimated our volatility in consideration of a number of factors including the volatility of our stock as well as that of comparable public companies. We use historical data, as well as subsequent events occurring prior to the issuance of the consolidated financial statements, to estimate option exercise and employee termination within the valuation model. The expected term of options granted under the Company's stock plans is based on the average of the contractual term (generally 10 years) and the vesting period (generally 48 months) The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.

The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes option pricing model:

                                                      December 31,
                                           2013           2012           2011
     Risk-free interest rate           0.77 - 2.52%   0.62 - 1.23%   0.97 - 3.05%
     Expected dividend yield                0%             0%             0%
     Expected term (employee grants)       6.25           6.25           6.25
     Expected volatility                   102%           75%            49%

Derivative Instruments

Prior to May 2013, certain of our issued and outstanding warrants to purchase Common Stock contained anti-dilution provisions. These warrants did not meet the requirements for classification as equity and were recorded as derivative warrant liabilities. We used valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates consistent with those discussed in Share-Based Compensation above in estimating the fair value for the warrants considered to be derivative warrant liabilities. Such derivative warrant liabilities were initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. The fair value of the derivative warrant liability was most sensitive to changes in the fair value of the underlying Common Stock and the estimated volatility of our Common Stock.

Research and Development and General and Administrative Expenses

Research and development expenses consist primarily of payroll and payments to contract research and development companies and payroll. General and administrative expenses consist primarily of payroll, rent and professional services.


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Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11 Income Taxes (Topic 740)-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists that provides guidance on whether an uncertain tax position should be presented as a reduction to a deferred tax asset or as a separate liability. This guidance seeks to address diversity in practice. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect the adoption of this ASU amendment to have any effect on the financial condition, results of operations or cash flows.

Results of Operations

Comparison of the years ended December 31, 2013 and 2012

Research and Development Expenses

Research and development expenses increased by $4,157,000 to approximately $10,533,000 for the year ended December 31, 2013 from approximately $6,376,000 for the year ended December 31, 2012. The increase is primarily attributable to increased research and development activity and the resulting increase in compensation costs of $1,447,000 due to both additional staffing and pay raises, $1,693,000 related to stock option expense, increase in rent and facility costs of $605,000, and higher pre-clinical testing costs of $880,000.

General and Administrative Expenses

General and administrative expenses increased by $2,068,000 to approximately $8,472,000 for the year ended December 31, 2013 from approximately $6,404,000 for the year ended December 31, 2012. The increase in expenses is primarily attributable to higher legal costs of $1,179,000, an increase of $391,000 in compensation costs related to staffing and pay increases, an increase of $210,000 in stock compensation costs and an increase in rent and facilities costs of $344,000. Partly offsetting these increases is a reduction in other spending of $56,000.

Interest Expense

Interest expense increased by $58,000 to approximately $130,000 for the year ended December 31, 2013 from approximately $72,000 for the year ended December 31, 2012. The increase in interest expense is due to an increase in borrowing under the loans payable.

Derivatives Gain (Loss)

Derivatives loss increased by approximately $36,351,000 to a loss of approximately $18,871,000 for the year ended December 31, 2013 from a gain of approximately $17,480,000 for the year ended December 31, 2012. The increase in this non-cash loss during the year ended December 31, 2013 reflects the increase in the fair value of derivative warrant liability prior to reclassification to additional paid-in capital due primarily to the increase in the fair value of the underlying Common Stock.

Loss from Modification of Warrants

Loss from modification of warrants was $765,000 for the year ended December 31, 2013. The charge is attributable to an increase in the fair value of warrants that resulted from the modification of the terms of warrants on May 17, 2013.


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Comparison of the years ended December 31, 2012 and 2011

Research and Development Expenses

Research and development expenses increased by $2,273,000 to approximately $6,376,000 for the year ended December 31, 2012 from approximately $4,103,000 for the year ended December 31, 2011. The increase in expenses is primarily attributable to increased research and development activity and the resulting increase in compensation costs of $1,245,000 due to both additional staffing and pay raises, $765,000 of costs in 2012 for the manufacturing of scaffolding devices, increase in rent and facility costs of $609,000, and increase in lab supplies of $212,000, offset by a reduction in pre-clinical testing of $861,000.

General and Administrative Expenses

General and administrative expenses increased by $1,848,000 to approximately $6,404,000 for the year ended December 31, 2012 from approximately $4,556,000 for the year ended December 31, 2011. The increase in expenses is primarily attributable to an increase in compensation costs of $534,000 due to additional staffing and pay raises, an increase of $178,000 in legal costs, an increase of $238,000 in recruiting and relocation costs, an increase of $170,000 in travel and conference meeting costs, an increase of $455,000 in stock compensation costs and an increase in rent and facilities costs of $240,000.

Interest Expense

Interest expense increased by $59,000 to approximately $72,000 for the year ended December 31, 2012 from approximately $13,000 for the year ended December 31, 2011. The increase in interest expense is due to an increase in borrowing under the loans payable.

Derivatives Gain (Loss)

Derivatives gain (loss) increased by approximately $43,546,000 to a derivative gain of $17,480,000 for the year ended December 31, 2012 from a derivative loss of $26,066,000 for the year ended December 31, 2011. The increase in this non-cash gain for the year ended December 31, 2012 reflects the decrease in the fair value of derivative warrant liability due primarily to the decrease in the fair value of the underlying Common Stock.

Financial Condition, Liquidity and Capital Resources

Since inception, we have devoted substantially all of our efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. Accordingly, the Company is considered to be in the development stage.

Since inception, we have incurred negative cash flows from operations, and historically we have financed our operations primarily through the sale of equity-related securities. At December 31, 2013, the accumulated deficit was approximately $81,909,000 and the stockholders' equity was approximately $12,890,000.

At December 31, 2013, we had total current assets of $14,602,000 and current liabilities of $2,268,000 resulting in a working capital of $12,334,000. At December 31, 2013, we had total assets of $17,096,000 and total liabilities of $4,207,000, resulting in a stockholders' equity of $12,890,000.

Net cash used by operating activities for the year ended December 31, 2013 was approximately $14,906,000. The operating loss used $19,005,000, decreases in accounts payable and increases in accrued expenses provided $18,000, non-cash stock share based compensation provided $3,136,000 and depreciation and amortization provided $741,000.


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Net cash used by investing activities for the year ended totaled $749,000 for purchases of capital equipment.

Net cash provided by financing activities was approximately $16,810,000 for the year ended December 31, 2013, due mainly to approximately $15,952,000 proceeds from issuance of common stock and warrants. In addition, we received $456,000 from the exercise of stock options and approximately $402,000 from loans and notes, net of repayments.

The accompanying consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have incurred losses since inception in devoting substantially all of our efforts toward research and development and have an accumulated deficit of approximately $81,909,000 at December 31, 2013. During the year ended December 31, 2013, we generated a net loss of approximately $38,756,000, used approximately $14,906,000 of cash in operations and we expect that we will continue to generate operating losses for the foreseeable future. At December 31, 2013, the consolidated cash balance was approximately $13,980,000. We believe this cash balance is adequate to fund operations through October 2014.

We have incurred significant operating losses and negative cash flows since inception. We have not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain profitability in the future. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, for selling, general and administrative expenses and other working capital requirements. We have, in the past, successfully completed multiple rounds of financings, but, due to market conditions and other factors, including our development stage and our ability to continue as a going concern, we may be unable to raise the required capital in the future.

We intend to pursue opportunities to obtain additional financing in the future through equity and/or debt financings. We have filed with the SEC, and the SEC declared effective, a universal shelf registration statement which permits us to issue up to $100 million worth of registered equity securities. Under this effective shelf registration, we have the flexibility to issue registered securities, from time to time, in one or more separate offerings or other transactions with the size, price and terms to be determined at the time of issuance. Registered securities issued using this shelf may be used to raise additional capital to fund our working capital and other corporate needs, for future acquisitions of assets, programs or businesses, and for other corporate purposes.

The source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, on our progress in our exploratory, preclinical and future clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back or eliminate some or all of our research and product development programs, planned clinical trials, and our capital expenditures or to license our potential products or technologies to third parties.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.


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Contractual Obligations

    In the table below, we set forth our legally binding and enforceable
contractual cash obligations at December 31, 2013:

                                                        Payments Due
                                           Less than                                   More than
Contractual Obligations        Total        1 year      1 - 3 years    3 - 5 years      5 years
Long-term debt              $ 1,920,000   $         -    $ 1,137,778    $   782,222       $     -
Operating lease payments      6,058,132     1,202,585      3,806,127      1,049,420             -
Capital lease (equipment)         2,799         2,799              -              -             -


Total                       $ 7,980,931   $ 1,205,384    $ 4,943,904    $ 1,831,642       $     -

Commitments

See Note 17, "Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for information.

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