Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q


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

For the quarterly period ended June 30, 2020

or

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

For the transition period from             to            .

Commission File Number: 001-37350


InVivo Therapeutics Holdings Corp.

(Exact name of registrant as specified in its charter)


Nevada

36-4528166

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

One Kendall Square, Suite B14402

Cambridge, MA

02139

(Address of principal executive offices)

(Zip code)

(617) 863-5500

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)


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

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 par value per share

NVIV

The Nasdaq Capital Market

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

Indicate by check mark whether the registrant has submitted electronically if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  

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

Large accelerated filer  

    

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Act). Yes No

As of August 7, 2020, 4,882,240 shares of the registrant’s Common Stock, $0.00001 par value, were issued and outstanding.


Table of Contents

INVIVO THERAPEUTICS HOLDINGS CORP.

Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2020

TABLE OF CONTENTS

     

Page

PART I

FINANCIAL INFORMATION

1. Financial Statements (Unaudited)

3

Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019

3

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

5

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

7

Notes to Consolidated Financial Statements

8

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

3. Quantitative and Qualitative Disclosures about Market Risk

31

4. Controls and Procedures

31

PART II

OTHER INFORMATION

1A. Risk Factors

31

2. Unregistered Sales of Equity Securities and Use of Proceeds

55

5. Other Information

55

6. Exhibits

55

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements.

InVivo Therapeutics Holdings Corp.

Consolidated Balance Sheets

(In thousands, except share and per-share data)

(Unaudited)

As of

    

June 30, 

    

December 31, 

 

2020

2019

ASSETS:

    

    

Current assets:

Cash and cash equivalents

$

9,825

$

6,602

Restricted cash

 

6

 

4

Prepaid expenses and other current assets

 

508

 

177

Total current assets

 

10,339

 

6,783

Property, equipment and leasehold improvements, net

 

82

 

73

Restricted cash - non current

110

110

Operating lease right-of-use assets

1,072

1,211

Prepaid clinical trial expenses

 

1,122

 

1,122

Other assets

 

17

 

26

Total assets

$

12,742

$

9,325

LIABILITIES AND STOCKHOLDERS’ EQUITY:

Current liabilities:

Accounts payable

$

518

$

942

Operating lease liabilities

310

294

Accrued expenses

 

964

 

1,427

Total current liabilities

 

1,792

 

2,663

Other liabilities

59

59

Operating lease liabilities - non current

861

1,020

Total liabilities

 

2,712

 

3,742

Commitments and contingencies (Note 5)

Stockholders’ equity:

Common stock, $0.00001 par value, authorized 16,666,667 shares; 4,882,420 shares issued and outstanding, including 6,886 shares of unvested restricted stock, at June 30, 2020; 550,736 shares issued and outstanding, including 6,886 shares of unvested restricted stock, at December 31, 2019

 

2

 

2

Additional paid-in capital

 

233,791

 

224,741

Accumulated deficit

(223,763)

(219,160)

Total stockholders’ equity

 

10,030

 

5,583

Total liabilities and stockholders’ equity

$

12,742

$

9,325

See notes to the unaudited consolidated financial statements.

(Share and per share data reflects 1-for-30 reverse stock split effective February 11, 2020)

3


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InVivo Therapeutics Holdings Corp.

Consolidated Statements of Operations

(In thousands, except share and per-share data)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

    

Operating expenses:

    

    

    

    

Research and development

$

940

$

1,716

$

1,991

$

2,826

General and administrative

 

1,255

 

1,532

 

2,632

 

3,200

Total operating expenses

 

2,195

 

3,248

 

4,623

 

6,026

Operating loss

 

(2,195)

 

(3,248)

 

(4,623)

 

(6,026)

Other income / (expense):

Interest income / (expense), net

 

4

 

72

 

18

 

171

Other income

2

32

2

76

Other income / (expense), net

 

6

 

104

 

20

 

247

Net loss

$

(2,189)

$

(3,144)

$

(4,603)

$

(5,779)

Net loss per share, basic and diluted

$

(0.49)

$

(10.13)

$

(1.70)

$

(18.62)

Weighted average number of common shares outstanding, basic and diluted

 

4,453,831

 

310,378

 

2,714,976

 

310,363

See notes to the unaudited consolidated financial statements.

(Share and per share data reflects 1-for-30 reverse stock split effective February 11, 2020)

4


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InVivo Therapeutics Holdings Corp.

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share and per-share data)

(Unaudited)

Three Month Period Ended June 30, 2020

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount 

    

Capital    

    

 Deficit   

    

    Equity

Balance as of March 31, 2020

2,571,553

$

2

$

231,132

$

(221,574)

$

9,560

Share-based compensation expense

 

45

45

Issuance of common stock upon vesting of restricted stock units

50

Issuance of common stock and warrants in public offering

1,715,240

2,557

2,557

Issuance of common stock upon exercise of warrants

 

595,577

57

57

Net loss

 

(2,189)

(2,189)

Balance as of June 30, 2020

 

4,882,420

$

2

$

233,791

$

(223,763)

$

10,030

Three Month Period Ended June 30, 2019

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount    

    

Capital

    

Deficit

    

Equity 

Balance as of March 31, 2019

310,393

$

1

$

223,508

$

(209,965)

$

13,544

Share-based compensation expense

 

68

68

Issuance of common stock upon vesting of restricted stock units

21

Net loss

 

(3,144)

(3,144)

Balance as of June 30, 2019

 

310,414

$

1

$

223,576

$

(213,109)

$

10,468

See notes to the unaudited consolidated financial statements.

(Share and per share data reflects 1-for-30 reverse stock split effective February 11, 2020)

5


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InVivo Therapeutics Holdings Corp.

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share and per-share data)

(Unaudited)

Six Month Period Ended June 30, 2020

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

 Deficit   

    

Equity     

Balance as of December 31, 2019

550,736

$

2

$

224,741

$

(219,160)

$

5,583

Share-based compensation expense

 

115

115

Issuance of common stock upon vesting of restricted stock units

50

Fractional shares issued due to 1 for 30 reverse stock split

7,692

Issuance of common stock and warrants in public offering

2,670,853

8,592

8,592

Issuance of common stock upon exercise of warrants

 

1,653,089

343

343

Net loss

 

(4,603)

(4,603)

Balance as of June 30, 2020

 

4,882,420

$

2

$

233,791

$

(223,763)

$

10,030

Six Month Period Ended June 30, 2019

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity 

Balance as of December 31, 2018

310,330

$

1

$

223,440

$

(207,330)

$

16,111

Share-based compensation expense

 

135

135

Issuance of common stock upon vesting of restricted stock units

48

Issuance of common stock under ESPP

 

36

1

1

Net loss

 

(5,779)

(5,779)

Balance at June 30, 2019

 

310,414

$

1

$

223,576

$

(213,109)

$

10,468

See notes to the unaudited consolidated financial statements.

(Share and per share data reflects 1-for-30 reverse stock split effective February 11, 2020)

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InVivo Therapeutics Holdings Corp.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended

June 30, 

    

2020

    

2019

 

Cash flows from operating activities:

    

    

Net loss

$

(4,603)

$

(5,779)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

 

23

32

Amortization of operating lease right-of-use assets

139

131

Share-based compensation expense

 

115

135

Non-cash interest expense

 

1

Changes in operating assets and liabilities:

Prepaid expenses

 

(331)

(696)

Accounts payable

 

(424)

(30)

Operating lease liability

(143)

(9)

Accrued expenses and other liabilities

 

(463)

(448)

Net cash used in operating activities

 

(5,687)

 

(6,663)

Cash flows from investing activities:

Purchases of property and equipment

(23)

Net cash used in investing activities

 

(23)

 

Cash flows from financing activities:

Proceeds from issuance of stock under ESPP

1

Proceeds from exercise of warrants

343

Repayment of loan payable

 

(100)

Proceeds from issuance of common stock and warrants, net of commissions and issuance costs

 

8,592

Net cash provided by / (used in) financing activities

 

8,935

 

(99)

Increase / (decrease) in cash and cash equivalents and restricted cash

 

3,225

 

(6,762)

Cash, cash equivalents and restricted cash at beginning of period

 

6,716

16,774

Cash, cash equivalents and restricted cash at end of period

$

9,941

$

10,012

Supplemental disclosure of cash flow information and non-cash investing and financing activities:

Fair value of warrants issued in connection with the March and April 2020 Offerings

$

5,907

$

Cash paid for interest

$

$

1

Right-of-use assets and lease liability recorded upon adoption of ASC 842

$

$

1,475

See notes to the unaudited consolidated financial statements.

(Share and per share data reflects 1-for-30 reverse stock split effective February 11, 2020)

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

1.

NATURE OF OPERATIONS AND GOING CONCERN, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Business

InVivo Therapeutics Holdings Corp., including its subsidiary, (the “Company”) is a biomaterials and biotechnology company with a focus on the treatment of spinal cord injuries (“SCIs”). The Company’s proprietary technologies incorporate intellectual property that is licensed under an exclusive, worldwide license from Boston Children’s Hospital (“BCH”) and the Massachusetts Institute of Technology (“MIT”), as well as intellectual property that has been developed internally in collaboration with its advisors and partners.

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, and raising capital. The Company has historically financed its operations primarily through the sale of equity-related securities. At June 30, 2020, the Company had cash and cash equivalents of $9.8 million. The Company has not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain profitability in the future. The Company does not expect to be profitable in the next several years, but rather expects to incur additional operating losses. The Company has limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain its product development efforts, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of its 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. The Company expects that it will need additional capital to fund its operations, which it may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances, and licensing arrangements. The Company believes that it can be successful in obtaining additional capital; however, no assurance can be provided that it will be able to do so. There is no assurance, moreover, that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The Company is aware that a significant number of its clinical sites have temporarily suspended enrollment into the INSPIRE 2.0 Study at their institution due to the COVID-19 outbreak, and as such, the COVID-19 outbreak has affected and may continue to affect the potential for enrollment in the Company’s INSPIRE 2.0 Study as clinical sites suspend studies in order to manage the pandemic. Aside from the impact on enrollment in the Company’s INSPIRE 2.0 Study, the Company did not experience any significant impact from the COVID-19 outbreak on its financial condition, liquidity, other operations, suppliers, industry, and workforce for the quarter ended June 30, 2020. The full impact of the COVID-19 outbreak continues to evolve as of the date of filing this Quarterly Report on Form 10-Q. The Company is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce, although there remains significant uncertainty related to the public health situation globally. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the ultimate effects of the COVID-19 outbreak on its future results of operations, financial condition, or liquidity in the future. However, as the COVID-19 outbreak continues, it will likely continue to have an adverse effect on enrollment in the Company’s INSPIRE 2.0 Study, and may also have an adverse effect on the Company’s results of future operations, financial position, and liquidity, and even after the COVID-19 outbreak has subsided, the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that has occurred or may occur in the future.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

Going Concern

The Company’s consolidated financial statements as of June 30, 2020 were prepared under the assumption that the Company will continue as a going concern. At June 30, 2020, the Company had cash and cash equivalents of $9.8 million. Given the Company’s development plans, the Company estimates cash resources will be sufficient to fund its operations into the second quarter of 2021.

The Company’s ability to continue as a going concern depends on its ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The COVID-19 outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown, which would impair the Company’s ability to raise needed funds to continue as a going concern. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on its unaudited consolidated financial statements, and it is likely that investors will lose all or part of their investment. If the Company seeks additional financing to fund its business activities in the future and there remains substantial doubt about its ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to the Company on commercially reasonable terms or at all. Based on these factors, as of June 30, 2020, management determined that there is substantial doubt regarding the Company’s ability to continue as a going concern.

Reverse Stock Split

On February 11, 2020, the Company effected a reverse stock split of its common stock, par value $0.00001 per share, at a ratio of 1-for-30 (the “2020 Reverse Stock Split”). As a result of the 2020 Reverse Stock Split, (i) every 30 shares of the issued and outstanding common stock were automatically converted into one newly issued and outstanding share of common stock, without any change in the par value per share; (ii) the number of shares of common stock into which each outstanding warrant or option to purchase common stock is exercisable was proportionally decreased, and (iii) the number of authorized shares of common stock outstanding was proportionally decreased. Shares of common stock underlying outstanding stock options and other equity instruments convertible into common stock were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities.

All of the Company’s historical share and per share information related to issued and outstanding common stock and outstanding options and warrants exercisable for common stock in these consolidated financial statements were adjusted, on a retroactive basis to reflect the 2020 Reverse Stock Split.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) consistent with those applied in, and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on February 20, 2020. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of June 30, 2020 and its results of operations and cash flows for the interim period presented, and are not necessarily indicative of results for subsequent interim periods or for the full year. The interim consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, as allowed by the relevant SEC rules and regulations; however, the Company believes that its disclosures are adequate to ensure that the information presented is not misleading.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequent amendments to the initial guidance: ASU No. 2018-19 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, ASU No. 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, ASU No. 2019-05 “Financial Instruments-Credit Losses”, ASU No. 2019-11 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses”, ASU No. 2020-02 “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)” and ASU No. 2020-03 “Codification Improvements to Financial Instruments, (collectively, “Topic 326”)”. Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for all public business entities, excluding smaller reporting companies, for periods beginning after December 15, 2019 and all other entities beginning after December 15, 2022. The Company early adopted ASU No. 2016-13 and the related amending ASU’s on January 1, 2020, and the adoption did not have a material effect on the Company’s financial position, results of operations or disclosures.

In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” which improves the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. The Company adopted ASU No. 2018-13 on January 1, 2020, and the adoption did not have a material effect on the Company’s financial position, results of operations or disclosures.

In November 2019, the FASB issued ASU No. 2019-08 “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer.” ASU No. 2019-08 amends and clarifies ASU No. 2018-07, which we adopted on January 1, 2019, to require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have already adopted the amendments in ASU No. 2018-07, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU No. 2019-08 on January 1, 2020, and the adoption did not have any impact on the Company’s financial position, results of operations or disclosures.

New Accounting Pronouncements Not Yet Adopted

In January 2020, the FASB issued ASU No. 2020-01 “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) —clarifying the interactions between Topic 321, Topic 323 and Topic 815 (a consensus of the emerging issues task force)”. The amendments in this ASU clarify the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. ASU No. 2020-01 is effective for the Company beginning in fiscal 2022. The Company is currently in the process of evaluating the effects of this pronouncement on its financial statements.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

2.

CASH AND CASH EQUIVALENTS

At June 30, 2020 and December 31, 2019, cash equivalents were comprised of money market funds.

From time to time, the Company may have cash balances in financial institutions in excess of insurance limits. The Company has not experienced any losses related to these balances. The Company considers only those investments that are highly liquid, readily convertible to cash, and that mature within 3 months from date of purchase to be cash equivalents. Management believes it is not exposed to significant credit risk.

Cash and cash equivalents consisted of the following:

June 30, 

December 31, 

(In thousands)

    

2020

    

2019

 

Cash

$

(38)

$

(15)

Money market funds

 

9,863

 

6,617

Total cash and cash equivalents

$

9,825

$

6,602

3.

RESTRICTED CASH

Restricted cash as of June 30, 2020 and December 31, 2019 was $116 thousand and $114 thousand, respectively. Restricted cash as of June 30, 2020 included a $50 thousand security deposit related to the Company’s credit card account, $6 thousand related to 401(k) reserve account and a $60 thousand standby letter of credit in favor of a landlord (see Note 5).

Restricted cash as of December 31, 2019 included a $50 thousand security deposit related to the Company’s credit card account, $4 thousand related to 401(k) reserve account and a $60 thousand standby letter of credit in favor of a landlord (see Note 5)

4.

FAIR VALUES OF ASSETS AND LIABILITIES

The Company groups its assets and liabilities generally measured at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

Assets and liabilities measured at fair value on a recurring basis are summarized below:

At December 31, 2019

(In thousands)

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Cash equivalents

$

6,617

$

$

$

6,617

At June 30, 2020

(In thousands)

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Cash equivalents

$

9,863

$

$

$

9,863

5.

COMMITMENTS AND CONTINGENCIES

Operating Leases

On November 30, 2011, the Company entered into a commercial lease for 26,342 square feet of office, laboratory and manufacturing space in Cambridge, Massachusetts (as amended on September 17, 2012 and October 31, 2017, the “Cambridge Lease”). The term of the Cambridge Lease was 6 years and 3 months, with one 5year extension option. On August 21, 2017, the Company exercised its option for the 5-year extension on the Cambridge Lease. The 5-year renewal lease term was set to commence on November 1, 2018 and end on October 31, 2023. The terms of the Cambridge Lease initially required a standby letter of credit in the amount of $311 thousand.

On May 3, 2018, the Company assigned the Cambridge Lease to a third party who assumed all of the Company’s remaining rights and obligations under the Cambridge Lease. On the same date as the lease assignment, the Company entered into a sublease for 5,104 square feet of space, originally part of the Cambridge Lease, from the third party to which the Company assigned the Cambridge Lease (the “Current Cambridge Lease”). The Current Cambridge Lease commenced on May 3, 2018 and expires October 31, 2023 and contains rent holiday and rent escalation clauses. The Current Cambridge Lease does not contain any renewal options.

In connection with the assignment of the Cambridge Lease and the Current Cambridge Lease, the $311 thousand standby letter of credit was terminated, and a new standby letter of credit was established for $40 thousand. On November 1, 2018, the standby letter of credit was increased to $60 thousand.

Under the Current Cambridge Lease, the Company will be required to pay its proportionate share of certain operating costs and property taxes applicable to the leased premises in excess of new base year amounts. These costs are considered to be variable lease payments and are not included in the determination of the lease’s right-of-use asset or lease liability.

The Company identified and assessed the following significant assumptions in recognizing its right-of-use assets and corresponding lease liabilities:

As the Company’s Current Cambridge Lease does not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments. To calculate the present value of remaining lease payments, the Company elected to use an incremental borrowing rate based on the remaining lease term at transition.
Since the Company elected to account for each lease component and its associated non-lease components as a single combined component, all contract consideration was allocated to the combined lease component.
The expected lease terms include noncancelable lease periods.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

The elements of lease expense are as follows:

Lease cost (In thousands)

Three Months Ended June 30, 2020

    

Three Months Ended June 30, 2019

Six Months Ended June 30, 2020

    

Six Months Ended June 30, 2019

Operating lease cost

$

91

$

91

$

182

$

182

Short-term lease cost

5

6

13

12

Variable lease cost

51

76

Total lease cost

$

147

$

97

$

271

$

194

Other information (In thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from short term leases

$

5

$

6

$

13

$

12

Operating cash flows from operating leases

93

60

186

60

Total cash paid for leases

$

98

$

66

$

199

$

72

Right-of-use assets obtained in exchange for operating lease liabilities

$

$

$

$

Weighted-average remaining lease term - operating leases

3.3 Years

4.3 Years

3.3 Years

4.3 Years

Weighted-average discount rate - operating leases

7.0%

7.0%

7.0%

7.0%

Maturities of lease liabilities due under the Company’s Current Cambridge Lease as of June 30, 2020 is as follows:

Leases (In thousands)

As of June 30, 2020

    

2020 (excluding the 6 months ended June 30, 2020)

$

189

2021

386

2022

398

2023

339

Total lease payments

1,312

Less: imputed interest

(141)

Present value of lease liabilities

$

1,171

Right-of-use lease assets and lease liabilities are reported in the Company’s consolidated balance sheets as follows:

Leases (In thousands)

Classification

    

June 30, 2020

December 31, 2019

Assets

Lease asset, net

Operating

$

1,072

$

1,211

Total lease assets

$

1,072

$

1,211

Liabilities

Current

Operating

$

310

$

294

Non-Current

Operating

861

1,020

Total lease liabilities

$

1,171

$

1,314

Clinical Trial Commitments

The Company has engaged and executed contracts with a clinical research organization (“CRO”) consultant to assist with the administration of its ongoing INSPIRE 1.0 and INSPIRE 2.0 clinical trials. As of June 30, 2020, approximately $5.1 million remains to be paid on these contracts over the term of the clinical trials which are expected to be completed in November 2023. The costs may vary depending on actual pass-through expenses

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

incurred to execute the trial. In the event the Company were to terminate the INSPIRE 2.0 trial, certain financial penalties would become payable to the CRO for costs to wind down the terminated trial.

6.        FIXED ASSETS

Property, equipment, and leasehold improvements, net consisted of the following:

June 30, 

December 31, 

(In thousands)

    

2020

    

2019

 

Computer software and hardware

$

154

$

131

Research and lab equipment

 

520

 

520

Leasehold improvements

 

66

 

66

Property and equipment

740

717

Less accumulated depreciation

 

(658)

 

(644)

Property and equipment, net

$

82

$

73

Depreciation expense for the three and six months ended June 30, 2020, was $7 thousand, and $14 thousand, respectively. Depreciation expense for the three and six months ended June 30, 2019, was $10 thousand, and $22 thousand, respectively. Maintenance and repairs are charged to expense as incurred and any additions or improvements are capitalized.

7.        INTANGIBLE ASSETS

Intangible assets, included in “other assets,” consisted of patent licensing fees paid to license intellectual property. In July 2007, the Company entered into a worldwide exclusive license (the “BCH License”) for patents co-owned by BCH and MIT initially covering the use of biopolymers to treat spinal cord injuries, and to promote the survival and proliferation of human stem cells in the spinal cord. During 2011, the BCH License was amended, and the Company obtained additional rights for use in the field of peripheral nerve injuries. The BCH License, as amended, has a 15year term, or as long as the life of the last expiring patent right thereunder, whichever is longer, unless terminated earlier by the licensor, under certain conditions as defined in the related license agreement. In connection with the BCH License, the Company paid an initial $75 thousand licensing fee and is required to pay certain annual maintenance fees, milestone payments and royalties. License fees are capitalized and the gross total at June 30, 2020 and December 31, 2019 was $200 thousand. The Company accounts for milestone payments, maintenance fees and royalties when they become due and payable. During the three and six months ended June 30, 2020 and 2019, the Company did not pay any milestone payments. The Company is amortizing the license fee as a research and development expense over the 15– year term of the license.

Intangible assets, net consisted of the following:

June 30, 

December 31, 

(In thousands)

    

2020

    

2019

 

Patent licensing fee

$

200

$

200

Accumulated amortization

 

(183)

 

(174)

Intangible assets, net

$

17

$

26

Amortization expense during each of the three and six months ended June 30, 2020 and 2019 was $5 thousand and $9 thousand, respectively.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

8.       ACCRUED EXPENSES

Accrued expenses consisted of the following:

June 30, 

December 31, 

(In thousands)

    

2020

    

2019

 

Compensation

$

406

$

1,040

Clinical

 

140

143

Legal

145

37

Other accrued expenses

 

273

207

Total accrued expenses

$

964

$

1,427

9.

LOAN PAYABLE

In October 2012, the Company entered into a loan agreement with the Massachusetts Development Finance Agency (“MassDev”). The loan agreement provided the Company with a $2.0 million line of credit from the Commonwealth of Massachusetts’ Emerging Technology Fund, with $200 thousand designated to be used for working capital purposes and the remainder to be used for the purchase of capital equipment. The annual interest rate on the loan was fixed at 6.5% with interest-only payments for the first 30 months, commencing on November 1, 2012, and then equal installments of interest and principal over the next 54 months, until the final maturity of the loan in March 2019. Commencing on May 1, 2015, equal monthly payments of $41 thousand were due until loan maturity.

In May 2018, in order to obtain the consent of MassDev for facility changes, including the assignment of the Cambridge Lease, and the sale of certain assets, the Company paid down $300 thousand of principal on the MassDev loan. During the six month period ended June 30, 2019, the Company made principal loan payments of $100 thousand. In March 2019, the Company repaid the MassDev loan in full and the loan agreement was terminated.

In October 2012, as part of the loan agreement, the Company issued MassDev a 7-year warrant for the purchase of 13 shares of the Company’s common stock with an exercise price of $4,980 per share. The fair value of the warrant was determined to be $32 thousand and was amortized through interest expense over the life of the note. The Company did not record any amortization expense during the three months ended June 30, 2019. For the six months ended June 30, 2019 the Company recorded $1 thousand in amortization expense. This amortization expense was included in interest expense in the Company’s consolidated statements of operations. The Company did not record any amortization expense during the three and six month periods ended June 30, 2020.

The equipment line of credit was secured by substantially all the assets of the Company, excluding intellectual property. Interest expense related to this loan for the six month period ended June 30, 2019 was $1 thousand. The Company did not record any interest expense during the three and six month periods ended June 30, 2020.

10.

COMMON STOCK

In May 2018, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to increase the number of shares of authorized common stock from 4,000,000 to 25,000,000 shares of common stock (giving effect to a 1-for-25 reverse stock split effected on April 16, 2018 but not the 2020 Reverse Stock Split). In January 2020, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to increase the number of shares of authorized common stock from 25,000,000 to 500,000,000 (without giving effect to the 2020 Reverse Stock Split). On February 11, 2020, the Company effected the 2020 Reverse Stock Split and the number of shares of authorized common stock was reduced to 16,666,667. As of June 30, 2020, and December 31, 2019, 4,882,420 and 550,736 shares were issued and outstanding, respectively.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

In April 2020, the Company entered into a securities purchase agreement (the "April 2020 Purchase Agreement") with certain institutional investors (the "April 2020 Purchasers"), pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of 1,715,240 of common stock, at a purchase price per share of $1.75 (the "April 2020 Shares"). The April 2020 Shares were offered by the Company pursuant to a shelf registration statement on Form S-3, which was declared effective by SEC on November 14, 2019 (File No. 333-234353) and a prospectus supplement thereunder. Pursuant to the April 2020 Purchase Agreement, in a concurrent private placement, the Company also issued to the April 2020 Purchasers warrants (the "Series C Warrants") to purchase up to 1,715,240 shares of common stock (the "Private Placement" and together with the April 2020 Registered Offering, the "April 2020 Offerings"). The Series C Warrants are exercisable immediately at an exercise price of $1.62 per share of common stock, subject to adjustment in certain circumstances, and expire on October 17, 2025. In connection with the April 2020 Offerings, the Company also issued to designees of H.C. Wainwright & Co., LLC (“Wainwright”), warrants to purchase an aggregate of 111,491 (“Wainwright April 2020 Placement Agent Warrants”) shares of the Company’s common stock which represents a number of shares of common stock equal to 6.50% of the aggregate number of April 2020 Shares sold in the April 2020 Registered Offering, at an exercise price of $2.1875 per share with a term expiring on April 15, 2025. The net proceeds to the Company, after deducting Wainwright's placement agent fees and other offering expenses payable by the Company, were approximately $2.6 million. The Company assessed whether the Series C Warrants, and the Wainwright April 2020 Placement Agent Warrants required accounting as derivatives and determined that they were (1) indexed to the Company’s own stock and (2) classified in stockholders’ equity in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. As such, the Company concluded that the Series C Warrants and the Wainwright April 2020 Placement Agent Warrants meet the scope exception for determining whether the instruments require accounting as derivatives and accordingly are classified in stockholders’ equity. The fair value of the Series C warrants was estimated at $2.1 million, using a Black-Scholes model with the following assumptions: expected volatility of 115.84%, risk free interest rate of 0.40%, expected life of 5.5 years and no dividends. The fair value of the Wainwright April 2020 Placement Agent Warrants was estimated at $128 thousand, using a Black-Scholes model with the following assumptions: expected volatility of 116.14%, risk free interest rate of 0.36%, expected life of 5 years and no dividends. During the three months ended June 30, 2020, the Company issued an aggregate of 35,000 shares of common stock upon the exercise of certain of the 2020 Series C warrants for aggregate proceeds of $57 thousand.

In March 2020, the Company completed a registered public offering (the “March 2020 Offering”) in which it sold an aggregate of (i) 955,613 shares of common stock, (the “Shares”) at a combined public offering price of $2.75 per share and 2020 Series A Warrant (as defined below), (ii) pre-funded Series B warrants exercisable for an aggregate of 1,589,842 shares of common stock at a combined public offering price of $2.74999 per share and 2020 Series A Warrant (the “2020 Series B Warrants”) and (iii) Series A Warrants exercisable for an aggregate of 2,545,455 shares of common stock (the “2020 Series A Warrants”). The Shares and the 2020 Series B Warrants were each offered together with the 2020 Series A Warrants, but the Shares and 2020 Series B Warrants were issued separately from the 2020 Series A Warrants. Each 2020 Series A Warrant has an exercise price of $2.75 per share, is exercisable immediately and expires in March 2025. Each 2020 Series B Warrant has an exercise price of $0.00001 per share, is exercisable immediately, and expires when exercised in full, subject to certain conditions. In connection with the March 2020 Offering, the Company issued, to designees of Wainwright the placement agent for the March 2020 Offering, warrants (the “Wainwright March 2020 Placement Agent Warrants”) to purchase an aggregate of 165,455 shares of the Company’s common stock, which represents a number of shares of common stock equal to 6.5% of the aggregate number of shares of common stock and 2020 Series B Warrants sold in the March 2020 Offering. The Wainwright March 2020 Placement Agent Warrants have an exercise price of $3.4375 per share, are immediately exercisable and expire in March 2025. The net proceeds to the Company, after deducting Wainwright's placement agent fees and other offering expenses payable by the Company, were approximately $6.0 million. The Company assessed whether the 2020 Series A Warrants, 2020 Series B Warrants and the Wainwright March 2020 Placement Agent Warrants required accounting as derivatives and determined that they were (1) indexed to the Company’s own stock and (2) classified in stockholders’ equity in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. As such, the Company concluded that the 2020 Series A Warrants, 2020 Series B Warrants and the Wainwright March 2020 Placement Agent Warrants meet the scope exception for determining whether the instruments require accounting as

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

derivatives and accordingly are classified in stockholders’ equity. The fair value of the 2020 Series A warrants and Wainwright March 2020 Placement Agent Warrants was estimated at $3.5 million and $218 thousand, respectively, using a Black-Scholes model with the following assumptions: expected volatility of 115.22%, risk free interest rate of 0.63%, expected life of 5 years and no dividends. The 2020 Series B Warrants had an intrinsic value of approximately $4.4 million. During the three months ended June 30, 2020, the Company issued an aggregate of 560,577 shares of common stock upon the exercise of certain of the pre-funded 2020 Series B warrants for an immaterial amount. During the six months ended June 30, 2020, the Company issued an aggregate of 1,577,114 shares of common stock upon the exercise of certain of the pre-funded 2020 Series B warrants for an immaterial amount.

In November 2019, the Company closed a public offering of an aggregate of 233,341 shares of its common stock, at an offering price of $3.60 per share (the offering, the “2019 Offering”). The net proceeds to the Company after deducting placement agent fees and other offering expenses, were $367 thousand. In connection with the 2019 Offering, the Company agreed to issue, and in January 2020 issued, to designees of Wainwright, the placement agent for the 2019 Offering, warrants (the “Placement Agent Warrants”) to purchase an aggregate of 15,168 shares of the Company’s common stock. The Placement Agent Warrants have an exercise price of $4.50 per share, are immediately exercisable and expire in November 2024. The Company assessed whether the Placement Agent Warrants required accounting as derivatives and determined that they were (1) indexed to the Company’s own stock and (2) classified in stockholders’ equity in accordance with ASC Topic 815, Derivatives and Hedging. As such, the Company concluded that the Placement Agent Warrants meet the scope exception for determining whether the instruments require accounting as derivatives and accordingly are classified in stockholders’ equity. The fair value of the Placement Agent Warrants was estimated at $59 thousand using a Black-Scholes model with the following assumptions: expected volatility of 100.82%, risk free interest rate of 1.61%, expected life of 5 years and no dividends. During the three and six months ended June 30, 2020, there was no exercise activity related to the Placement Agent Warrants.

In June 2018, the Company closed an underwritten public offering of an aggregate of 45,950 Common Units, at an offering price of $60.00 each, each comprised of 1 share of the Company’s common stock and 1 Series A warrant to purchase 1 share of common stock. The public offering also included 208,096 pre-funded units at an offering price of $59.70 each, each comprised of 1 pre-funded Series B Warrant, and 1 Series A warrant to purchase 1 share of common stock. Each Series A warrant has an exercise price of $60.00 per share, is exercisable immediately and expires 5 years from the date of issuance. Each Series B warrant had an exercise price of $0.30 per share, was exercisable immediately and would have expired 20 years from the date of issuance. The net proceeds to the Company, after deducting the underwriting discounts and commissions and other offering expenses, were $13.5 million. In September 2018, the Company entered into an Amendment to the Warrant Agency Agreement and Warrants (the “Ladenburg Warrant Amendment”) with Continental Stock Transfer & Trust Company (“Continental”) that amended the Warrant Agency Agreement, by and between the Company and Continental, as Warrant Agent, dated June 25, 2018, and the Series A common stock Purchase Warrant, and the Series B Pre-Funded common stock Purchase Warrant both dated June 25, 2018 (the Series A and Series B Warrant, collectively the “2018 Warrants”). The Ladenburg Warrant Amendment added a provision to each of the warrants that allowed the Company or a successor entity whose stock is not listed on a trading market to, in connection with a Fundamental Transaction (as such term is defined in the 2018 Warrants) that is not within the Company’s control, purchase the warrant from the holder, at the holder’s option, by paying the same form of consideration in the same proportion that is offered to the holders of the Company’s common stock in connection with the Fundamental Transaction, including cash, stock, any combination thereof and any choice of consideration thereof,  in an amount equal to the Black-Scholes Value of the remaining unexercised portion of the Warrant on the consummation date of the Fundamental Transaction. The 2018 Warrants were initially classified as liabilities, as a result of the amendment, the Company reassessed the warrant classification and concluded that the warrants qualified for equity classification. The fair value of the amended 2018 Warrants was re-measured immediately prior to the date of the Ladenburg Warrant Amendment with changes in fair value recorded as a loss of $764 thousand in the Company’s consolidated statement of operations and $14.7 million was reclassified to equity. In November 2019, the Company entered into a Second Amendment to Warrant Agency Agreement and Warrants, (“the Second Ladenburg Warrant Amendment”), by and between the Company and Continental, as Warrant Agent,

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

that amended the Series A warrants to reflect a reduced exercise price per share of $6.98 from $60.00. The fair value of the amended Series A warrants was re-measured immediately prior to the date of the Second Ladenburg Warrant Amendment with changes in fair value recorded as incremental expense of $666 thousand in the Company’s consolidated statement of operations. The Company did not issue any shares as a result of either the Series A or Series B warrant exercise activity during the three months ended June 30, 2020. During the six months ended June 30, 2020 the Company issued an aggregate of 40,975 shares of common stock upon the exercise of certain of the Series A warrants for aggregate proceeds of $286 thousand. The Company did not issue any shares as a result of Series B warrant exercise activity during the six months ended June 30, 2020. The Company did not issue any shares as a result of either the Series A or Series B warrant exercise activity during the three and six months ended June 30, 2019. There are no outstanding Series B warrants as of June 30, 2020.

In January 2018, the Company entered into a purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “RRA”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), under which it had the right to sell up to $15 million, in shares of our common stock,,  to Lincoln Park over a 24 month period, subject to certain limitations and conditions set forth in the Purchase Agreement and RRA. On May 30, 2018, the Company’s stockholders approved to increase the issuance and sale by the Company to Lincoln Park, including the Company’s prior issuances and sales of shares of common stock to Lincoln Park since January 2018, of up to 40,000 shares of common stock. In accordance with the terms of the Purchase Agreement, at the time the Company signed the Purchase Agreement and the RRA, it issued 574 shares to Lincoln Park as consideration for its commitment to purchase shares of the Company’s common stock under the Purchase Agreement and recorded $627 thousand in deferred offering costs of which the full amount was capitalized into additional paid-in capital in 2018. The Company did not sell any shares to Lincoln Park during the three months ended June 30, 2019. In May 2019, the Company terminated the Purchase Agreement with Lincoln Park.

In May 2018, the Company’s Board of Directors approved to increase the number of shares of common stock reserved under the 401(k) Plan by 134 shares, bringing the aggregate number of shares of common stock eligible for distribution pursuant to the 401(k) Plan as of that date to 137 shares. In the second quarter of 2018 the Company revised its 401(k)-matching policy to move from share matching to cash-based matching. During the three and six months ended June 30, 2019, the Company contributed $19 thousand and $31 thousand respectively, in cash as a matching contributions to employee 401(k) accounts. During the three and six months ended June 30, 2020, the Company contributed $16 thousand and $35 thousand respectively, in cash as a matching contribution to employee 401(k) accounts.

In January 2019, 36 shares that were purchased in the offering period commencing on July 1, 2018 and ending on December 31, 2018 were issued under the ESPP. During the three and six months ended June 30, 2020, the Company did not issue any shares under the Company’s Employee Stock Purchase Plan (the “ESPP”).

During the three months ended June 30, 2019, the Company issued an aggregate of 21 shares of common stock respectively, upon vesting of restricted stock units. During the six months ended June 30, 2019, the Company issued an aggregate of 48 shares of common stock respectively, upon vesting of restricted stock units. During the three and six months ended June 30, 2020, the Company issued an aggregate of 50 shares of common stock upon vesting of restricted stock units.

During the six months ended June 30, 2020, as part of the adjustment to reflect the 2020 Reverse Stock Split, the Company issued 7,692 shares of common stock to account for the fractional roundup of shareholders.

11.

STOCK-BASED COMPENSATION

In 2007, the Company’s Board of Directors adopted, and the Company’s shareholders subsequently approved, the 2007 Employee, Director and Consultant Stock Plan (the “2007 Plan”). The 2007 Plan provided that the Company’s Board of Directors (or committees and/or executive officers delegated by the Board of Directors) could grant incentive and nonqualified stock options to the Company’s employees, officers, directors, consultants and advisors.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

On October 26, 2010, the Company’s Board of Directors adopted, and the Company’s shareholders subsequently approved, the 2010 Equity Incentive Plan (as subsequently amended, the “2010 Plan”). The 2010 Plan provided for grants of incentive stock options to employees, and nonqualified stock options and restricted common stock to employees, consultants, and non-employee directors of the Company.

In April 2015, the Company’s Board of Directors adopted, and the Company’s shareholders subsequently approved, the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan provides for grants of incentive stock options to employees, and nonqualified stock options, restricted common stock, restricted stock units (“RSUs”), and stock appreciation rights to employees, consultants, and non-employee directors of the Company.

Upon approval of the 2015 Plan by the Company’s shareholders on June 16, 2015, the 2010 Plan was terminated and no additional shares or share awards have been subsequently granted under the 2010 Plan. In March 2019, the Company’s Board approved, and recommended to the Company’s shareholders for approval, an amendment to the 2015 Plan (the “2015 Plan Amendment”), and on January 21, 2020, the Company’ shareholders subsequently approved the 2015 Plan Amendment. The 2015 Plan Amendment increased the maximum number of shares reserved for issuance under the 2015 Plan by 26,667 shares to a total of 32,000 shares. As of June 30, 2020, the total number of shares available to be issued under the 2015 Plan was 26,670 shares, consisting of (i) 5,333 shares initially authorized under the 2015 Plan shares plus, (ii) the shares that remained available for grant under the 2010 Plan at the time of its termination adjusted for cumulative cancellations, forfeitures and issuances from the 2010 Plan and 2015 Plan plus, (iii) the 26,667 shares approved for increase during the January 2020 shareholders meeting.

Options issued under the 2007 Plan, 2010 Plan, and 2015 Plan (collectively, the “Plans”) are exercisable for up to 10 years from the date of issuance.

In March 2015, the Company’s Board of Directors adopted, and the Company’s shareholders subsequently approved the ESPP. The ESPP allows employees to buy company stock twice per year through after-tax payroll deductions at a discount from market. The Company’s Board of Directors initially authorized 250 shares for issuance under the ESPP. Commencing on the first day of the year ended December 31, 2016 and on the first day of each year thereafter during the term of the ESPP, the number of shares of common stock reserved for issuance shall be increased by the lesser of (i) 1% of the Company’s outstanding shares of common stock on such date, (ii) 67 shares or (iii) a lesser amount determined by the Board of Directors. Under the terms of the ESPP, in no event shall the aggregate number of shares reserved for issuance during the term of the ESPP exceed 1,667 shares. As of both June 30, 2020 and December 31, 2019, there were 264 shares reserved for issuance under the ESPP.

In January 2019, 36 shares that were purchased in the offering period commencing on July 1, 2018 and ending on December 31, 2018 were issued under the ESPP. The ESPP is considered a compensatory plan with the related compensation cost recognized over each 6 month offering period. None of the Company’s employees participated in the ESPP plan in the current offering period and consequently no compensation expense was recorded during the six month period ended June 30, 2020.

Stock-based compensation

For the three month periods ended June 30, 2020 and 2019, the Company recorded stock-based compensation expense of $45 thousand and $68 thousand, respectively. For the six month periods ended June 30, 2020 and 2019, the Company recorded stock-based compensation expense of $115 thousand and $135 thousand, respectively. Stock-based compensation recognized was classified in the consolidated statements of operations as follows:

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

(In thousands)

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Research and development

$

7

$

26

$

27

$

50

General and administrative

38

42

88

85

Total

$

45

$

68

$

115

$

135

The fair value of each option award is estimated on the date of grant using the BlackScholes option pricing model, which uses the following assumptions; (i) Risk-free interest rate, (ii) Expected dividend yield, (iii) Expected term and (iv) Expected volatility. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercises within the valuation model. The expected term of options granted under the Plans, all of which qualify as “plain vanilla,” is based on the average of the contractual term (10 years) and the vesting period (generally, 48 months). For nonemployee options, the expected term is the contractual term. The riskfree rate is based on the yield of a U.S. Treasury security with a term consistent with the option. The impact of forfeitures on compensation expense is recorded as they occur.

The Company grants RSUs and restricted stock awards (“RSAs”), collectively referred to as restricted securities under its the 2015 Equity Incentive Plan. These restricted securities, generally vest over a three-year period, contingent on the recipient’s continued employment. Prior to vesting, all RSAs have the right to vote and receive dividends under the 2015 Equity Incentive Plan; however, the Company’s form of Restricted Stock Agreement provides that the payment of dividends on unvested RSAs shall be deferred until such time as the shares vest. The grant date fair value of these awards is based on the fair market value of our common stock on the date of grant.

The Company did not grant any awards during the three and six months ended June 30, 2020. The assumptions used principally in determining the fair value of options granted during the three and six months ended June 30, 2019 were as follows:

June 30, 

 

    

2019

 

Risk-free interest rate

    

2.55%

Expected dividend yield

 

0%

Expected term (employee grants)

 

6 Years

Expected volatility

 

105%

Stock options

A summary of option activity as of June 30, 2020 and changes for the six month period then ended are presented below:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Options

    

Shares

    

Price

    

Term in Years

Value

Outstanding at December 31, 2019

 

4,187

$

1,077.78

 

8.17

$

Granted

 

$

Expired

 

$

Cancelled/Forfeited

$

Outstanding at June 30, 2020

 

4,187

$

1,077.78

7.65

Vested and Exercisable at June 30, 2020

 

2,061

$

2,022.20

6.83

The total fair value of options that vested in the three months ended June 30, 2020 and 2019 was $24 thousand and $33 thousand, respectively. The total fair value of options that vested in the six months ended June 30, 2020 and

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

2019 was $80 thousand and $69 thousand, respectively. For the three month periods ended June 30, 2020 and 2019, the Company recorded stock-based compensation expense of $21 thousand and $43 thousand, respectively related to stock options. For the six month periods ended June 30, 2020 and 2019, the Company recorded stock-based compensation expense of $64 thousand and $84 thousand, respectively related to stock options. As of June 30, 2020, total unrecognized compensation expense related to non-vested share-based option compensation arrangements amounted to $116 thousand and is estimated to be recognized over a period of 1.21 years.

Restricted Securities

The following table summarizes the restricted securities activity under the 2015 Plan during the six month period ended June 30, 2020:

Weighted-Average

Restricted Securities

    

Number of Grants

    

Grant Date Fair Value

Unvested balance at December 31, 2019

7,086

$

33.78

Granted

$

Vested

(50)

$

Unvested balance at June 30, 2020

7,036

$

29.34

For the three month periods ended June 30, 2020, and 2019, the Company recorded stock-based compensation expense of $24 thousand and $25 thousand, respectively, related to the time-based restricted securities. For the six month periods ended June 30, 2020, and 2019, the Company recorded stock-based compensation expense of $51 thousand and $51 thousand, respectively, related to the time-based restricted securities. As of June 30, 2020, total unrecognized compensation expense related to non-vested restricted securities amounted to $177 thousand which the Company expects to recognize over a remaining weighted-average of 1.81 years. All the restricted securities that remain unvested and outstanding at June 30, 2020 are subject to time-based vesting.

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

12.     WARRANTS

The following table presents information about warrants to purchase common stock issued and outstanding at June 30, 2020:

    

    

    

Number of

    

Exercise Price

    

Year Issued

Defined Name

Classification

Warrants

as of June 30, 2020

Date of Expiration

2014

2014 Warrants

Equity

11

$

352.50

5/9/2021

2016

2016 Warrants

Equity

2,865

$

7,500.00

3/18/2021

2018

2018 Series A Warrants

Equity

211,921

$

6.98

6/25/2023

2019

Placement Agent Warrants

Equity

15,168

$

4.50

11/21/2024

2020

2020 Series A Warrants

Equity

2,545,455

$

2.75

3/10/2025

2020

Wainwright March 2020 Placement Agent Warrants

Equity

165,455

$

3.4375

3/5/2025

2020

2020 Series B Warrants

Equity

12,728

$

0.00001

Until Fully Exercised

2020

2020 Series C Warrants

Equity

1,680,240

$

1.62

10/17/2025

2020

Wainwright April 2020 Placement Agent Warrants

Equity

111,491

$

2.1875

4/15/2025

Total

 

4,745,334

Weighted average exercise price

$

7.08

Weighted average life in years

 

4.82

13. NET LOSS PER COMMON SHARE

Basic and diluted net loss per share of common stock has been computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted net loss per share of common stock is computed by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, warrants and convertible securities. In a net loss period, options, warrants, unvested restricted securities and convertible securities are anti-dilutive and, therefore, excluded from diluted loss per share calculations.

For the three month periods ended June 30, 2020 and 2019, the following potentially dilutive securities were not included in the computation of net loss per share because the effect would be anti-dilutive:

June 30, 

2020

2019

Warrants

4,745,334

255,781

Stock options

4,187

4,187

Unvested RSUs

150

293

Unvested RSAs

6,886

Total potentially dilutive securities

4,756,557

260,261

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InVivo Therapeutics Holdings Corp.

Notes to Consolidated Financial Statements for the Quarter Ended June 30, 2020 (Unaudited)

(Continued)

14.     SUBSEQUENT EVENTS

On August 4, 2020, the Company held its 2020 Annual Meeting of Stockholders (the “Annual Meeting”). At the Annual Meeting, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to increase the number of shares of authorized common stock from 16,666,667 to 50,000,000 shares.

In addition, at the Annual Meeting, the Company’s stockholders approved an amendment to the 2015 Plan to increase the number of shares available for issuance thereunder by 400,000 shares.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis should be read in conjunction with the unaudited consolidated financial statements included elsewhere in this Quarterly Report and with our historical consolidated financial statements, and the related notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”). The management’s discussion and analysis contains forward-looking statements within the meaning of the safe harbor provisions under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include statements made regarding our commercialization strategy, future operations, cash requirements and liquidity, capital requirements, and other statements on our business plans and strategy, financial position, and market trends. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “should,” “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and other similar expressions. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report, including factors such as our ability to raise substantial additional capital to finance our planned operations and to continue as a going concern; our ability to execute our strategy and business plan; our ability to obtain regulatory approvals for our products, including the Neuro-Spinal Scaffold™; our ability to successfully commercialize our current and future product candidates, including the Neuro-Spinal Scaffold; the progress and timing of our development programs; market acceptance of our products; our ability to retain management and other key personnel; our ability to promote, manufacture, and sell our products, either directly or through collaborative and other arrangements with third parties; the impact of the COVID-19 outbreak and our response to it; and other factors detailed under “Risk Factors” in Part II, Item 1A of this Quarterly Report. These forward-looking statements speak only as of the date hereof. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report, except as required by law.

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us 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 consolidated 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 our estimates on historical experience and on various other factors that we believe 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.

All share amounts presented in this Item 2 are retroactively adjusted to give effect to the 1-for-30 reverse stock split of our outstanding shares of common stock, par value $0.00001 per share (“common stock”), that occurred on February 11, 2020.

Overview

We are a research and clinical-stage biomaterials and biotechnology company with a focus on treatment of spinal cord injuries, or SCIs. Our approach to treating acute SCIs is based on our investigational Neuro-Spinal Scaffold™ implant, a bioresorbable polymer scaffold that is designed for implantation at the site of injury within a spinal cord and is intended to treat acute SCI. The Neuro-Spinal Scaffold implant incorporates intellectual property licensed under an exclusive, worldwide license from Boston Children’s Hospital, or BCH, and the Massachusetts Institute of Technology, or MIT. We also plan to evaluate other technologies and therapeutics that may be complementary to our development of the Neuro-Spinal Scaffold implant, such as stem cells, therapeutics or electrical stimulation, including in combination with learnings applied from our Neuro-Spinal Scaffold implant or technologies that offer the potential to bring us closer to our goal of redefining the life of the SCI patient.

The current standard of care for acute management of spinal cord injuries focuses on preventing further injury to the spinal cord. However, the current standard of care does not address repair of the spinal cord.

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Our Clinical Program

We currently have one clinical development program for the treatment of acute SCI.

Neuro-Spinal Scaffold Implant for acute SCI

Our Neuro-Spinal Scaffold implant is an investigational bioresorbable polymer scaffold that is designed for implantation at the site of injury within a spinal cord. The Neuro-Spinal Scaffold implant is intended to promote appositional, or side-by-side, healing by supporting the surrounding tissue after injury, minimizing expansion of areas of necrosis, and providing a biomaterial substrate for the body’s own healing/repair processes following injury. We believe this form of appositional healing may spare white matter, increase neural sprouting, and diminish post-traumatic cyst formation.

The Neuro-Spinal Scaffold implant is composed of 2 biocompatible and bioresorbable polymers that are cast to form a highly porous investigational product:

Poly lactic-co-glycolic acid, a polymer that is widely used in resorbable sutures and provides the biocompatible support for Neuro-Spinal Scaffold implant; and

Poly-L-Lysine, a positively charged polymer commonly used to coat surfaces in order to promote cellular attachment.

Because of the complexity of SCIs, it is likely that multi-modal therapies will be required to maximize positive outcomes in SCI patients. In the future, we may attempt to further enhance the performance of our Neuro-Spinal Scaffold implant by multiple combination strategies involving electrostimulation devices, additional biomaterials, drugs approved by the U.S. Food and Drug Administration, or FDA, or growth factors. We expect the Neuro-Spinal Scaffold implant to be regulated by the FDA as a Class III medical device.

INSPIRE 2.0 Study

Our Neuro-Spinal Scaffold implant has been approved to be studied under our approved Investigational Device Exemption, or IDE, in the INSPIRE 2.0 Study, which is titled the “Randomized, Controlled, Single-blind Study of Probable Benefit of the Neuro-Spinal Scaffold™ for Safety and Neurologic Recovery in Subjects with Complete Thoracic AIS A Spinal Cord Injury as Compared to Standard of Care.” The purpose of the INSPIRE 2.0 Study is to assess the overall safety and probable benefit of the Neuro-Spinal Scaffold for the treatment of neurologically complete thoracic traumatic acute SCI. The INSPIRE 2.0 Study is designed to enroll 10 subjects into each of the 2 study arms, which we refer to as the Scaffold Arm and the Comparator Arm. Patients in the Comparator Arm will receive the standard of care, which is spinal stabilization without dural opening or myelotomy. The INSPIRE 2.0 Study is a single blind study, meaning that the patients and assessors are blinded to treatment assignments. The FDA approved the enrollment of up to 35 patients in this study so that there would be at least 20 evaluable patients (10 in each study arm) at the primary endpoint analysis, accounting for events such as screen failures or deaths that would prevent a patient from reaching the primary endpoint visit. As of August 9, 2020, eight patients in the INSPIRE 2.0 Study have been enrolled and 17 sites are activated for enrollment. We are aware that a significant number of our clinical sites have temporarily suspended enrollment into the INSPIRE 2.0 Study at their institution due to the coronavirus pandemic. We estimate that enrollment in the INSPIRE 2.0 Study will be complete in the second quarter of 2021, with the final patient enrolled in the INSPIRE 2.0 study reaching their six-month primary endpoint visit in the fourth quarter of 2021.

 

The primary endpoint is defined as the proportion of patients achieving an improvement of at least 1 American Spinal Injury Association Impairment Scale (“AIS”) grade at 6 months post-implantation. Assessments of AIS grade are at hospital discharge, 3 months, 6 months, 12 months and 24 months. The definition of study success for INSPIRE 2.0 is that the difference in the proportion of subjects who demonstrate an improvement of at least 1 grade on AIS assessment at the 6-month primary endpoint follow-up visit between the Scaffold Arm and the Comparator Arm must be equal to or greater than 20%. In one example, if 50% of subjects in the Scaffold Arm have an improvement of AIS grade at the 6-month primary endpoint and 30% of subjects in the Comparator Arm have an improvement, then the difference in the proportion of subjects who demonstrated an improvement is equal to 20% (50% minus 30% equals 20%) and the definition of study success would be met. In another example, if 40% of subjects in the Scaffold Arm have an

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improvement of AIS grade at the 6-month primary endpoint and 30% of subjects in the Comparator Arm have an improvement, then the difference in the proportion of subjects who demonstrated an improvement is equal to 10% (40% minus 30% equals 10%) and the definition of study success would not be met. Additional endpoints include measurements of changes in neurological level of injury, sensory levels and motor scores, bladder, bowel and sexual function, pain, Spinal Cord Independence Measure, and quality of life.

Our Neuro-Spinal Scaffold was previously studied in The INSPIRE Study: the “InVivo Study of Probable Benefit of the Neuro- Spinal Scaffold for Safety and Neurologic Recovery in Subjects with Complete Thoracic AIS A Spinal Cord Injury,” under an IDE application for the treatment of neurologically complete thoracic traumatic acute SCI. Although The INSPIRE Study was structured with an Objective Performance Criterion, or the OPC as the primary component for demonstrating probable benefit, the OPC is not the only variable that the FDA would evaluate when reviewing a future human device exemption, or HDE, application. Similarly, while our INSPIRE 2.0 Study is structured with a definition of study success requiring a minimum difference between study arms in the proportion of subjects achieving improvement, that success definition is not the only factor that the FDA would evaluate in the future HDE application.  Approval is not guaranteed if the OPC is met for The INSPIRE Study or the definition of study success is met for the INSPIRE 2.0 Study, and even if the OPC or definition of study success are not met, the FDA may approve a medical device if probable benefit is supported by a comprehensive review of all clinical endpoints and preclinical results, as demonstrated by the sponsor’s body of evidence.

 

In 2016, the FDA accepted our proposed HDE modular shell submission and review process for the Neuro-Spinal Scaffold implant. The HDE modular shell is comprised of 3 modules: a preclinical studies module, a manufacturing module, and a clinical data module. As part of its review process, the FDA reviews each module, which are individual sections of the HDE submission, on a rolling basis. Following the submission of each module, the FDA reviews and provides feedback, typically within 90 days, allowing the applicant to receive feedback and potentially resolve any deficiencies during the review process. Upon receipt of all 3 modules, which constitutes the complete HDE submission, the FDA makes a filing decision that may trigger the review clock for an approval decision. We submitted the first module in March 2017 and received feedback in June 2017. We submitted an updated first module in the fourth quarter of 2019. The HDE submission will not be complete until the manufacturing and clinical modules are also submitted.

Impact of COVID-19 Outbreak

On January 30, 2020, the World Health Organization, or the WHO, announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China, or the COVID-19 outbreak, and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. We are aware that a significant number of our clinical sites have temporarily suspended enrollment into the INSPIRE 2.0 Study at their institution due to the COVID-19 outbreak, and as such, the COVID-19 outbreak has affected and may continue to affect the potential for enrollment in our INSPIRE 2.0 Study as clinical sites suspend studies in order to manage the pandemic. Aside from the impact on enrollment in our INSPIRE 2.0 Study, we did not experience any significant impact from the COVID-19 outbreak on our financial condition, liquidity, other operations, suppliers, industry, and workforce for the quarter ended June 30, 2020. The full impact of the COVID-19 outbreak continues to evolve as of the date of filing this Quarterly Report on Form 10-Q. We are actively monitoring the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry, and workforce, although there remains significant uncertainty related to the public health situation globally. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, we are not able to estimate the ultimate effects of the COVID-19 outbreak on our results of operations, financial condition, or liquidity in the future. However, as the COVID-19 outbreak continues, it will likely continue to have an adverse effect on enrollment in our INSPIRE 2.0 Study, and may also have an adverse effect on our results of future operations, financial position, and liquidity, and even after the COVID-19 outbreak has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires

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management to make estimates and assumptions and, in connection therewith, adopt certain accounting policies that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, stock-based compensation expense, and the fair value determined for stock purchase warrants classified as derivative liabilities. We base our estimates and judgments on historical experience, current economic and industry conditions, and on various other factors that we believe to be reasonable under the circumstances. Such factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes in our critical accounting policies and estimates from the disclosure provided in our 2019 Annual Report.

We believe that the consolidated financial statements accurately reflect our best estimate of the results of operations, financial position, and cash flows for the periods presented.

Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

Research and Development Expenses

Research and development expenses consisted primarily of expenses related to contract research organizations and clinical sites, professional services, and payroll. Research and development expenses for the three months ended June 30, 2020 were $0.9 million, a decrease of $776 thousand compared to the three months ended June 30, 2019. The decrease in research and development expenses for the three months ended June 30, 2020 is attributable to a decrease clinical trial costs of $592 thousand, a decrease in compensation related expenses of $179 thousand, a decrease in scaffold manufacturing costs of $43 thousand and a decrease in other net immaterial balances of $11 thousand. These decreases were partially offset by an increase in facilities and rent expense of $49 thousand.

General and Administrative Expenses

General and administrative expenses consisted primarily of payroll, rent, and professional services. General and administrative expenses for the three months ended June 30, 2020 were $1.3 million, a decrease of $277 thousand compared to the three months ended June 30, 2019. The decrease in general and administrative expenses for the three months ended June 30, 2020 is attributable primarily due to a decrease in compensation related expenses of $279 thousand. This decrease was partially offset by increases in other net immaterial balances of $2 thousand.

Other Income and Expense

Other income for the three months ended June 30, 2020 was $6 thousand, which was comprised primarily of interest income. Other income for the three months ended months ended June 30, 2019 was $104 thousand, which was comprised of miscellaneous income of $32 thousand and interest income of $72 thousand.

Comparison of the Six Months Ended June 30, 2020 and 2019

Research and Development Expenses

Research and development expenses consisted primarily of expenses related to contract research organizations and clinical sites, professional services, and payroll. Research and development expenses for the six months ended June 30, 2020 were $2.0 million, a decrease of $835 thousand compared to the six months ended June 30, 2019. The decrease in research and development expenses for the six months ended June 30, 2020 is attributable primarily due to a decrease in compensation related expenses of $268 thousand and a decrease clinical trial costs of $639 thousand. These decreases were partially offset by an increase in facilities and rent expense of $72 thousand.

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General and Administrative Expenses

General and administrative expenses consisted primarily of payroll, rent, and professional services. General and administrative expenses for the six months ended June 30, 2020 were $2.6 million, a decrease of $568 thousand compared to the six months ended June 30, 2019. The decrease in general and administrative expenses for the six months ended June 30, 2020 is attributable to a decrease in consulting costs of $360 thousand, a decrease compensation related expenses of $317 thousand and decreases in other net immaterial balances of $10 thousand. These decreases were partially offset by an increase in investor relations expenses of $119 thousand.

Other Income and Expense

Other income for the six months ended June 30, 2020 was $20 thousand, which was comprised primarily of interest income. Other income for the six months ended June 30, 2019 was $247 thousand, which was comprised of interest income of $171 thousand and other income of $76 thousand.

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. At June 30, 2020, our accumulated deficit was $223.8 million. Since our inception, we have historically financed our operations primarily through the sale of equity-related securities.

At June 30, 2020, we had total assets of $12.7 million, total liabilities of $2.7 million, and total stockholders’ equity of $10.0 million. During the six months ended June 30, 2020, we recorded a net loss of $4.6 million. 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 believe that our cash and cash equivalents on hand which includes proceeds from the two offerings that occurred in 2020 and described in more detail below, will provide necessary funding to fund operations into the second quarter of 2021. This estimate is based on assumptions that may prove to be wrong; expenses could prove to be significantly higher, leading to a more rapid consumption of our existing resources. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to fund our operations and 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 for other working capital requirements. We also expect that we will need to raise additional capital through a combination of equity offerings, debt financings, other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Additionally, the COVID-19 outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown, which would impair our ability to raise needed funds to continue as a going concern. Based on these factors, as of June 30, 2020, management determined that there is substantial doubt regarding our ability to continue as a going concern.

We may pursue various other dilutive and nondilutive funding alternatives depending upon our clinical path forward and the extent to which we require additional capital to proceed with development of some or all of our product candidates on expected timelines. The source, timing and availability of any future financing will depend principally upon market conditions and the status of our clinical development programs, both of which may be negatively impacted by the COVID-19 outbreak. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us to, among other things, delay, scale back or eliminate some or all of our research and product development programs, planned clinical trials, and capital expenditures or to license our potential products or technologies to third parties. We may alternatively engage in cost-cutting measures in an attempt to extend our cash resources as long as possible.

Financings Transactions

On April 15, 2020, we entered into a securities purchase agreement, or the April 2020 Purchase Agreement, with certain institutional investors, or the April 2020 Purchasers, pursuant to which we agreed to sell and issue, in a registered direct offering, an aggregate of 1,715,240 of common stock, at a purchase price per share of $1.75, or the

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April 2020 Shares, for net proceeds to us of approximately $2.6 million, after deducting fees payable to Wainwright, the placement agent for the offering, and other offering expenses payable by us, or the April 2020 Registered Offering. The April 2020 Shares were offered pursuant to a shelf registration statement on Form S-3, which was declared effective by SEC on November 14, 2019 (File No. 333-234353) and a prospectus supplement thereunder. Pursuant to the April 2020 Purchase Agreement, in a concurrent private placement, we also issued to the April 2020 Purchasers warrants (the "Series C Warrants") to purchase up to 1,715,240 shares of common stock (the "Private Placement" and together with the April 2020 Registered Offering, the "April 2020 Offerings"). The Series C Warrants are exercisable immediately at an exercise price of $1.62 per share of common stock, subject to adjustment in certain circumstances, and expire on October 17, 2025. In connection with the April 2020 Offerings, we also issued to designees of Wainwright, warrants to purchase an aggregate of 111,491 shares of our common stock, which represents a number of shares of common stock equal to 6.50% of the aggregate number of April 2020 Shares sold in the April 2020 Registered Offering, at an exercise price of $2.1875 per share with a term expiring on April 15, 2025. During the three months ended June 30, 2020, we issued an aggregate of 35,000 shares of common stock upon the exercise of certain of the Series C Warrants for aggregate proceeds of $57 thousand.

In March 2020, we completed a registered public offering, or the March 2020 Offering, in which we sold an aggregate of (i) 955,613 shares of common stock, or the Shares, at a combined public offering price of $2.75 per share and 2020 Series A Warrant (as defined below), (ii) 2020 Series B Warrants exercisable for an aggregate of 1,589,842 shares of common stock at a combined public offering price of $2.74999 per share and 2020 Series A Warrant and (iii) 2020 Series A Warrants exercisable for an aggregate of 2,545,455 shares of common stock. The Shares and the 2020 Series B Warrants were each offered together with the 2020 Series A Warrants, but the Shares and 2020 Series B Warrants were issued separately from the Series A Warrants. Each 2020 Series A warrant has an exercise price of $2.75 per share, is exercisable immediately and expires in March 2025. Each 2020 Series B warrant has an exercise price of $0.00001 per share, is exercisable immediately, and expires when exercised in full, subject to certain conditions. In connection with the March 2020 Offering, we issued Wainwright, the placement agent for the March 2020 Offering, the Wainwright March 2020 Placement Agent Warrants to purchase an aggregate of 165,455 shares of our common stock, which represents a number of shares of common stock equal to 6.5% of the aggregate number of shares of common stock and 2020 Series B Warrants sold in the March 2020 Offering. The Wainwright March 2020 Placement Agent Warrants have an exercise price of $3.4375 per share, are immediately exercisable and expire in March 2025. The net proceeds to us, after deducting Wainwright's placement agent fees and other offering expenses payable by us, were approximately $6.0 million. During the three months ended June 30, 2020, we issued an aggregate of 560,577 shares of common stock upon the exercise of certain of the pre-funded 2020 Series B warrants for an immaterial amount. During the six months ended June 30, 2020, we issued an aggregate of 1,577,114 shares of common stock upon the exercise of certain of the pre-funded 2020 Series B warrants for an immaterial amount.

In November 2019, we closed a public offering of an aggregate of 233,341 shares of our common stock, at an offering price of $3.60 per share (the offering, the “2019 Offering”). The net proceeds to us after deducting the placement agent fees and other offering expenses, were $367 thousand. In connection with the 2019 Offering, we issued to designees of Wainwright, the placement agent for the 2019 Offering, warrants, or the “Placement Agent Warrants”, to purchase an aggregate of 15,168 shares of our common stock. The Placement Agent Warrants have an exercise price of $4.50 per share, are immediately exercisable and expire in November 2024. During the three and six months ended June 30, 2020, there was no exercise activity related to the Placement Agent Warrants.

In June 2018, we closed an underwritten public offering of an aggregate of 45,950 Common Units, at an offering price of $60.00 each, each comprised of 1 share of our common stock, and 1 Series A warrant to purchase 1 share of common stock. The public offering also included 208,096 pre-funded units at an offering price of $59.70 each, each comprised of 1 pre-funded Series B Warrant and 1 Series A warrant to purchase 1 share of common stock. Each Series A warrant had an exercise price of $60.00 per share, was exercisable immediately from the date of issuance and expired 5 years from the date of issuance. Each Series B warrant had an exercise price of $0.30 per share, was exercisable immediately and would have expired 20 years from the date of issuance. The net proceeds to us, after deducting the underwriting discounts and commissions and other offering expenses, were $13.5 million. We did not issue any shares as a result of either the Series A or Series B warrant exercise activity during the three months ended June 30, 2020. During the six months ended June 30, 2020 we issued an aggregate of 40,975 shares of common stock upon the exercise of certain of the Series A warrants for aggregate proceeds of $286 thousand. We did not issue any shares as a result of either the Series A or Series B warrant exercise activity during the three and six months ended June 30, 2019. There are no outstanding Series B warrants as of June 30, 2020.

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In September 2018, we entered into an Amendment to Warrant Agency Agreement and Warrants, or the Ladenburg Warrant Amendment, with Continental Stock Transfer & Trust Company, or Continental, that amended the Warrant Agency Agreement, by and between us and Continental, as Warrant Agent, dated June 25, 2018, and the Series A common stock Purchase Warrant, and the Series B Pre-Funded common stock Purchase Warrant both dated June 25, 2018, and we refer to the Series A and Series B Warrant collectively as the 2018 Warrants. See Note 10 to our Consolidated Financial Statements in Item 1 of this report for more information about the Ladenburg Warrant Amendment.

In November 2019, we entered into a Second Amendment to Warrant Agency Agreement and Warrants, or “the Second Ladenburg Warrant Amendment”, by and between us and Continental, as Warrant Agent, dated November 21, 2019, that amended the Series A warrants to reflect a reduced exercise price per share of $6.98 from $60.00. See Note 10 to our Consolidated Financial Statements in Item 1 of this report for more information about the Second Ladenburg Warrant Amendment.

In January 2018, we entered into a purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “RRA”) with Lincoln Park Capital Fund, LLC, which we refer to as Lincoln Park, under which we had the right to sell up to $15 million in shares of our common stock to Lincoln Park over a 24-month period, subject to certain limitations and conditions set forth in the Purchase Agreement and RRA. On May 30, 2018 at our 2018 Annual Meeting of Stockholders, our stockholders approved an increase to the number of shares of common stock available for issuance and sale by us to Lincoln Park, including our prior issuances and sales of shares of common stock to Lincoln Park since January 2018, up to 40,000 shares of common stock. In accordance with the terms of the Purchase Agreement, at the time we signed the Purchase Agreement and the RRA, we issued 574 shares to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the purchase agreement and recorded $627 thousand in deferred offering costs of which the full amount was capitalized into additional paid-in capital as of December 31, 2018. In May 2019, we terminated the Purchase Agreement with Lincoln Park.

Facility Changes

In May 2018, we assigned the Cambridge Lease to a third party, who assumed from us all of our remaining rights and obligations under the lease. Concurrently with the lease assignment, we entered into a sublease for 5,104 square feet of the space, originally part of the Cambridge Lease, from the third party to which we assigned the lease. The sublease ends on October 31, 2023 and contains rent holidays and rent escalation clauses. In order to obtain the consent of our lender for these facility changes and the sale of certain assets, we repaid $300 thousand of principal on our loan and recorded an impairment charge of $48 thousand. On January 1, 2019 we adopted ASU No. 2016-02, Leases (Topic 842). The adoption of this standard resulted in the recognition of operating lease liabilities and right-of-use assets of $1.5 million and $1.5 million, respectively, on our consolidated balance sheet. For more information, see Notes 1 and 5 to the notes to our unaudited Consolidated Financial Statements in Item 1 of this report.

Cashflows

Net cash used in operating activities for the six months ended June 30, 2020 was $5.7 million, as compared to net cash used in operating activities of $6.7 million for the six months ended June 30, 2019. The change in net cash used in operating activities for the six months ended June 30, 2020, as compared to the same period in the prior year was primarily due to a decrease in our net loss of $1.2 million, an increase in the change in accrued expenses and other liabilities of $15 thousand, an increase in the change in operating lease liability of $134 thousand, an increase in the change in accounts payable of $394 thousand and a decrease in the change in prepaid expenses and other assets of $365 thousand. In addition to the above operating activity, there was a net decrease in the change in non-cash activity of $22 thousand.

Net cash used in investing activities for the six months ended June 30, 2020 was $23 thousand related to the purchase of computer equipment. The Company did not generate or use cash in investing activities during the six months ended June 30, 2019.

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Net cash generated by financing activities for the six months ended June 30, 2020, was $8.9 million consisting of $8.6 million in proceeds from the issuance of common stock associated with the Offerings in 2020 and $343 thousand in proceeds from the exercise of warrants. This compares to net cash used by financing activities of $99 thousand for the six months ended June 30, 2019 consisting primarily $100 thousand in loan repayments and offset by employee stock purchase plan issuances of $1 thousand.

Off-Balance Sheet Arrangements

We do not have any 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.

Contractual Obligations

As of June 30, 2020, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2019 Annual Report.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of June 30, 2020, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1A.       Risk Factors.

Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are

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unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.

Risks Related to Our Business

The COVID-19 outbreak, which began in late 2019 and has had impacts worldwide, has and may continue to delay our ability to complete our ongoing INSPIRE 2.0 clinical trial or delay the initiation of future clinical trials, disrupt regulatory activities, or have other adverse effects on our business and operations. In addition, this pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could result in adverse effects on our business and operations.

The COVID-19 outbreak, which began in December 2019, has had impacts worldwide, causing many governments to implement measures to slow the spread of the outbreak through quarantines, travel restrictions, heightened border scrutiny, and other measures. The outbreak and government measures taken in response, including widespread emergency orders requiring business and residents to curtail non-essential activities, have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. The future progression of the outbreak and its effects on our business and operations are uncertain. We and our clinical research organizations, as well as clinical trial sites, have faced disruptions related to the INSPIRE 2.0 clinical trial arising from suspension of activity at numerous clinical trial sites due to hospital staff shortages or state or city ‘‘stay at home’’ or ‘‘shelter in place’’ orders, delays in the ability to obtain necessary institutional review board, or IRB, or other necessary site approvals, as well as other delays at clinical trial sites. Specifically, we are aware that a significant number of our clinical sites have temporarily suspended enrollment into the INSPIRE 2.0 Study at their institution due to the coronavirus pandemic. Additionally, the response to the COVID-19 outbreak may redirect resources of regulators in a way that would adversely impact our ability to progress regulatory approvals. In addition, we may face impediments to regulatory meetings and approvals due to measures intended to limit in-person interactions. Any of these factors could continue to adversely impact our ability to enroll, or delay enrollment in, the INSPIRE 2.0 clinical trial. Additionally, the pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds through public offerings and may also impact the volatility of our stock price and trading in our stock. Moreover, it is possible the pandemic will significantly impact economies worldwide, which could result in adverse effects on our business and operations. We cannot be certain what the overall impact of the COVID-19 outbreak will be on our business and it has the potential to adversely affect our business, financial condition, results of operations, and prospects.

We have found it difficult and may continue to find it difficult to enroll patients in our clinical studies, which could delay or prevent clinical studies of our product candidates, and due to such enrollment delays, we may need to make a determination as to the next steps for our clinical program that could significantly impact our future operations and financial position. Specifically, if the pace of enrollment in our INSPIRE 2.0 Study does not increase, we may need to make a determination as to the next steps for the INSPIRE 2.0 Study and our clinical program. The COVID-19 outbreak has affected and may continue to affect the potential for enrollment in our INSPIRE 2.0 Study as clinical sites suspend studies in order to manage the pandemic.

Patient enrollment is affected by a number of factors including:

widespread emergency orders in response to the COVID-19 outbreak requiring business and residents to curtail non-essential activities,;

severity of the disease, injury, or condition under investigation;

design of the study protocol;

size and nature of the patient population;

eligibility criteria for and design of the study in question;

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perceived risks and benefits of the product candidate under study;

proximity and availability of clinical study sites for prospective patients;

availability of competing therapies and clinical studies;

efforts to facilitate timely enrollment in clinical studies;

patient referral practices of physicians; and

ability to monitor patients adequately during and after treatment.

For a period in 2016, as a result of an FDA pre-specified enrollment hold, we were unable to enroll patients in The INSPIRE Study pending FDA authorization to proceed with additional enrollment, which delayed our ability to open new sites and enroll patients at the pace we had anticipated. In addition, in July 2017 we halted enrollment in the study, and subsequently closed enrollment in the study. We are also experiencing enrollment delays with our INSPIRE 2.0 Study.  We may not be able to initiate or continue clinical studies if we cannot enroll a sufficient number of eligible patients to participate in the clinical studies required by regulatory agencies, and as a result, if the pace of enrollment does not increase, we may need to make a determination as to the next steps for the INSPIRE 2.0 Study and our clinical program.

 

If we have difficulty enrolling a sufficient number of patients to conduct our clinical studies as planned, we may need to delay, limit, or terminate ongoing or planned clinical studies, any of which would have an adverse effect on our business. We also may consider changes to our current business strategy and future operations. We are reviewing alternatives with a goal of maximizing the value of our company. We could determine to engage in one or more potential transactions, such as the sale of our company, a strategic partnership with one or more parties or the licensing, sale or divestiture of some of our assets or proprietary technologies, or to continue to operate our business in accordance with our existing business strategy.

We have experienced delays and may experience further delays in our clinical development of our Neuro-Spinal Scaffold implant. Clinical trials for future product candidates may also experience delays or may not be able to commence.

Before we can obtain regulatory approval for the sale of our Neuro-Spinal Scaffold implant, we must complete the clinical studies that are required. In July 2017, The INSPIRE Study of our Neuro-Spinal Scaffold implant was placed on hold following the third patient death in the trial.  We subsequently closed enrollment in The INSPIRE Study and will follow the active patients until completion. The FDA has approved the INSPIRE 2.0 Study. However, the INSPIRE 2.0 Study may not be successfully completed or may take longer than anticipated because of any number of factors, including potential delays in the enrollment of subjects in the study, including delays due to the COVID-19 outbreak, the availability of scaffold implants to supply to our clinical sites, failure to demonstrate safety and probable benefit of our Neuro-Spinal Scaffold implant, lack of adequate funding to continue the clinical trial, or unforeseen safety issues. For example, enrollment in our Inspire 2.0 trial has been slower than we initially anticipated. Enrolling patients the INSPIRE 2.0 Study and any other clinical trial of our Neuro-Spinal Scaffold implant will continue to require the approval of the institutional review boards, or IRBs at each clinical site.

 

In addition, our results may subsequently fail to meet the safety and probable benefit standards required to obtain regulatory approvals. For example, in The INSPIRE Study, 2 of the 16 evaluable patients were initially assessed to have improved from complete AIS A SCI to incomplete AIS B SCI, but each was later assessed to have reverted to complete AIS A SCI prior to the patient’s 6-month examination. Of these 2 patients, 1 patient had converted back to AIS B and the other remained at AIS A at the 6-month examination. There is known and published variability in some of the measures used to assess AIS improvement and these measures can vary over time or depending upon the examiner. While we implemented procedures in The INSPIRE Study and the INSPIRE 2.0 Study, and will also implement procedures in any future clinical study to limit such variations, we cannot be certain that regulatory authorities will accept the results of our clinical trials or interpret them the way that we do.

 

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In addition, clinical trials can be delayed or aborted for a variety of reasons, including delay or failure to:

obtain regulatory approval to commence future clinical trials;
reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
obtain IRB approval at each site;
recruit, enroll, and retain patients through the completion of clinical trials;
maintain clinical sites in compliance with trial protocols through the completion of clinical trials;
address patient safety concerns that arise during the course of the trial;
initiate or add a sufficient number of clinical trial sites; or
manufacture sufficient quantities of our product candidate for use in clinical trials.

We could encounter delays if a clinical trial is suspended or terminated by us, by the relevant IRB at the sites at which such trials are being conducted, by the Data Safety Monitoring Board for such trial, or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, a problematic inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse events, or changes in laws or regulations. In addition, regulatory agencies may require an audit with respect to the conduct of a clinical trial, which could cause further delays or increase costs. For example, in December 2017, we and several of our clinical sites and our CRO were subject to an FDA inspection in association with The INSPIRE Study. At the close of the inspection at the Company, the FDA issued a Form 483 with 2 observations relating to our oversight of clinical trial sites in The INSPIRE Study. We sought input from the FDA regarding the scope and timing of our proposed remediation efforts and the FDA has indicated that our corrective actions appear adequate. We cannot be certain that we will not be subject to additional regulatory action by the FDA. Our remediation efforts have added, and may continue to add, costs to our clinical development plans.  Any delays in completing our clinical trials will increase our costs, slow down our product candidate development and regulatory review process, and jeopardize our ability to obtain approval and commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition, and prospects significantly.

Risks Related to Our Financial Position and Need for Additional Capital

We will need additional funding.  If we are unable to raise capital when needed, we could be forced to delay, reduce, or eliminate our product development programs or commercialization efforts, engage in one or more potential transactions, or cease our operations entirely.  

 

We do not have sufficient cash resources to continue our business operations beyond the second quarter of 2021. Our current cash resources will not be sufficient to complete clinical development of our Neuro-Spinal Scaffold implant, including submission of the HDE application to the FDA. In addition, we expect that our expenses will increase in connection with our ongoing activities, particularly as we conduct our INSPIRE 2.0 Study, and as we seek regulatory approval for our Neuro-Spinal Scaffold implant.  If we obtain regulatory approval for any of our current or future product candidates, we expect to incur significant commercialization expenses related to manufacturing, marketing, sales, and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.

 

If we are unable to raise additional capital, we may seek to engage in one or more potential transactions, such as the sale of our company, a strategic partnership with one or more parties or the licensing, sale or divestiture of some of our assets or proprietary technologies, or we may be forced to cease our operation entirely.  There can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or on terms that are favorable to

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us.  If we are unable to raise capital when needed or on attractive terms, or should we engage in one or more potential strategic transactions, we could be forced to delay, reduce, or eliminate our research and development programs or any future commercialization efforts or to cease operations entirely.  If we determine to change our business strategy or to seek to engage in a strategic transaction, our future business, prospects, financial position and operating results could be significantly different than those in historical periods or projected by our management.  Because of the significant uncertainty regarding these events, we are not able to accurately predict the impact of any potential changes in our existing business strategy.

 

Our future funding requirements, both near and long term, will depend on many factors, including, but not limited to:

the scope, progress, results, and costs of preclinical development, laboratory testing, and clinical trials for our Neuro-Spinal Scaffold implant and any other product candidates that we may develop or acquire, including our INSPIRE 2.0 Study;
future clinical trial results of our Neuro-Spinal Scaffold implant;
the timing of, and the costs involved in, obtaining regulatory approvals for the Neuro-Spinal Scaffold implant, and the outcome of regulatory review of the Neuro-Spinal Scaffold implant;
the cost and timing of future commercialization activities for our products if any of our product candidates are approved for marketing, including product manufacturing, marketing, sales, and distribution costs;
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
the cost of having our product candidates manufactured for clinical trials in preparation for regulatory approval and in preparation for commercialization;
the cost and delays in product development as a result of any changes in regulatory oversight applicable to our product candidates;
our ability to establish and maintain strategic collaborations, licensing, or other arrangements and the financial terms of such agreements;
the cost and timing of establishing sales, marketing, and distribution capabilities;
the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio;
the efforts and activities of competitors and potential competitors;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products, and technologies.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive, and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all, and if we are not successful in raising additional capital, we may not be able to continue as a going concern

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We have a limited operating history and have incurred significant losses since our inception.

We have incurred net losses each year since our inception, including net losses of $4.6 million for the six months ended June 30, 2020, and net losses of $11.8 million for the year ended December 31, 2019 and $23.4 million for the year ended December 31, 2018. As of June 30, 2020, we had an accumulated deficit of $223.8 million. We have a limited operating history on which to base an evaluation of our business and investors should consider the risks and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets, particularly companies engaged in the development of medical devices. To date, we have not commercialized any products or generated any revenues from the sale of products, and we do not expect to generate any product revenues in the foreseeable future. We do not know whether or when we will generate revenue or become profitable. Moreover, we may allocate significant amounts of capital towards products and technologies for which market demand is lower than anticipated and, as a result, may not achieve expectations or may elect to abandon such efforts.

We have devoted most of our financial resources to research and development, including our clinical and preclinical development activities related to our Neuro-Spinal Scaffold implant. Overall, we expect our research and development 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. We expect that it could be several years, if ever, before we have a product candidate ready for commercialization. Even if we obtain regulatory approval to market our Neuro-Spinal Scaffold implant or other products, our future revenues will depend upon the size of any markets in which our products have received approval, our ability to achieve sufficient market acceptance, reimbursement from third-party payers, and other factors.

There is substantial doubt about our ability to continue as a going concern, which will affect our ability to obtain future financing and may require us to curtail our operations.

Our consolidated financial statements as of June 30, 2020 were prepared under the assumption that we will continue as a going concern. At June 30, 2020, we had cash and cash equivalents of $9.8 million. Given our development plans, we estimate cash resources will be sufficient to fund our operations into the second quarter of 2021. This estimate is based on assumptions that may prove to be wrong; expenses could prove to be significantly higher, leading to a more rapid consumption of our existing resources.

Our ability to continue as a going concern will depend on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce or contain expenditures, and, ultimately, to generate revenue.

If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all. Based on these factors, management determined that there is substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm expressed substantial doubt as to our ability to continue as a going concern in its report included in our Annual report on Form 10-K as filed with the SEC on February 20, 2020.

We anticipate that we will continue to incur substantial losses for the foreseeable future and may never achieve or maintain profitability.

We expect to continue to incur significant expenses and increasing net losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

continue clinical development of our Neuro-Spinal Scaffold implant;

initiate or restart the research and development of other product candidates;

have our product candidates manufactured for clinical trials and for commercial sale;

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establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

maintain, protect, and expand our intellectual property portfolio; and

continue our research and development efforts for new product opportunities.

To become and remain profitable, we must succeed in developing and commercializing our product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our current and future product candidates, developing additional product candidates, obtaining regulatory approval for these product candidates, and manufacturing, marketing, and selling any products for which we may obtain regulatory approval. We are only in the initial stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings, or even continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations, or require us to relinquish rights to our product candidates on unfavorable terms to us.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, and other third party funding alternatives including license and collaboration agreements. To raise additional capital or pursue strategic transactions, we may in the future sell additional shares of our common stock, par value $0.00001 per share (the “common stock”) or other securities convertible into or exchangeable for our common stock, which will dilute the ownership interest of our current stockholders, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our current stockholders. If we raise additional funds through collaborations, strategic alliances, or marketing, distribution, or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us or that may reduce the value of our common stock. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or commercialization efforts for our Neuro-Spinal Scaffold implant or any other product candidates that we develop or acquire or to cease our operations entirely.

Changes in tax laws or in their implementation or interpretation may adversely affect our business and financial condition.

 

Recent changes in tax law may adversely affect our business or financial condition. On December 22, 2017, President Trump signed into law the Tax Cut and Jobs Act, or the Tax Act, which significantly revised the Internal Revenue Code of 1986, as amended, which we refer to as the Code. The Tax Act, among other things, contained significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses, or NOLs, arising in taxable years beginning after December 31, 2017,to 80% of current year taxable income and elimination of NOL carrybacks, for losses arising in taxable years ending after December 31, 2017 (though any such NOLs may be carried forward indefinitely), imposition of a one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), the allowance of immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits.

As part of Congress’ response to the COVID-19 pandemic, the Families First Coronavirus Response Act, or FFCR Act, was enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted on March 27, 2020. Both contain numerous tax provisions. In particular, the CARES Act retroactively

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and temporarily (for taxable years beginning before January 1, 2021) suspends application of the 80%-of-income limitation on the use of NOLs, which was enacted as part of the Tax Act. It also provides that NOLs arising in any taxable year beginning after December 31, 2017 and before January 1, 2021 are generally eligible to be carried back up to five years. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxes the limitation of the tax deductibility for net interest expense by increasing the limitation from 30% to 50% of adjusted taxable income.

Regulatory guidance under the Tax Act, the FFCR Act and the CARES Act is and continues to be forthcoming, and such guidance could ultimately increase or lessen impact of these laws on our business and financial condition. Congress is also considering and may enact further tax law changes in connection with the COVID-19 pandemic, some of which could have an impact on our company. In addition, state tax legislation or administration guidance conforming to or decoupling from particular provisions of the Tax Act, the FFCR Act and the CARES Act could affect our business or financial condition.

 

Our ability to use our net operating loss carryforwards and tax credit carryforwards may be limited.

 

We have generated significant NOLs and research and development tax credits, or R&D credits, as a result of our incurrence of losses and our conduct of research activities since inception. We generally are able to carry NOLs and R&D credits forward to reduce our tax liability in future years but certain NOL carryforwards could expire unused and be unavailable to offset our future income tax liabilities. As described above in “Changes in tax laws or in their implementation or interpretation may adversely affect our business and financial condition,” the Tax Act, as amended by the CARES Act, includes changes to U.S. federal tax rates and the rules governing NOLs that may significantly impact our ability to utilize our NOLs to offset taxable income in the future. Nor is it clear how various states will respond to the Tax Act, the FFCR Act or the CARES Act. In addition, state NOLs generated in one state cannot be used to offset income generated in another state. For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.

 

In addition, our ability to utilize the NOLs and R&D credits is subject to the rules of Sections 382 and 383, respectively, of the Code. Those sections generally restrict the use of NOLs and R&D credits after an “ownership change.” An ownership change occurs if, among other things, the stockholders (or specified groups of stockholders) who own or have owned, directly or indirectly, 5% or more of a corporation’s common stock or are otherwise treated as 5% stockholders under Section 382 of the Code and the United States Treasury Department regulations promulgated thereunder increase their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these stockholders over the applicable testing period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards and Section 383 imposes an annual limitation on the amount of tax a corporation may offset with business credit (including the R&D credit) carryforwards. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL or R&D credit carryforwards. We have completed several financings since our inception, which may have resulted in an ownership change as defined by Sections 382 and 383 of the Code, or could result in an ownership change in the future, but we have not completed an analysis of whether a limitation as noted above exists. As of June 30, 2020, we have not performed a Section 382 study, but we will complete an appropriate analysis before our tax attributes are utilized.

Increases in authorized shares may be required for future financings or other strategic transactions. We have previously experienced difficulties obtaining quorum for our annual meetings and achieving the number of votes required for increases in authorized shares.

 

We may seek the additional capital necessary to fund our operations through public or private equity offerings, debt financings, and collaborative and licensing arrangements. We have limited capital and in order for us to execute on our business plan and remain viable as a going concern, we must have the flexibility to engage in capital raising transactions until we are able to generate sufficient revenue and cash flow. Investors in prior transactions have purchased our common stock or our derivative securities, such as warrants, for which we must reserve unissued common stock. We therefore may need to increase the number of authorized shares of common stock that will enable us to issue common stock or securities convertible or exercisable into common stock to investors and other strategic partners, and as a result enable us to engage in capital raising transactions and other strategic transactions involving the issuance of equity securities.

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Such increases to our authorized common stock require shareholder approval. Our 2019 annual meeting of stockholders was initially postponed due to a lack of quorum, and we were able to successfully achieve quorum and the votes required to pass the proposal to increase the number of authorized shares only after announcing a new record date for the meeting, which was held in January 2020. Our 2020 annual meeting of stockholders was held in August 2020, and we were able to achieve quorum and obtain the number of necessary votes to approve an increase in our authorized common stock, without having to postpone the meeting. Although we were able to achieve quorum and obtain the number of necessary votes for an increase in authorized common stock in our January 2020 meeting and our August 2020 meeting, we cannot guarantee that we won’t experience future difficulties in obtaining quorum for our annual meetings or difficulties in obtaining the necessary votes required to pass proposals such as increases in authorized shares. In such events, we will be limited in our efforts to raise additional capital, and our operations, financial condition and our ability to continue as a going concern may be materially and adversely affected.

Acquisitions of companies, businesses, or technologies may substantially dilute our stockholders and increase our operating losses.

We continue to actively evaluate business partnerships and acquisitions of businesses, technologies, or intellectual property rights that we believe would be necessary, useful, or complementary to our current business. Any such acquisition may require assimilation of the operations, products or product candidates, and personnel of the acquired business and the training and integration of its employees, and could substantially increase our operating costs, without any offsetting increase in revenue. We may also acquire the right to use certain intellectual property through licensing agreements, which could substantially increase our operating costs. Acquisitions and licensing agreements may not provide the intended technological, scientific or business benefits and could disrupt our operations and divert our limited resources and management’s attention from our current operations, which could harm our existing product development efforts. While we may use cash or equity to finance a future acquisition or licensing agreement, it is likely we would issue equity securities as a significant portion or all of the consideration in any acquisition. The issuance of equity securities for an acquisition could be substantially dilutive to our stockholders. Any investment made in, or funds advanced to, a potential acquisition target could also significantly, adversely affect our results of operations and could further reduce our limited capital resources. Any acquisition or action taken in anticipation of a potential acquisition or other change in business activities could substantially depress the price of our stock. In addition, our results of operations may suffer because of acquisition related costs, or the post-acquisition costs of funding the development of an acquired technology or product candidates or operations of the acquired business, or due to amortization or impairment costs for acquired goodwill and other intangible assets.

Risks Related to the Development, Regulatory Approval, and Commercialization of Our Product Candidates

We are wholly dependent on the success of 1 product candidate, the Neuro-Spinal Scaffold implant. Even if we are able to complete clinical development and obtain favorable clinical results, we may not be able to obtain regulatory approval for, or successfully commercialize, our Neuro-Spinal Scaffold implant.

We currently have only 1 product candidate, the Neuro-Spinal Scaffold implant, in clinical development, and our business depends almost entirely on the successful clinical development, regulatory approval, and commercialization of that product candidate, which may never occur. We currently have no products available for sale, generate no revenues from sales of any products, and we may never be able to develop marketable products. Our Neuro-Spinal Scaffold implant will require substantial additional clinical development, testing, manufacturing process development, and regulatory approval before we are permitted to commence its commercialization. Before obtaining regulatory approval via the HDE pathway for the commercial sale of any product candidate, we must demonstrate through extensive preclinical testing and clinical trials that the product candidate does not pose an unreasonable or significant risk of illness or injury, and that the probable benefit to health outweighs the risk of injury or illness from its use, taking into account the probable risks and benefits of currently available devices or alternative forms of treatment. Alternatively, if we were to seek pre-market approval, or PMA, for our product candidate, that would require demonstration that the product is safe and effective for use in each target indication. This process can take many years. Of the large number of medical devices in development in the United States, only a small percentage successfully complete the regulatory approval process required by the U.S. Food and Drug Administration, or the FDA and are commercialized. Accordingly, even if we are able to obtain the requisite capital to continue to fund our development and clinical programs, we may be unable to successfully develop or commercialize our Neuro-Spinal Scaffold implant or any other product candidate.

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The clinical trials of any of our current or future product candidates are, and the manufacturing and marketing of any such product candidates will be, subject to extensive and rigorous review and regulation by the FDA and other government authorities in the United States and in other countries where we intend to test and, if approved, market such product candidates.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier nonclinical studies and clinical trials may not be predictive of future trial results.

The results of preclinical studies and early clinical trials of new medical devices do not necessarily predict the results of later-stage clinical trials. The design of our clinical trials is based on many assumptions about the expected effects of our product candidates, and if those assumptions are incorrect, the trials may not produce results to support regulatory approval. We are currently pursuing marketing approval via the HDE regulatory pathway which requires us to show the device does not pose an unreasonable or significant risk of illness or injury, and that the probable benefit of health outweighs the risk of injury or illness from its use. Preliminary results may not be confirmed upon full analysis of the detailed results of an early clinical trial. Product candidates in later stages of clinical development may fail to show safety and probable benefit sufficient to support intended use claims despite having progressed through initial clinical testing. The data collected from clinical trials of our product candidates may not be sufficient to obtain regulatory approval in the United States or elsewhere. It is also possible that patients enrolled in clinical trials will experience adverse events or unpleasant side effects that are not currently part of the product candidate’s profile. Because of the uncertainties associated with clinical development and regulatory approval, we cannot determine if or when we will have an approved product ready for commercialization or achieve sales or profits.

We must obtain FDA approval before we can sell any of our products in the United States and approval of similar regulatory authorities in countries outside the United States before we can sell our products in such countries. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our products if such approval is denied or delayed.

The development, manufacture, and marketing of our products are subject to government regulation in the United States and other countries. In the United States and most foreign countries, we must complete rigorous preclinical testing and extensive human clinical trials that demonstrate the safety and efficacy of a product in order to apply for regulatory approval to market the product. If the FDA grants regulatory approval of a product, the approval may be limited to specific indications or limited with respect to its distribution. Expanded or additional indications for approved devices may not be approved, which could limit our potential revenues. Foreign regulatory authorities may apply similar or additional limitations or may refuse to grant any approval. Consequently, even if we believe that preclinical and clinical data are sufficient to support regulatory approval for our products, the FDA and foreign regulatory authorities may not ultimately grant approval for commercial sale in any jurisdiction. If our product candidates are not approved, our ability to generate revenues will be limited and our business will be adversely affected.

We are currently pursuing an HDE regulatory pathway in the United States for our Neuro-Spinal Scaffold implant. The HDE requires that there is no other comparable device available to provide therapy for a condition and requires sufficient information for the FDA to determine that the device does not pose an unreasonable or significant risk of illness or injury, and that the probable benefit to health outweighs the risk of injury or illness from its use. The amended protocol for The INSPIRE Study, which was approved in February 2016, established an OPC, which is a measure of study success used in clinical studies designed to demonstrate safety and probable benefit in support of an HDE approval. The OPC for The INSPIRE Study is currently defined as 25% or more of the patients in the study demonstrating an improvement of at least 1 AIS grade by 6 months post-implantation. While we expect The INSPIRE Study to serve as 1 source of data used to support HDE approval in the future, we will not complete full enrollment of that study. In addition, although The INSPIRE Study is structured with the OPC as the primary component for demonstrating probable benefit, the OPC is not the only variable that the FDA would evaluate when reviewing a future HDE application.

The FDA had previously recommended that we include a randomized, concurrent control arm in the study and we have proposed and received approval for the INSPIRE 2.0 Study. The primary endpoint is defined as the proportion of patients achieving an improvement of at least 1 AIS grade at 6 months post-implantation. The definition of study success is that the difference in the proportion of subjects who demonstrate an improvement of at least 1 grade on AIS

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assessment at the 6-month primary endpoint follow-up visit between the Scaffold Arm and the Comparator Arm must be equal to or greater than 20%. While our INSPIRE 2.0 Study is structured with a definition of study success requiring a minimum difference between groups in the percentage of subjects achieving improvement, that success definition is not the only factor that the FDA would evaluate in the future HDE application. Moreover, there can be no assurance that the INSPIRE 2.0 Study will be successfully completed.

Approval is not guaranteed if the OPC is met for The INSPIRE Study or the definition of study success is met for the INSPIRE 2.0 Study, and even if the OPC or definition of study success are not met, the FDA may approve a medical device if probable benefit is supported by a comprehensive review of all clinical endpoints and preclinical results, as demonstrated by the sponsor’s body of evidence.

In addition, as 1 source of comparator data, we completed the CONTEMPO Registry Study, utilizing existing databases and registries to develop a historical comparator that, to the extent possible, matches patients to those patients enrolled in The INSPIRE Study. Analysis of data from the CONTEMPO Registry Study may suggest a higher threshold for evidencing probable benefit. For example, AIS conversion rates at approximately 6 months post-injury across the three registries used in CONTEMPO varied from 16.7% – 23.4%, which are higher than the approximately 15.5% conversion rate from the historical registries that were the basis for the selection of the current OPC for The INSPIRE Study.

Even if we successfully complete the INSPIRE 2.0 Study, we cannot be certain that the FDA will agree that this study, together with the CONTEMPO Registry Study, provides sufficient information for the FDA to determine that the device does not pose an unreasonable or significant risk of illness or injury, and that the probable benefit to health outweighs the risk of injury or illness from its use.

In the event our clinical data is not acceptable to the FDA, our ability to obtain approval under the HDE pathway may be delayed or may not be feasible. If the FDA does not approve our product candidates in a timely fashion, or at all, our business and financial condition will be adversely affected.

The 21st Century Cures Act increased the upper population limit for an HDE from 4,000 to 8,000, which allows us to potentially request an expansion of our current HUD to include additional patient populations beyond our current HUD for complete SCI. If we choose to pursue such an expansion, this may cause our application to be delayed or cause the FDA to request additional information. In addition, our current study is not designed to support approval beyond complete SCI. Thus, expansion would require additional studies. We cannot be certain that we will be able to increase the potential population that we might be able to treat based on the HDE pathway. If any of these events occur, our business and financial condition will be adversely affected.

There are risks associated with pursuing FDA approval via an HDE pathway, including the possibility that the approval could be withdrawn in the future if the FDA subsequently approves another device for the same intended use, as well as limitations on the ability to profit from sales of the product.

If the FDA subsequently approves a PMA or clears a 510(k) for the HUD or another comparable device with the same indication, the FDA may withdraw the HDE. Once a comparable device becomes legally marketed through PMA or 510(k) clearance to treat or diagnose the disease or condition in question, there may no longer be a need for the HUD and so the HUD may no longer meet the requirements of section 520(m)(2)(B) of the Food Drug & Cosmetic Act, or the FDCA.

 

Except in certain circumstances, products approved under an HDE cannot be sold for an amount that exceeds the costs of research and development, fabrication, and distribution of the device (i.e., for profit). Currently, under section 520(m)(6)(A)(i) of the FDCA, as amended by the Food and Drug Administration Safety and Innovation Act, a HUD is only eligible to be sold for profit after receiving HDE approval if the device (1) is intended for the treatment or diagnosis of a disease or condition that occurs in pediatric patients or in a pediatric subpopulation, and such device is labeled for use in pediatric patients or in a pediatric subpopulation in which the disease or condition occurs; or (2) is intended for the treatment or diagnosis of a disease or condition that does not occur in pediatric patients or that occurs in pediatric patients in such numbers that the development of the device for such patients is impossible, highly impracticable, or unsafe. If an HDE-approved device does not meet either of the eligibility criteria, the device cannot be

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sold for profit. With enactment of the FDA Reauthorization Act of 2017, Congress provided that the exemption for HUD / HDE profitability is available as long as the request for an exemption is submitted before October 1, 2022.

Some of our future products may be viewed by the FDA as combination products and the review of combination products is often more complex and more time consuming than the review of other types of products.

Our future products may be regulated by the FDA as combination products. For a combination product, the FDA must determine which center or centers within the FDA will review the product candidate and under what legal authority the product candidate will be reviewed. The process of obtaining FDA marketing clearance or approval is lengthy, expensive, and uncertain, and we cannot be sure that any of our combination products, or any other products, will be cleared or approved in a timely fashion, or at all. In addition, the review of combination products is often more complex and more time consuming than the review of a product candidate under the jurisdiction of only 1 center within the FDA. We cannot be sure that the FDA will not select to have our combination products reviewed and regulated by only 1 FDA center and/or different legal authority, in which case the path to regulatory approval would be different and could be lengthier and more costly. If the FDA does not approve or clear our products in a timely fashion, or at all, our business and financial condition will be adversely affected.

We may face substantial competition, which may result in others discovering, developing, or commercializing products before or more successfully than we do.

In general, the biotechnology industry is subject to intense competition and rapid and significant technological change. We have many potential competitors, including major drug companies, specialized biotechnology firms, academic institutions, government agencies, and private and public research institutions. Many of these competitors have significantly greater financial and technical resources than us, and superior experience and expertise in research and development, preclinical testing, design and implementation of clinical trials, regulatory processes and approval for products, production and manufacturing, and sales and marketing of approved products. Large and established companies compete in the biotechnology market. In particular, these companies have greater experience and expertise in securing government contracts and grants to support their research and development efforts, conducting testing and clinical trials, obtaining regulatory approvals to market products, manufacturing such products on a broad scale, and marketing approved products. Smaller or early-stage companies and research institutions may also prove to be significant competitors, particularly if they have collaborative arrangements with larger and more established biotechnology companies. We will also face competition from these parties in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites, and registering subjects for clinical trials.

In order to effectively compete, we will have to make substantial investments in development, clinical testing, manufacturing, and sales and marketing, or partner with 1 or more established companies. There is no assurance that we will be successful in having our products approved or gaining significant market share for any of our products. Our technologies and products also may be rendered obsolete or noncompetitive as a result of products introduced by our competitors.

The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.

Our ongoing research and development, preclinical testing, and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. Clinical studies must be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support market clearance for these products. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA will agree with our conclusions regarding them. Success in preclinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and preclinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.

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If approved, our products will require market acceptance to be successful. Failure to gain market acceptance would impact our revenues and may materially impair our ability to continue our business.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of our products will depend on, among other things, their acceptance by physicians, patients, third-party payers such as health insurance companies, and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. Physicians and hospitals will need to establish training and procedures to utilize and implement our Neuro-Spinal Scaffold implant, and there can be no assurance that these parties will adopt the use of our device or develop sufficient training and procedures to properly utilize it. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, both within and outside of our control. Payers may view new products or products that have only recently been launched or with limited clinical data available, as investigational, unproven, or experimental, and on that basis may deny coverage of procedures involving use of our products. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business.

If we or our suppliers fail to comply with FDA regulatory requirements, or if we experience unanticipated problems with any approved products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain regulatory approval, and the manufacturing processes, reporting requirements, post-approval clinical data, and promotional activities for such product, will be subject to continued regulatory review and oversight by the FDA. In particular, we and our third-party suppliers will be required to comply with the FDA’s Quality System Regulations, or QSRs. These FDA regulations cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers, fail to adhere to QSR requirements, this could delay production of our product candidates and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition and results of operations.

In addition, we and our suppliers are required to comply with Good Manufacturing Practices and Good Tissue Practices with respect to any human cells and biologic products we may develop, and International Standards Organization regulations for the manufacture of our products, and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage, and shipping of any product for which we obtain clearance or approval. Manufacturing may also be subject to controls by the FDA for parts of the combination products that the FDA may find are controlled by the biologics regulations.

The FDA audits compliance with the QSR and other similar regulatory requirements through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by us or 1 of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in any of the following enforcement actions:

untitled letters, warning letters, fines, injunctions, consent decrees, and civil penalties;

unanticipated expenditures to address or defend such actions;

customer notifications or repair, replacement, refunds, recall, detention, or seizure of our products;

operating restrictions or partial suspension or total shutdown of production;

refusing or delaying our requests for premarket approval of new products or modified products;

withdrawing PMA that have already been granted;

refusal to grant export approval for our products; or

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criminal prosecution.

Any of these sanctions could have a material adverse effect on our reputation, business, results of operations, and financial condition.

Our products and operations are subject to extensive governmental regulation both in the United States and abroad, and our failure to comply with applicable requirements could cause our business to suffer.

Our medical device and biologic products and operations are subject to extensive regulation by the FDA and various other federal, state, and foreign governmental authorities. Government regulation of medical devices and biologic products is meant to assure their safety and effectiveness, and includes regulation of, among other things:

design, development, and manufacturing;

testing, labeling, content, and language of instructions for use and storage;

clinical trials;

product safety;

marketing, sales, and distribution;

regulatory clearances and approvals including premarket clearance and approval;

conformity assessment procedures;

product traceability and record keeping procedures;

advertising and promotion;

product complaints, complaint reporting, recalls, and field safety corrective actions;

post-market surveillance, including reporting of deaths or serious injuries, and malfunctions that, if they were to recur, could lead to death or serious injury;

post-market studies; and

product import and export.

The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could impede our ability to carry on or expand our operations and could result in higher than anticipated costs or lower than anticipated sales.

Before we can market or sell a new regulated medical device product in the United States, we must obtain clearance under Section 510(k) of the FDCA, approval of a PMA, or approval of an HDE, unless the device is specifically exempt from premarket review. Our Neuro-Spinal Scaffold implant is expected to be regulated by the FDA as a Class III medical device, requiring either PMA or HDE approval. A HUD designation was granted for the Neuro-Spinal Scaffold implant in 2013, opening the HDE pathway.

In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing, and labeling data.

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Modifications to products that are approved through a PMA generally need FDA approval. The process of obtaining a PMA is costly and generally takes from 1 to 3 years, or even longer, from the time the application is submitted to the FDA until an approval is obtained.

An HDE application is similar in form and content to a PMA and, although exempt from the effectiveness requirements of a PMA, an HDE does require sufficient information for the FDA to determine that the device does not pose an unreasonable or significant risk of illness or injury, and that the probable benefit to health outweighs the risk of injury or illness from its use. Like a PMA, changes to HDE devices generally need FDA approval.

Biological products must satisfy the requirements of the Public Health Services Act and its implementing regulations. In order for a biologic product to be legally marketed in the U.S., the product must have a BLA approved by the FDA. The testing and approval process requires substantial time, effort, and financial resources, and each may take several years to complete.

The FDA can delay, limit, or deny clearance or approval of a product for many reasons, including:

we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their intended uses;

the data from our preclinical studies and clinical trials may be insufficient to support clearance or approval, where required; and

the manufacturing process or facilities we use may not meet applicable requirements.

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions that may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis.

Further, even after we have obtained the proper regulatory clearance or approval to market a product, the FDA may require us to conduct post-marketing studies. Failure to conduct required studies in a timely manner could result in the revocation of approval for the product that is subject to such a requirement and could also result in the recall or withdrawal of the product, which would prevent us from generating sales from that product in the United States.

Failure to comply with applicable laws and regulations could jeopardize our ability to sell our products and result in enforcement actions such as:

warning letters;

fines;