Item 9.01

Financial Statements and Exhibits

 

TABLE OF CONTENTS

 

Item 1.01.

Entry into a Material Definitive Agreement

On October 26, 2010, the Company entered into an Agreement and Plan of Merger and Reorganization, which we refer to in this Current Report as the “ Merger Agreement ”, and completed the Merger. For a description of the Merger and the material agreements entered into in connection with the Merger, please see the disclosures set forth in Item 2.01 to this Current Report, which disclosures are incorporated into this item by reference.  

 

Item 2.01.

Completion of Acquisition or Disposition of Assets

 

THE MERGER AND RELATED TRANSACTIONS

 

The Merger

 

On October 26, 2010 (which we refer to as the “ Closing Date ”), ITHC, InVivo and Acquisition Corp. entered into the Merger Agreement and completed the Merger. Before their entry into the Merger Agreement, no material relationship existed between ITHC (or its Acquisition Corp. subsidiary) and InVivo. A copy of the Merger Agreement is attached as Exhibit 2.1 to this Current Report and is incorporated herein by reference.

 

Pursuant to the Merger Agreement, on the Closing Date, Acquisition Corp., a wholly-owned subsidiary of ITHC, merged with and into InVivo, with InVivo remaining as the surviving entity.  ITHC acquired the business of InVivo pursuant to the Merger and will continue the existing business operations of InVivo as a wholly-owned subsidiary.

 

Simultaneously with the Merger, on the Closing Date all of the issued and outstanding shares of InVivo common stock converted, on a 13.7706 for 1 basis, into shares of the Company’s common stock (“ Common Stock ”). Also on the Closing Date, all of the issued and outstanding options to purchase shares of InVivo common stock, and the issued and outstanding Bridge Warrants (as defined below) to purchase shares of InVivo Common Stock, converted, respectively, into options (the “ New Options ”) and new bridge warrants (the “ New Bridge Warrants ”) to purchase shares of our Common Stock. The number of shares of Common Stock issuable under, and the price per share upon exercise of, the New Options and the New Bridge Warrants were calculated based on the terms of the original options and warrants of InVivo, as adjusted by the conversion ratio in the Merger, which is described in the Merger Agreement. The New Options will be administered under InVivo’s 2007 Stock Incentive Plan, which the Company assumed and adopted on the Closing Date in connection with the Merger.

On the Closing Date, an aggregate of 31,647,190 shares of Common Stock were issued to former InVivo stockholders and 5,915,561 Options and 600,000 New Bridge Warrants were issued to holders of outstanding InVivo options and warrants. The stockholders of ITHC before the Merger, without giving effect to the Offering (as defined below), retained 6,999,981 shares of Common Stock.

 

The Merger Agreement contains customary representations, warranties and covenants of ITHC, and, as applicable, Acquisition Corp., for like transactions. Breaches of representations and warranties are secured by customary indemnification provisions.

 

The Merger will be treated as a recapitalization of the Company for financial accounting purposes. The historical financial statements of ITHC before the Merger will be replaced with the historical financial statements of InVivo before the Merger in all future filings with the Securities and Exchange Commission (the “ SEC ”).

 

Following closing of the Merger, our board of directors consists of five members. In keeping with the foregoing, on the Closing Date, Peter A. Reichard and Peter L. Coker, the directors of ITHC before the Merger, appointed Frank M. Reynolds,   Richard J. Roberts, George Nolen, Christi M. Pedra and Adam K. Stern to fill vacancies on the board of directors, and Messrs. Reichard and Coker resigned their positions as directors. Also on the Closing Date, Messrs. Reichard and Coker, the officers of ITHC, resigned and new executive officers designated by InVivo were appointed. The officers and directors of the Company as of the Closing Date are identified in this Current Report under the heading “Directors and Executive Officers.”

 

Before the Merger, ITHC’s board of directors adopted the 2010 Equity Incentive Plan, which is expected to be submitted to the shareholders of the Company for approval during the twelve month period immediately following the closing of the Merger. The 2010 Equity Incentive Plan provides for the issuance of up to 3,500,000 shares of Common Stock as incentive awards granted to executive officers, key employees, consultants and directors. In addition, the Company assumed and adopted InVivo’s 2007 Stock Incentive Plan, and as described above option holders under that plan will be granted New Options to purchase Common Stock. No further options will be granted under the 2007 Stock Incentive Plan. The parties have taken all actions necessary to ensure that the Merger is treated as a tax free exchange under Section 368(a) of the Internal Revenue Code of 1986, as amended.

  

The issuance of shares of Common Stock to holders of InVivo’s capital stock in connection with the Merger was not registered under the Securities Act of 1933, as amended (the “ Securities Act ”), in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Regulation D promulgated by the SEC under that section, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirement.

The Offering

 

Concurrently with the closing of the Merger and in contemplation of the Merger, the Company completed a private offering (the “ Offering ”) of 10,514,097 units of its securities (“ Units ”), at a price of $1.00 per Unit. Each Unit consists of one share of Common Stock and a warrant to purchase one share of Common Stock. The warrants (the “ Investor Warrants ”) are exercisable for a period of five years at a purchase price of $1.40 per share of Common Stock. The Offering was made only to accredited investors, as defined under Regulation D, Rule 501(a). On the Closing Date, the investors in the Offering collectively purchased 10,514,097 Units for total cash consideration of $10,514,097, which includes the conversion of $504,597 of principal of, and accrued interest on, Bridge Notes (as defined below).

 

The sale of Units (including the Common Stock, the Investor Warrants and the Common Stock underlying the Investor Warrants) in the Offering was exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D and Regulation S as promulgated by the SEC. In the Offering, no general solicitation was made by us or any person acting on our behalf. The Units were sold pursuant to transfer restrictions, and the certificates for shares of Common Stock and Investor Warrants underlying the Units sold in the Offering contain appropriate legends stating that such securities are not registered under the Securities Act and may not be offered or sold absent registration or an exemption from registration.

 

The Company paid the Placement Agent (the name of which will be disclosed on a subsequent Current Report on Form 8-K) a commission of 10% of the funds raised from such investors in the Offering. In addition, the Placement Agent received a non-accountable expense allowance equal to 3% of the proceeds raised in the Offering as well as warrants to purchase a number of shares of Common Stock equal to 20% of the Units sold to investors in the Offering. As a result of the foregoing arrangement, at the initial closing of the Offering, the Placement Agent was paid commissions and expenses of $1,366,833 and was issued warrants to purchase (i) 2,102,819 shares of Common Stock at an exercise price of $1.00 per share and (ii) 2,102,819 shares of Common Stock at an exercise price of $1.40 per share.

  

The form of the Investor Warrant issued in the Offering is attached as Exhibit 4.3 to this Current Report and is incorporated herein by reference.

 

The Private Sale

 

Prior to the commencement of the Offering, InVivo completed a Bridge Financing, wherein it sold $500,000 in principal amount of its bridge notes (the “Bridge Notes”) and 36,310 bridge warrants (the “Bridge Warrants”) to accredited investors (the “Bridge Financing”). The Bridge Notes converted into 504,597 Units in the Offering. The 36,310 Bridge Warrants converted into 500,000 New Bridge Warrants, each exercisable at a price of $1.00 per share of Common Stock, upon the closing of the Merger. Holders of the New Bridge Warrants received the same registration rights with respect to the shares of common stock issuable upon exercise of such Warrants as the investors in the Offering. As consideration for locating investors to participate in the Bridge Financing, the Placement Agent received Warrants from InVivo that were exchanged on the closing of the Merger for Warrants to purchase 100,000 shares of Common Stock at a price of $1.00 per share. The Placement Agent also received, upon conversion of the Bridge Notes, compensation in the same amount as it received for other Units sold in the Offering. The Merger, the Offering, the Private Sale and the related transactions are collectively referred to in this Current Report as the “ Transactions .”

Registration Rights

 

All of the securities issued in connection with the Transactions are “restricted securities,” and as such are subject to all applicable restrictions specified by federal and state securities laws.

 

On the Closing Date, the Company entered into a registration rights agreement with the investors in the Offering. Under the terms of the registration rights agreement, the Company has committed to file a registration statement covering the resale of the Common Stock underlying the Units and the Common Stock that is issuable on exercise of the Investor Warrants and the New Bridge Warrants (but not the Common Stock that is issuable upon exercise of the warrants issued as compensation to the Placement Agent in the Offering or in the Bridge Financing) within 90 days from the Closing Date (the “Filing Deadline”), and shall use commercially reasonable efforts to cause the registration statement to become effective no later than 180 days after it is filed (the “Effective Deadline”).

 

The Company has agreed to use reasonable efforts to maintain the effectiveness of the registration statement through the one year anniversary of the date the registration statement is declared effective by the SEC, or until Rule 144 of the Securities Act is available to investors in the Offering with respect to all of their shares, whichever is earlier. The Company will be liable for monetary penalties equal to equal to one-half of one percent (0.5%) of such holder’s investment in the Offering on every thirty (30) day anniversary of such Filing Deadline or Effectiveness Deadline failure until such failure is cured. The payment amount shall be prorated for partial thirty (30) day periods. The maximum aggregate amount of payments to be made by the Company as the result of such failures, whether by reason of a Filing Deadline failure, Effectiveness Deadline failure or any combination thereof, shall be an amount equal to 9% of each holder’s investment amount. Notwithstanding the foregoing, no payments shall be owed with respect to any period during which all of the holder’s registrable securities may be sold by such holder under Rule 144 or pursuant to another exemption from registration.

 

Moreover, no such payments shall be due and payable with respect to any registrable securities the Company is unable to register due to limits imposed by the SEC’s interpretation of Rule 415 under the Securities Act. The holders of any registrable securities removed from the Registration Statement a result of a Rule 415 or other comment from the SEC shall have “piggyback” registration rights for the shares of Common Stock or Common Stock underlying such warrants with respect to any registration statement filed by the Company following the effectiveness of the Registration Statement which would permit the inclusion of these shares. The form of the registration rights agreement is attached as Exhibit 10.4 to this Current Report and is incorporated herein by reference.

Split-Off Agreement

 

Immediately after the closing of the Merger, ITHC split off its wholly-owned subsidiary, D Source Split Corp., a company organized under the laws of Nevada (“DSSC”). The split-off was accomplished through the sale of all outstanding shares of DSSC. In connection with the Split-Off, 14,747,554 (post-split) shares of Common Stock held by Peter Reichard, Lawrence Reichard and Peter Coker (the “ Split-Off Shareholders ”) were surrendered and cancelled without further consideration, other than the shares of DSSC.  An additional 1,014,490 (post-split) shares of Common stock were cancelled by a shareholder of ITHC for no consideration (the “ Share Cancellation ”). The assets and liabilities of ITHC were transferred to the Split-Off Shareholders in the Split-Off. The Company executed a split off agreement with the Split-Off Shareholders, a copy of which is attached as Exhibit 10.5 to this Current Report and is incorporated herein by reference.

 

Lock-up Agreements  

 

In connection with the Merger, each of the officers, directors and holders of 5% or more of the Company’s Common Stock and certain employees and affiliates of the Placement Agent have agreed to “lock-up” and not sell or otherwise transfer or hypothecate any of their shares for a term equal to the earlier of (i) twelve (12) months from the Closing Date of the Merger; or (ii) six (6) months following the effective date of the Registration Statement registering the shares of Common Stock included in the Units as well as the shares of Common Stock issuable upon exercise of the Investor Warrants and the New Bridge Warrants.

Current Ownership

 

Immediately after giving effect to the Transactions, the Units sold in this Offering, the options granted under the 2007 Plan (that were assumed by the Company), and the warrants issued to the Placement Agent in connection with the Offering and the issuance of the New Bridge Warrants, there were issued and outstanding securities of the Company on the closing of the Transactions:

§

49,161,268 shares of Common Stock;

§

No shares of preferred stock;

§

Options to purchase 5,915,615  shares of Common Stock granted under the 2007 Plan;

§

Investor Warrants to purchase 10,514,097 shares of Common Stock at $1.40 per share issued to the investors in the Offering and warrants to purchase 2,102,819 shares of Common Stock at a price of $1.00 per share and 2,102,819 warrants exercisable at a price of $1.40 per share issued  to the Placement Agent  in connection with the Offering; and

§

New Bridge Warrants issued to Bridge Investors to purchase 500,000 shares of Common Stock at $1.00 per share and warrants to purchase 100,000 shares of Common Stock exercisable at a price of $1.00 per share issued to the Placement Agent in connection with the Bridge Financing.

Accounting Treatment; Change of Control

 

The Merger is being accounted for as a “reverse merger,” and InVivo is deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements prior to the Merger will be those of InVivo, and the consolidated financial statements after completion of the Merger will include the assets and liabilities of InVivo, historical operations of InVivo and operations of InVivo from the Closing Date of the Merger. Except as described in the previous paragraphs, no arrangements or understandings exist among present or former controlling stockholders with respect to the election of members of our board of directors and, to our knowledge, no other arrangements exist that might result in a change of control of the Company. Further, as a result of the issuance of the shares of Common Stock pursuant to the Merger, a change in control of the Company occurred as of the date of consummation of the Merger.

DESCRIPTION OF BUSINESS

 

Immediately following the Merger, the business of InVivo became the business of the Company.

InVivo Therapeutics Corporation was founded to develop and commercialize groundbreaking technologies for the treatment of spinal cord injuries (“ SCI ”).  InVivo’s proprietary technology was co-invented by Robert S. Langer, ScD, Professor at Massachusetts Institute of Technology and Joseph P. Vacanti, MD, affiliated with Massachusetts General Hospital. The intellectual property rights that are the basis for InVivo’s products are licensed under an exclusive, world-wide license from Children’s Medical Center Corporation (“ CMCC ”) and Massachusetts Institute of Technology.

InVivo intends to create a new paradigm of care for SCI.  Current treatments consist of a collection of approaches that only focus on symptoms of SCI. To date, we are not aware of any product on the market that addresses the underlying pathology of a SCI.

Currently, there are no successful spinal cord injury treatment options for SCI patients. InVivo takes a novel approach to SCI and focuses on protection of the spinal cord and prevention of secondary injury rather than regeneration. InVivo’s platform technologies focus on minimizing tissue damage sustained following acute injury and promoting neural plasticity of the spared healthy tissue, which may result in full or partial functional recovery.  The technologies encompass multiple strategies involving biomaterials, U.S. Food & Drug Administration (“ FDA ”) approved drugs, growth factors, and human neural stem cells (“ hNSCs ”).  According to Eric J. Woodard, MD, our Chief Medical Officer, former Chief of Spine Surgery Brigham and Women’s Hospital, Department of Neurosurgery and Harvard Medical School, and current Chief of Neurosurgery at New England Baptist Hospital, InVivo’s approach could very likely become a standard treatment for both acute and chronic SCI.

 

The Technology

InVivo intends to leverage its primary platform technology to deliver three products to the market as follows:

1.

A biocompatible polymer scaffolding device to treat acute wound SCI.

 

2.

A biocompatible hydrogel for local controlled release of methylprednisolone to treat acute SCI.

 

3.

A biocompatible polymer scaffolding device seeded with autologous hNSCs to treat acute and chronic SCI.

 

InVivo products are biopolymer-based devices that are surgically implanted or injected into the lesion created during traumatic injury, or the “primary injury”. These scaffolding products protect the damaged spinal cord by mitigating the progression of “secondary injury” resulting from the body’s inflammatory and immune response to injury, and promote neuroplasticity, a process where functional recovery may occur through the rerouting of  signaling pathways to the spared healthy issue.  Achieving these results is essential to the recovery process, as secondary injury can significantly worsen the immediate damage sustained during trauma. The additional damage dramatically reduces patient quality of life post-SCI.

Additional applications of InVivo’s platform technologies include the potential treatment for, spinal cord injury following tumor removal, peripheral nerve damage, and postsurgical treatment of any transected nerve. Furthermore, because InVivo’s first product is an acellular and drug-free medical device, we expect the regulatory approval timeline may require just one year patient follow-up.

 

Market Opportunity

As we are aware of no current products on the market to achieve the therapeutic benefit expected with InVivo’s device, we believe that InVivo’s market opportunity is significant. By 2011, based on the Company’s estimates, the total addressable market for acute SCI will be approximately $10.4 billion annually based on multiplying the global incidence rate by an anticipated global price per unit of $44,000. Since 1973, the National Spinal Cord Injury Statistical Center (“ NSCISC ”) at the University of Alabama has been commissioned by the US government to maintain a national database of SCI statistics.  The NSCISC has projected an annual SCI incidence growth rate of 1% due to a growing US population and escalated societal risks that include faster highway speed limits, expanding participation in extreme sports, and increased gun ownership.

In the United States:

·

Approximately 1,275,000 people are currently living with paralysis due to SCI.

 

·

An additional 12,000 individuals will become fully or partially paralyzed this year alone.

 

Globally:

·

Over 5,200,000 people are living with spinal cord injuries,

 

·

More than 167,000 individuals will become fully or partially paralyzed this year alone.

 

The financial impact of SCI, as reported by the NSCISC, is enormous:

·

During the first year, “cost of care” ranges from $244,562 to $829,843, depending on the severity.

 

·

The net present value (“ NPV ”) to maintain a quadriplegic injured at age 25 for life is $3,273,270.

 

·

The NPV to maintain a paraplegic injured at age 25 for life is $1,093,669.

 

Sources: Christopher & Dana Reeve Foundation, and National Spinal Cord Injury Statistical Center. “One Degree of Separation: Paralysis and Spinal Cord Injury in the United States” 2010.

These costs place a tremendous financial burden on families, insurance providers, and government agencies.  Moreover, despite all financial investment, the patient remains disabled for life since current medical interventions address only the symptoms of SCI rather than the underlying neurological cause.

Source: National Spinal Cord Injury Statistical Center; February 2010 edition of “Spinal Cord Injury Facts and Figures at a Glance.” All figures in US Dollars .

Note: tetraplegia is paralysis in the arms, legs and trunk of the body below the level of the spinal cord injury; paraplegia is paralysis of the lower part of the body including the legs.

 

 Creating a New Paradigm for SCI Treatment

InVivo intends to create a new paradigm for treating SCI.  Current methods consist of a collection of approaches that only focus on symptoms of SCI. To date, we are not aware of any product on the market that addresses the underlying pathology of SCI.

InVivo’s goal is to create a new paradigm for care by changing the way physicians treat SCI. InVivo’s technology aims to protect the spinal cord and minimize secondary injury that causes cell death while promoting neural plasticity of the spared healthy tissue, something no other product on the market is designed to do. InVivo’s products, if approved for commercialization, will be a new therapeutic class of products and will not compete with current treatment options (i.e. spinal fixation devices). Rather, it is expected that they will be complementary to these products, and the combination may create the best clinical outcome.

 

InVivo’s Planned First Product: A Scaffolding Device to Treat SCI

SCI involves not only initial cell death at the lesion due to mechanical impact but also a devastating secondary injury pathology that persists for several weeks (Figure 1).  We are focused on preventing this secondary cascade of cell death and promoting the subsequent repair and recovery processes.

 

FIGURE 1.  PROGRESSION OF SECONDARY INJURY (DAYS 2-30 POST-INJURY) (Fleming et al. 2006)

 

InVivo’s first product is a novel surgical device, designed for implantation into the lesion to treat acute open-wound SCI (Figure 2). InVivo’s recent results in primate studies are extremely promising. The scaffold was developed from polylactic-co-glycolic acid (PLGA), a biodegradable and biocompatible polymer, which is approved by the FDA for applications such as surgical sutures (Dolphin sutures and Ethicon sutures), drug delivery (Lupron Depot and Sandostatin LAR Depot), and tissue engineering (Dermagraft). This device degrades naturally inside the body over a desired time period to maximize efficacy without requiring subsequent removal.

FIGURE 2.  SCAFFOLD IMPLANTED INTO SCI LESION

In preventing the cascading inflammatory response or secondary injury, InVivo’s device is designed to perform four functions:

1.

Fill the necrotic lesion to minimize secondary injury, which may occur by inhibiting cell-cell signaling via inflammatory cytokines.

 

2.

Bridge the gap formed by the lesion, providing a matrix designed to promote regrowth and reorganization of neural elements (neurons and neurites).

 

3.

Act as a synthetic extracellular matrix, with the goal of promoting survival of surrounding neurons.

 

4.

Reduce scar formation (astrogliosis).

 

InVivo’s Polymer Technology Differentiator

InVivo intends to introduce the first biodegradable polymer scaffold without any other FDA regulated components for SCI treatment.  The current cell and drug-free nature of InVivo’s implantable device is expected to expedite InVivo’s regulatory approval timelines.  The device will be customized to fit inside a patient-specific lesion.

 

InVivo’s Planned Second Product: Local Controlled Release Drug Delivery

InVivo’s second intended product is an injectable hydrogel designed to counteract the inflammatory environment that results during a secondary injury from a closed-wound SCI where further cell death occurs. The hydrogel is designed to release drugs over at least 10 days in order to synchronize the rate of delivery to match the period in which the inflammatory response peaks during secondary injury.  While the hydrogel could incorporate other hydrophilic drugs or therapeutic agents that counteract secondary injury, promote neuroplasticity or support endogenous repair mechanisms, InVivo’s second product is designed to deliver the anti-inflammatory steroid methylprednisolone sodium succinate.  Methylprednisolone sodium succinate is FDA approved, and is currently a treatment option for SCI.  However, high-dose intravenous administration of the drug can result in harmful systemic side effects, including increased risks of pneumonia, sepsis and mortality.  By precisely controlling the release of methylprednisolone at the site of injury, we hypothesize that therapeutically effective doses can be delivered to the point of inflammation while mitigating the risk of harmful systemic side effects.

 

InVivo’s Planned Third Product: Polymer Scaffold Seeded with Autologous Human Neural Stem Cells

InVivo’s third intended product extends the biopolymer platform technology to treat both acute closed-wound and chronic SCI patients by seeding the patient’s own stem cells onto the scaffold and then inserting the scaffold into the injured spinal cord.  The scaffold acts as a synthetic extracellular matrix on which cells can be transplanted.

InVivo’s third product is intended to counteract the pathophysiology of SCI by:

1.

Replacing lost cells of the spinal cord.

 

2.

Activating endogenous regenerative processes such as the formation of new synapses and axonal sprouting based on molecules the stem cells produce.

 

PRE-CLINICAL RESULTS IN ANIMALS

InVivo has demonstrated the proof of concept for its SCI therapy in primate and rodent animal models.

Seminal Rodent Study – 2002

The first animal study for InVivo’s promising technology was performed in 2002 and published in the Proceedings of the National Academy of Sciences (PNAS, 2002, vol.99, no.5, 3024-9).  The implemented scaffold was designed to mimic the cellular architecture of the inner ‘grey’ matter and outer ‘white’ matter of the spinal cord (Figure 3).

FIGURE 3 ( a ) SCHEMATIC OF THE SCAFFOLD SHOWING INNER AND OUTER ARCHITECTURE. ( b and c ) INNER SCAFFOLDS SEEDED WITH HNSC (SCALE: 200 µM AND 50 µM, RESPECTIVELY). THE OUTER SECTION OF THE SCAFFOLD CONTAINS LONG, AXIALLY ORIENTED PORES FOR AXONAL GUIDANCE AS WELL AS RADIAL PORES TO ALLOW FLUID TRANSPORT WHILE INHIBITING THE IN-GROWTH OF SCAR TISSUE (SCALE: 100 µM). ( e ) SCHEMATIC OF SURGICAL INSERTION OF THE IMPLANT INTO THE SPINAL CORD.

The study demonstrated the impact of InVivo polymer-alone device (first product) and InVivo’s polymer with hNSC device (third product) in treating SCI (Figure 5).  The hNSCs augment the polymer scaffolding treatment.  The study also demonstrated that stem cells injected into the lesion without InVivo’s proprietary scaffold do not exert a therapeutic effect.  Comparable to the adhesion of cells to the body’s extracellular matrix, it is thought that the scaffolding device is necessary for the hNSCs to survive and function following transplantation.

Basso-Beattie-Bresnahan (BBB) scoring was used to evaluate open-field locomotion at one day post-surgery and weekly time points over the course of six weeks post-injury.  Results from the PLGA scaffold configured to treat SCI showed functional locomotive improvement as early as two weeks post injury.  While the study was stopped at the end of either week 8 or week 10, rodents were kept for over one year. Over this period, the subjects demonstrated sustainable functional recovery, and they exhibited no adverse pathological reactions to the product.  Since the rat has an average lifespan of two years, InVivo believes that the follow-up timeframe of over one year demonstrates the viability of its device.

Pilot Primate Study – 2008

We believe the non-human primate model is the best surrogate for how SCI products will work in humans.  To date, the PLGA scaffolding device has been evaluated in two primate studies. The first study was completed in 2008, is published in the Journal of Neuroscience Methods, and focused mainly on the assessment criteria following the model SCI. The second primate study which involved a larger number of primates also included collecting quantitative electromyographic and kinematic analyses.

In April 2008, InVivo conducted a non-human primate study for model SCI.  The experiment was designed as a pilot study to test the model injury’s suitability in assessing the therapeutic efficacy of InVivo’s technologies.  The study was conducted at the St. Kitts Biomedical Research Foundation in St. Kitts and Nevis. The surgeries were performed by Eric Woodard, MD, InVivo’s Chief Medical Officer, and Jonathan Slotkin, MD.  Dr. Woodard served as Chief of Spine Surgery at Harvard’s Brigham & Women’s Hospital for ten years and is currently Chief of Neurosurgery at Boston’s New England Baptist Hospital.  Dr. Slotkin has practiced at Harvard’s Brigham & Women’s Hospital and is currently a spine neurosurgeon at the Washington Brain and Spine Institute and a member of InVivo’s Scientific Advisory Board.

We utilized a lateral hemisection injury model in four African Green monkeys, in which the left-half segment of the spinal cord between T9 and T10 was surgically removed.  Following tissue removal, the InVivo patented device was inserted into the resulting lesion by InVivo’s Chief Medical Officer Dr. Eric Woodard (Figure 4).  The model resulted in Brown-Séquard syndrome: paralysis of the animals’ left hind limb and loss of sensory function in the animals’ right hind limb.  The model was successful in preserving bowel and bladder function in all animals.

 

FIGURE 4.  DEVICE INSERTED INTO HEMI-SECTION

 

Animals were monitored for six weeks post-injury, and behavioral scoring was performed to measure functional recovery by a neuroscientist blinded to the injury model or treatments performed on each subject.  Preliminary data uses a 20-point observational scale to assess the degree of functional recovery in the hind-limbs, where a score greater than 8 indicates the subject’s ability to bear weight and perform deliberate stepping (Figure 6).

 

Non-Human Primate Studies: Comparison of Results to Prior Rodent Study

The two African Green monkeys that received scaffolds seeded with human neural stem cells (n=2, Figure 6) demonstrated an improved level of functional recovery compared to the control animal (n=1, Figure 6). These results mirrored the behavioral observations obtained in InVivo’s rodent study (n=12, Figure 5). Furthermore, implantation of the scaffold alone demonstrated improved efficacy in promoting functional recovery compared to the control in both one monkey (n=1, Figure 6) and in prior rodent studies (n=12, Figure 5).

2 nd Primate Study 2010- Preclinical evaluation of biomaterial scaffolds and hydrogels in a model spinal cord injury in the African green monkey.

A segmental thoracic hemisection was used in African green monkeys for the evaluation of biomaterial implants in a pre-clinical model of spinal cord injury in the non-human primate. The model’s physiological tolerance permitted behavioral analyses for a 12-week period post-injury, extending to termination points for immunohistochemical analyses.

Implementation of surgically-induced spinal cord injury (SCI) through T9-T10 thoracic lateral hemisection on 16 African green monkeys with administration of a PLGA-polylysine scaffold (n=4), a PLGA-polylysine scaffold soaked in g rowth factors (EGF, bFGF, 15 μg each) (n=5), a t hiol-acrylate poly(ethylene glycol) based hydrogel containing 150 μg methylprednisolone sodium succinate (n=4), or no treatment for control (n=4).  Implants were administered at the time of lesioning.  The ob jective was to determine the feasibility and reliability of this pre-clinical model of SCI, the safety and efficacy of the implants in a non-human primate model, as well as the establishment of assessment measures. Analysis of functional improvements was performed by statistical evaluation of 3D kinematic and electromyographic (EMG) recordings, a 0-20 neuromotor scoring system and histological and immunohistochemical stains on post-mortem spinal cord thoracic and lumbar cross-sections.

The neuromotor assessment by a blinded trained neuroscientist for each group over the twelve-week period for the left hind limb was charted (Figure 7).  All groups show an initial paralysis 2 days post-injury, confirming successful surgical induction of model Brown-Séquard syndrome.  The treatment groups exhibited an improved recovery compared to untreated injured controls on average.  Kinematic and EMG analyses exhibited the same trend.  While a limited number of subjects were studied and statistical power tests have not been completed, the results align with data from prior monkey and rodent studies.

FIGURE 7.  IPSILATERAL HINDLIMB TREADMILL HANDCAM NEUROMOTOR SCORE

 

Commercialization Strategy

 

Clinical Regulatory Plan

InVivo’s PLGA biopolymer scaffolding product is expected to be regulated as a Class III medical device by the FDA. The Company will be required to demonstrate safety and efficacy in a human clinical trial before it can submit a PMA for FDA approval. Before human clinical trials can commence, the Company is required to obtain FDA clearance to conduct the clinical trial under an Investigational Device Exemption (“ IDE ”). The Company has conducted a Pre-IDE meeting with the FDA to discuss the clinical trial and plans to submit an IDE to the FDA by the end of 2010.

The Company first plans to conduct a pilot clinical study to evaluate the device in ten acute open-wound SCI patients. The Company is also planning a larger follow on pivotal human study in acute SCI patients after the pilot study is completed.   The Company expects to have completed both the pilot study and the larger pivotal clinical trial by mid 2012.  The clinical development timeline is subject to a number of risks that could delay the filing of a PMA or cause a PMA never to be filed. These risks are described in the section entitled “Risk Factors and Special Considerations”. The estimated clinical development timeline to submission of a PMA for FDA approval is as follows:

FDA Clinical Development Plan for Polymer Scaffolding Device

The InVivo Therapeutics regulatory team is led by David Feigal, MD, a consultant to the Company and a member of the InVivo’s Business Advisory Board.  Dr. Feigal recently served as Vice-President, Regulatory at Amgen, Inc. and earlier was the number-two executive at the FDA from 1992 to 2006.  During his tenure, he was head of the FDA’s Center for Devices for five years and head of the Center for Biologics for five years.  For InVivo day-to-day handling of FDA processes, InVivo will hire a Director of Regulatory & Clinical Affairs who will be responsible for managing InVivo’s regulatory affairs.

Janice Hogan, a managing partner at Hogan & Lovells US LLP, serves as InVivo’s FDA consultant. Ms. Hogan has over twenty-five years of experience in representing spine industry companies to the FDA such as Johnson & Johnson’s DePuy Spine, Synthes Spine, Abbott Spine, Stryker Spine, and Medtronic Spine.

 

Manufacturing and Product Delivery Plan

We believe that the raw material polymers for our first device product can be readily obtained from suppliers that already have obtained FDA clearance to manufacture these components. The Company has developed a proprietary manufacturing process to create a uniform porous three-dimensional scaffolding structure for each device. The Company plans to purchase the raw material polymers from suppliers and then utilize its proprietary manufacturing process to create the final polymer scaffolding.  Proprietary manufacturing processes will include 3D printing and batch processes to create the scaffolds.  The Company’s intends to either establish a manufacturing facility or utilize a third-party to produce the polymer scaffolding and then package the final product.

InVivo’s product delivery process from the point of injury through patient rehabilitation is outlined below:

 

Sales and Marketing

The Company plans to sell its SCI product through a to-be-established direct sales force for major markets in the U.S and through distributors in foreign markets.   Primary international markets will include Europe and Japan. Since the product is novel and would most likely be the first therapeutic treatment for SCI, the Company will seek to gain acceptance with the physicians who are thought leaders in the SCI field and plans on utilizing a consultative selling approach. The direct sales force will focus its efforts on maximizing revenue through product training, placement and support. The Company will seek to establish strong relationships with orthopedic spine surgeons and neurosurgeons and expects to provide a high level of service for the products including providing on-site assistance and service during procedures at any time of day. The primary market channel for the product will be to emergency department physicians handling trauma cases. In addition, the Company will establish medical education programs to reach practioners in physical medicine and rehabilitation centers, and through patient advocacy groups. The Company will also establish Internet and other marketing approaches to reach SCI patients.

 

Intellectual Property

In July 2007, InVivo obtained a world-wide exclusive license (the “ CMCC License ”) to a broad suite of patents co-owned by M.I.T. and CMCC covering the use of a wide range of biopolymers to treat SCI, and to promote the survival and proliferation of human stem cells in the spinal cord.  In addition, they cover the use of biomaterials in combination with growth factors and drugs.  The CMCC License covers 10 issued US patents and 3 pending US patents as well as 67 international patents and 34 international patents pending.

The CMCC License provides InVivo intellectual property protection for the use of any biomaterial scaffolding used as an extracellular matrix substitute for treating SCI by itself or in combination with drugs, growth factors and human stem cells. The Company’s rodent studies have shown that human stem cells cannot proliferate and survive without the addition of the biopolymer scaffolding which serves as an extracellular matrix replacement and mimics the natural cellular architecture of the inner ‘grey’ and outer ‘white’ matter of the spinal cord.  We believe that any extracellular matrix developed to treat spinal cord injuries will infringe on the patents licensed to InVivo.  InVivo intends to defend all patents very aggressively.

The patents are the results of over a decade of research by Dr. Robert S. Langer, Professor of Chemical and Biomedical Engineering at M.I.T. and his research teams at M.I.T.’s Langer Lab. Dr. Langer is a prolific, world renowned inventor who is generally regarded to be the cofounder of the field of tissue engineering.

Under the CMCC License, InVivo has the right to sublicense the patents.  InVivo has full control and authority over the development and commercialization of the licensed products, including clinical trials, manufacturing, marketing, and regulatory filings and we own the rights to the data it generates. In addition InVivo has the first right of negotiation for a thirty-day period to any improvements to the intellectual property.

The CMCC License has a 15-year term, or as long as the life of the last expiring patent right, whichever is longer, unless terminated earlier by CMCC.  In connection with the CMCC License, InVivo submitted a 5-year plan with targets and projections to CMCC and MIT.  InVivo is required to meet the objectives in the plan, or else it is required to notify CMCC and revise the plan.  CMCC has the right to terminate the License for failures by InVivo to either notify CMCC when objectives will not be reached or revise the plan. 

InVivo is required to pay certain fees and royalties under the CMCC License.  Specifically, InVivo was required to pay a license issue fee, which was paid at the execution of the CMCC License.  InVivo is also required to make milestone payment upon completing various phases of product development, including (i) upon FDA filing of first Investigational New Drug application and Investigational Device Exemption application; (ii) upon enrolling first patient in Phase II testing; (iii) upon enrolling first patient in Phase III testing; (iv) upon filing with the FDA of first New Drug Application or related applications, and; (v) upon first market approval in any country outside the US.  Each year prior to the release of a licensed product, InVivo is also required to pay a maintenance fee.  Further, InVivo is required to make payments based on sublicenses to manufacturers and distributors.  InVivo believes that it will have sufficient capital resources upon completion of the Merger to make all of such payments. In addition, following commercialization, InVivo is required to make ongoing royalty payments equal to a low single digit percentage of net sales of the licensed products.

Employees

We currently have 8 full-time employees. None of our employees are represented by a labor union, and we consider our employee relations to be good. We also utilize part-time employees and a number of consultants to assist with research and development and regulatory activities. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.

Description of Property

Our executive officers are located in leased premises at One Broadway, 14 th Floor, Cambridge, MA 02142   and our phone number is 617-47 5-1520 .

Legal Proceedings

From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

We anticipate that we will expend significant financial and managerial resources in the defense of our intellectual property rights in the future if we believe that our rights have been violated. We also anticipate that we will expend significant financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties.

Available Information

We are subject to the reporting requirements of the Securities Exchange Act of 1934 (“ Exchange Act ”).  Reports filed with the SEC pursuant to the Exchange Act, including annual and quarterly reports, and other reports we file, can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Investors can request copies of these documents upon payment of a duplicating fee by writing to the SEC. The reports we file with the SEC are also available on the SEC’s website (http://www.sec.gov).

RISK FACTORS AND SPECIAL CONSIDERATIONS

 

This Report contains forward-looking statements.

Information provided in this Report and in the annexed Exhibits may contain forward-looking statements, which reflect management’s current view with respect to future events and the Company’s performance.  Such forward-looking statements may include the estimated timeline for the Company to file for FDA approval, projections with respect to market size and acceptance, revenues and earnings, marketing and sales strategies, efficacy of its drugs and business operations.

InVivo operates in a highly competitive and highly regulated business environment. The Company’s business can be expected to be affected by government regulation, economic, political and social conditions, business’ response to new and existing products and services and services, technological developments and the ability to obtain and maintain patent and/or other intellectual property protection for its products and intellectual property.  The Company’s actual results could differ materially from management’s expectations because of changes both within and outside of the Company’s control.

Risks Related To Our Business and Our Industry

We have a limited operating history and it is difficult to predict our future growth and operating results .

InVivo was incorporated in Delaware in November 2005 and has a limited operating history and limited operations and assets.  Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties encountered by companies in the early stage of development.  As a development stage company, our development timelines have been and may continue to be subject to adjustments that could negatively affect our cash flow and ability to develop or bring products to market, if at all.  Predicting our future operating and other results is extremely difficult, if not impossible.

The Company’s prospects must be considered in light of inherent risks, expenses and difficulties encountered by all early stage companies, particularly companies in new and evolving markets.  These risks include, by way of example and not limitation, unforeseen capital requirements, unforeseen technical problems, delays in obtaining regulatory approvals, failure of market acceptance and competition from foreseen and unforeseen sources.

We have not generated any revenues to date and have a history of losses since inception.

InVivo has not generated any revenue to date and, through June 30, 2010, has incurred net losses of approximately $7,800,000 since its formation in 2005. It can be expected that the Company will continue to incur significant operating expenses and continue to experience losses in the foreseeable future. As a result, the Company cannot predict when, if ever, it might achieve profitability and cannot be certain that it will be able to sustain profitability, if achieved.

We will need substantial additional funding to develop our products and for our future operations. If we are unable to obtain the funds necessary to do so, we may be required to delay, scale back or eliminate our product development or may be unable to continue our business.

 

The development and approval to market and sell our product candidates will require a commitment of substantial funds, in excess of our current capital resources. Before we can market or sell any of our products, we will need to conduct costly and time-consuming research, which will include preclinical and clinical testing and regulatory approvals.  We anticipate the amount of operating funds that we use will continue to increase along with our operating expenses over at least the next several years as we plan to bring our products to market. While we believe our current capital resources will satisfy our planned capital needs for approximately 12 months, our future capital requirements will depend on many factors, including:

 

·

the progress and costs of our research and development programs, including our ability to develop our current portfolio of therapeutic products, or discover and develop new ones;

·

our ability, or our partners ability and willingness, to advance partnered products or programs;

·

the cost of prosecuting, defending and enforcing patent claims and other intellectual property rights;

·

the progress, scope, costs, and results of our preclinical and clinical testing of any current or future products;

·

the time and cost involved in obtaining regulatory approvals;

·

the cost of manufacturing our product candidates;

·

expenses related to complying with GMP manufacturing of product candidates;

·

costs of financing the purchases of additional capital equipment and development technologies;

·

competing technological and market developments;

·

our ability to establish and maintain collaborative and other arrangements with third parties to assist in bringing our products to market and the cost of such arrangements.

		Six Months Ended				Years Ended December 31,
		June 30, 2010				2009				2008
		(unaudited)
Risk-free interest rate			3.24	%			2.68	%			3.24	%
Expected dividend yield			0	%			0	%			0	%
Expected term (employee grants)			7.45				6.25				7.75
Expected volatility			49.15	%			50.10	%			49.15	%

 

Financial Condition, Liquidity and Capital Resources

 

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.  Accordingly, the Company is considered to be in the development stage.

 

As of December 31, 2009, the Company had cash of approximately $227,000, an accumulated deficit of approximately $5,179,000 and a stockholders’ deficit of approximately $3,619,000.  The Company is in the development stage, has no revenue and has relied on raising capital to finance its operations.  At December 31, 2009, the Company did not have sufficient capital to fund its operations.  This, in turn, raises substantial doubt about the Company’s ability to continue as a going concern

 

Since inception, the Company incurred negative cash flows from operations. The Company has financed its operations primarily through the sale of equity-related securities. At June 30, 2010 the accumulated deficit was $6,603,000 and stockholders’ deficit was $328,000.

 

At June 30, 2010, we had total current assets of $216,000 and current liabilities of $272,000, resulting in a working capital deficit of   $56,000. At   December 31, 2009, we had total current assets of $238,000 and current liabilities of $658,000, resulting in a working capital deficit of $420,000.

Name of Beneficial Owner		No. Shares of Common Stock Beneficially Owned				% of Common Stock Outstanding
Frank Reynolds (1)			15,147,660				30.8	%
Robert S. Langer			8,262,360				16.8	%
Kevin Kimberlin (2)			6,192,959				11.60	%
Adam K. Stern (1)(3)			2,441,122				4.9	%
Richard J. Roberts (1)(4)			805,580				1.6	%
George Nolen (1)(5)			50,984				.1
Christi Pedra (1)(6)			81,968				.1
All directors and executive officers as a group (5 persons) (1)			18,527,313				36.7	%

DIRECTORS AND EXECUTIVE OFFICERS

The following persons are the executive officers, non-executive officers and directors of the Company and hold the positions set forth opposite their name.

Name		Age		Position
Frank M. Reynolds		48		Chairman of the Board of Directors, Chief Executive Officer, Chief Financial Officer *
Christopher Pritchard **		25		Chief Science Officer
Eric J. Woodard **		50		Chief Medical Officer, Scientific Advisory Board Member
Richard J. Roberts		67		Director, Scientific Advisory Board Member
George Nolen		54		Director
Christi M. Pedra		52		Director
Adam K. Stern		46		Director

SCIENTIFIC AND BUSINESS ADVISORY BOARDS

Eric J. Woodard		Chief Medical Officer, Scientific Advisory Board Member
Dr. Richard J. Roberts		Director, Scientific Advisory Board Member
Dr. Robert S. Langer		Scientific Advisory Board Member
V. Reggie Edgerton		Scientific Advisory Board Member
Jonathan R. Slotkin		Scientific Advisory Board Member
Todd Albert		Scientific Advisory Board Member
Paul Mraz		Business Advisory Board Member
David Feigal		Business Advisory Board Member

 

Forbes Magazine (1999) and Bio World (1990) have named Dr. Langer as one of the 25 most important individuals in biotechnology in the world.  Discover Magazine (2002) named him as one of the 20 most important people in this area.  Forbes Magazine (2002) selected Dr. Langer as one of the 15 innovators worldwide who will reinvent our future.  Time Magazine and CNN (2001) named Dr. Langer as one of the 100 most important people in America and one of the 18 top people in science or medicine in America (America’s Best).   Parade Magazine (2004) selected Dr. Langer as one of 6 “Heroes whose research may save your life.”  Dr. Langer has received honorary doctorates from Harvard University, the Mt. Sinai School of Medicine, Yale University, the ETH (Switzerland), the Technion (Israel), the Hebrew University of Jerusalem (Israel), the Universite Catholique de Louvain (Belgium), Rensselaer Polytechnic Institute, Willamette University, the University of Liverpool (England), the University of Nottingham (England), Albany Medical College, Pennsylvania State University, Northwestern University, Uppsala University (Sweden) and the University of California – San Francisco Medal.  He received his Bachelor’s Degree from Cornell University in 1970 and his Sc.D. from the Massachusetts Institute of Technology in 1974, both in Chemical Engineering.

 

Dr. Reggie Edgerton, PhD, Scientific Advisory Board Member, has been the Director of U.C.L.A’s Edgerton Lab since 1968 and is a professor in the Department of Physiological Sciences at U.C.L.A. His research is focused on neural control of movement and how this neural control adapts to altered use and after spinal cord injury. He completed his Ph.D. under the direction of Drs. Wayne Van Huss, Rex Carrow, and William Heusner at Michigan State University.

 

Dr. Edgerton is on the Scientific Advisory Board of The Christopher Reeves Foundation (CRF) and his laboratory is one of eight in the world receiving funding from the CRF.  In addition to serving on the board of the CRF, he is currently on the Scientific Advising board of the American Paralysis Association. Dr. Edgerton has co-authored two books and is the author of approximately 300 research papers.

 

Jonathan Slotkin, MD, Scientific Advisory Board Member, is a clinical neurosurgeon and research scientist. Clinically, Dr. Slotkin has expertise in complex spinal surgery, minimally invasive spinal surgery, spinal oncology surgery and brain tumor surgery. Dr. Slotkin completed residency training in neurosurgery at Harvard Medical School, Brigham and Women's Hospital. He performed a fellowship in complex spinal surgery with Dr. Eric J. Woodard. He is the co-editor of a two-volume publication on spinal surgery. Dr. Slotkin is currently a neurosurgeon with the Washington Brain and Spine Institute.

 

Dr. Slotkin has authored or co-authored several peer-reviewed scientific publications in the areas of repair after spinal cord injury in animal models, and in vivo quantum dot labeling of neural stem cells.

 

Todd J. Albert, MD , Scientific Advisory Board Member is the James Edwards Professor and Chair of the Department of Orthopaedics at Jefferson Medical College.  He is also the President of the Rothman Institute in Philadelphia. Previously, he served as Co-director of Reconstructive Spine Surgery and the Spine Fellowship Program at Thomas Jefferson University. Dr. Albert graduated magna cum laude from Amherst College, received his doctor of medicine degree from the University of Virginia School of Medicine.

 

Dr. Albert serves on the boards of several scientific journals, including Spine, The Spine Journal, and The Journal of Spinal Disorders and Techniques, as well as medical associations. He is Chair of Network Development for the National Spine Network. Dr. Albert has published over 200 scientific articles, authored over 40 book chapters, and seven textbooks on spinal surgery.

 

 

Paul Mraz, Business Advisory Board , currently serves as Chief Executive Officer of CeraPedics, Inc., a medical device company.  Mraz most recently served as Chairman and CEO of Angstrom Medica, Inc. (acquired by Pioneer Surgical Technology). Prior to Angstrom Medica, Mraz was a Principal of Link Spine Group Inc. as Vice President - Worldwide Marketing and International Sales until its acquisition by Johnson & Johnson in June 2003.

 

Mr. Mraz currently serves as a Director of superDimension, Ltd. (Herzliya, ISRAEL and Plymouth, MN). Mraz received a B.S. degree in Mechanical Engineering from Lafayette College and an M.S. degree in Mechanical Engineering and Biomechanics from Case Western Reserve University. He holds six US Patents for various medical devices and is an active advisor to numerous venture capital groups.

 

David W. Feigal Jr., MD, Business Advisory Board, recently served as Vice President, Global Regulatory at Amgen, Inc. Previously, Dr. Feigal was Senior Vice President, Head of Global Regulatory and Global Safety Surveillance at Elan. Prior to joining Elan in November 2006, he spent 12 years with the FDA. During his time at the FDA, he was Head of the Center for Devices and Head of the Center for Biologics for five years each.

 

Before joining the FDA, Dr. Feigal worked for 10 years within the academic and hospital settings of the University of California in San Diego, San Francisco and Davis. He holds a BA from University of Minnesota, an MD from Stanford University and a Master of Public Health from the University of California, Berkeley.

The Company does not pay Members of its Advisory Boards any cash compensation and currently compensates the Scientific Advisory and Business Advisory Boards through the issuance of Stock Options.

 

 

1 The Stock Options listed in the above table were issued under InVivo’s 2007 Plan. All options issued under the 2007 Plan vest over a period of four (4) years.

Agreements with Officers, Directors and Advisory Board Members

In November 2006, InVivo entered into an Agreement with each of: (i) Frank Reynolds, InVivo’s current Chief Executive Officer; (ii) Robert Langer, InVivo’s current Scientific Advisory Member; and (iii) Yang D. Teng.  The Agreement provided for the repurchase of a party’s unvested shares of common stock by the other parties upon the occurrence of certain events.  As of the date of this Report, all shares granted to each of the parties have vested.

InVivo entered into an employment agreement with Mr. Reynolds in May 2008, which was amended in November 2009.  The agreement, as amended, provides: (i) for an indefinite term of employment; (ii) for a base salary of $375,000 plus benefits; (iii) for a grant of stock options to purchase 784,924 shares of Common Stock; and (iv) that if Mr. Reynolds employment is terminated by the Company without cause, or by Mr. Reynolds as a result of a constructive termination by the Company, or as a result of the Mr. Reynolds death or disability, then InVivo is obligated to pay severance (consisting of salary and benefits as in effect at the time of termination) to Mr. Reynolds (or Mr. Reynolds’ legal representatives) for a period of 18 months.  In addition, if Mr. Reynolds employment is terminated by the Company without cause, or by Mr. Reynolds as a result of a constructive termination by the Company, the Company will be obligated to pay Mr. Reynolds his annual bonus during such 18 month period.  The amount of the bonus after the date of termination will equal the greater of (i) the last such bonus before termination, or (ii) the average of the three most recent bonuses paid before the date of termination (or all such bonuses, if less than three).

 

 

The agreement, as amended, provides for a possible bonus to Mr. Reynolds for the 12-month period commencing November 1, 2009, payable upon the attainment of certain milestones.  The bonus may range from 10% to 130% of Mr. Reynolds’ 2009 base salary, depending on the number and type of milestones attained. The most significant of these milestones (100% of 2009 base salary), will be triggered if the Company obtains FDA approval to begin a human study on or before October 31, 2010.

 

InVivo entered into an employment contract in September 2010 with Mr. Pritchard pursuant to which Mr. Pritchard will act as Chief Science Officer of InVivo. Mr. Pritchard’s agreement provides: (i) a base salary of $225,000 plus benefits; and (ii) options to purchase 909,989 shares of InVivo common stock at an exercise price of $1.00 per share, vesting over four years commencing one year from the date of grant. Mr. Pritchard’s contract is for an indefinite term of employment, subject to early termination for death, disability or cause.

 

 

(1) The options were granted on December 12, 2009, and vest as follows: 25% on each of the first, second, third and fourth anniversaries of the date of grant

Board of Directors and Corporate Governance

 

Our Board of Directors consists of five (5) members. On the Closing of the Merger, Peter L. Coker and Peter A. Reichard, the sole members of the Board of Directors of ITHC resigned, and simultaneously therewith, a new Board of Directors was appointed. The Board consists of four (4) members who were former directors of InVivo and Adam K. Stern, who was appointed at the Closing of the Merger at the request of the Placement Agent.

 

Board Independence and Committees

 

The Company is not currently listed on any national securities exchange or in an inter-dealer quotation system that has a requirement that the Board of Directors be independent. However, in evaluating the independence of its members and the composition of the committees of the Board of Directors, the Board utilizes the definition of “independence” as that term is defined by applicable listing standards of the Nasdaq Stock Market and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee director definition of Rule 16b-3 promulgated under the Exchange Act.

 

 

The Board of Directors expects to continue to evaluate its independence standards and whether and to what extent the composition of the Board and its committees meets those standards. The Company ultimately intends to appoint such persons to the Board and committees of the Board as are expected to be required to meet the corporate governance requirements imposed by a national securities exchange. Therefore, the Company intends that a majority of its directors will be independent directors of which at least one director will qualify as an “audit committee financial expert,” within the meaning of Item 407(d)(5) of Regulation S-K, as promulgated by the SEC.

 

Additionally, the Board of Directors is expected to appoint an audit committee, governance committee and compensation committee and to adopt charters relative to each such committee.

 

We believe that   Messrs. Nolen and Roberts and Ms. Pedra are currently “independent” directors as that term is defined by applicable listing standards of the Nasdaq Stock Market and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee director definition of Rule 16b-3 promulgated under the Exchange Act. The Board determined that Mr. Stern is not independent as a result of the payments to the Placement Agent and that Mr. Reynolds is not independent as a result of his employment relationship with the Company.

 

We currently anticipate that Christi Pedra and Richard Roberts will initially serve on our audit committee, and as stated above our Board of Directors believes that all of the members are independent as that term is defined by applicable listing standards of the Nasdaq Stock Market and SEC rules. We expect that George Nolen and Richard Roberts will initially serve on our compensation committee.

 

Code of Ethics

 

ITHC has adopted a written code of ethics. We believe that the code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.

 

(1) Mr. Roberts was granted options to purchase 743,612 shares on Common Stock at a price of $0.07 per share on June 1, 2007.  The options, which expire in June 2017, vest as follows:  25% on date of grant and the remainder in three equal installments on the first, second and third anniversaries of the grant date.  In addition, Mr. Roberts was granted options to purchase 123,935 shares of Common Stock at a price of $0.07 per share on November 24, 2008.  The options, which expire in November 2018, vest as follows:  25% of the grants vests on each of the first, second, third and fourth anniversaries of the grant date.

(2) Mr. Nolen was granted options to purchase 123,934 shares of Common Stock in December 2009 at a price of $0.91 per share.  The options, which expire in December 2019, vest as follows:  25% of the grants vests on each of the first, second, third and fourth anniversaries of the grant date.

(3) Ms. Pedra was granted options to purchase 123,934 shares of Common Stock in November 2008 at a price of $0.07 per share.  The options, which expire in November 2018, vest as follows:  25% of the grants vests on each of the first, second, third and fourth anniversaries of the grant date.

2010 Equity Incentive Plan

 

The Board of Directors has adopted the 2010 Equity Incentive Plan in 2010, subject to stockholder approval, which will reserve a total of 3,500,000 shares of our Common Stock for issuance under the 2010 Plan.  If an incentive award granted under the 2010 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2010 Plan.

 

Shares issued under the 2010 Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring another entity are not expected to reduce the maximum number of shares available under the 2010 Plan.  In addition, the number of shares of Common Stock subject to the 2010 Plan, any number of shares subject to any numerical limit in the 2010 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in our outstanding Common Stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.

 

If stockholder approval is not obtained within 12 months after the Board’s adoption of the 2010 Plan, all awards granted under the 2010 Plan will terminate. In addition, no award under the 2010 Plan will become exercisable until stockholder approval has been obtained.

 

Administration

 

It is expected that the compensation committee of the Board, or the Board in the absence of such a committee, will administer the 2010 Plan.  Subject to the terms of the 2010 Plan, the compensation committee would have complete authority and discretion to determine the terms of awards under the 2010 Plan.

 

 

Grants

 

The 2010 Plan is expected to authorize the grant to 2010 Plan participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants intended to comply with Section 162(m) of the Internal Revenue Code (as amended, the “ Cod e”) and stock appreciation rights, as described below:

 

·

Options granted under the 2010 Plan entitle the grantee, upon exercise, to purchase a specified number of shares from us at a specified exercise price per share.  The exercise price for shares of Common Stock covered by an option cannot be less than the fair market value of the Common Stock on the date of grant unless agreed to otherwise at the time of the grant.

 

·

Restricted stock awards and restricted stock units may be awarded on terms and conditions established by the compensation committee, which may include performance conditions for restricted stock awards and the lapse of restrictions on the achievement of one or more performance goals for restricted stock units.

 

·

The compensation committee may make performance grants, each of which will contain performance goals for the award, including the performance criteria, the target and maximum amounts payable, and other terms and conditions.

 

·

The 2010 Plan authorizes the granting of stock awards.  The compensation committee will establish the number of shares of Common Stock to be awarded and the terms applicable to each award, including performance restrictions.

 

·

Stock appreciation rights (“ SARs ”) entitle the participant to receive a distribution in an amount not to exceed the number of shares of Common Stock subject to the portion of the SAR exercised multiplied by the difference between the market price of a share of Common Stock on the date of exercise of the SAR and the market price of a share of Common Stock on the date of grant of the SAR.

 

Duration, Amendment, and Termination

 

The Board is expected to have the power to amend, suspend or terminate the 2010 Plan without stockholder approval or ratification at any time or from time to time.  No change may be made that increases the total number of shares of Common Stock reserved for issuance pursuant to incentive awards or reduces the minimum exercise price for options or exchange of options for other incentive awards, unless such change is authorized by our stockholders within one year.  Unless sooner terminated, the 2010 Plan would terminate ten years after it is adopted.

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with ITHC Shareholders

Forward Split, Split-Off and Share Cancellation

Our Common Stock was forward-split on a 2.02898 for 1 basis effective October 22, 2010 so that there were 6,999,981 shares of the ITHC’s common stock issued and outstanding before taking into account the issuance of shares of Common Stock to purchasers of Units in the Offering and in the Merger and after giving pro forma effect to the Split-Off, as discussed below.

Upon the closing of the Merger, ITHC transferred all of its operating assets and liabilities to DSSC and split-off DSSC through the sale of all of the outstanding capital stock of DSSC (the “ Split-Off ”).  In connection with the Split-Off, 14,747,554 shares of Common Stock held by the Split-Off Shareholders were surrendered and cancelled without further consideration, other than the receipt of DSSC shares. An additional 1,014,490 shares of common stock were cancelled by a shareholder of ITHC for no consideration (the “ Share Cancellation ”)..

Transactions with the Placement Agent and its Related Parties

The Placement Agent also acted as finder to InVivo in connection with its sale of $500,000 of principal amount of its Bridge Notes, which was consummated in September 2010.  The Company issued investors participating in this bridge financing New Bridge Warrants to purchase an aggregate of 500,000 shares of the Company’s Common Stock at a price of $1.00 per share. The New Bridge Warrants have a term of five years and are fully exercisable.  The Bridge Notes were converted into Units in the Offering upon the closing of the Offering. The Placement Agent earned Warrants (which are identical to the New Bridge Warrants) to purchase 100,000 shares of Common Stock of the Company at a price of $1.00 per Share as compensation for acting as a finder in the Bridge Financing.  Affiliates of the Placement Agent purchased $150,000 of Bridge Notes in the Bridge Financing.

In September 2010, several related parties to the Placement Agent, purchased an aggregate of 1,920,000 shares of Common Stock (3,895,643 shares on a post stock split adjusted basis) from various shareholders of ITHC. The aggregate purchase price paid to such shareholders by the related parties for such shares was approximately $49,000.  Adam K. Stern, Senior Managing Director of the Placement Agent and its designee to serve on the Company’s Board of Directors upon the Closing of the Offering, beneficially owns 960,247 of these shares (1,948,322 shares on a post-split basis).

ITHC engaged the Placement Agent as its exclusive placement agent in connection with the Offering. For its services, ITHC paid the Placement Agent (i) a cash fee equal to 10% of the gross proceeds raised in the Offering ($1,051,410) and (ii) a non-accountable expense allowance equal to 3% of the gross proceeds raised in the Offering ($315,423).  In addition, the Company granted to the Placement Agent or its designees, for nominal consideration, five-year warrants (“Placement Agent Warrants”) to purchase (i) 2,102,819 shares of Common Stock at an exercise price of $1.00 per share and (ii) 2,102,819 shares of Common Stock at an exercise price of $1.40 per share.

 

 

The Company has agreed to engage the Placement Agent as its warrant solicitation agent in the event the Investor Warrants are called for redemption and shall pay a warrant solicitation fee to the Placement Agent equal to five (5%) percent of the amount of funds solicited by the Placement Agent upon the exercise of the Investor Warrants following such redemption.

 

The Placement Agent was granted the right to designate one member to our Board of Directors and has designated Adam K. Stern to fill such Board seat.

 

The Company has also agreed to pay the Placement Agent compensation of $5,000 per month for  a period of two years for services relating to strategies to maximize shareholder value; and entered into a non-exclusive finder’s fee agreement with the Placement Agent providing that if the Placement Agent shall introduce us to a third party that consummates certain investment or business combination transactions with us during the eighteen (18) month period following the later of the termination of this Offering or the final Closing of this Offering, the Placement Agent will be paid a finder’s fee, payable in cash at the closing of such transaction, equal to equal to 7% of the first $1 million of consideration paid by or to the Company, plus 6% of the next $1 million of consideration paid by or to the Company, plus 5% of the next $5 million of the consideration paid by or to the Company, plus 4% of the next $1 million paid by or to the Company, plus 3% of the next $1 million paid by or to the Company, plus 2.5% of any consideration paid by or to the Company in excess of $9 million. The Placement Agent will not be entitled to a finder's fee with respect to any transaction entered into with any party with whom the Company had a pre-existing relationship prior to the date of the specific introduction and who was not introduced to the Company by the Placement Agent.

 

Furthermore, we granted the Placement Agent a preferential right of first refusal to act as agent with respect to future private placements of the Company’s securities for a period of  eighteen (18) months from the date of the final Closing of the Offering.

The price of the Units was been determined following our discussions with the Placement Agent.  Among the factors considered in the negotiations were our limited operating history, our history of losses, an assessment of our management and our proposed operations, our current financial condition, the prospects for the industry in which we operate, the prospects for the development of our business with the capital raised in the Offering and the general condition of the securities markets at the time of the Offering.  The Offering price of the Units or the exercise price of the Investor Warrants does not necessarily bear any relationship to our assets, book value or results of operations or any other generally accepted criterion of value.

 

The Company has agreed to indemnify the Placement Agent and other broker-dealers who are FINRA members selected by the Placement Agent to offer and sell Units, to the fullest extent permitted by law for a period of four (4) years from the Closing of the Offering, against certain liabilities that may be incurred in connection with this Offering, including certain civil liabilities under the Securities Act, and, where such indemnification is not available, to contribute to the payments the Placement Agent may be required to make in respect of such liabilities.  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the Placement Agent, pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

 

Lock-ups

Officers, directors and holders of 5% or more of the Company’s Common Stock and certain employees and affiliates of the Placement Agent have agreed to “lock-up” and not sell or otherwise transfer or hypothecate any of their shares for a term equal to the earlier of (i) twelve (12) months from the Closing Date of the Merger; or (ii) six (6) months following the effective date of the Registration Statement registering the shares of Common Stock that were sold in the Offering.

 

Authorized Capital Stock

 

As of October 26, 2010, our authorized capital stock consisted of 100,000,000 shares of Common Stock, par value $0.00001 per share.

 

Issued and Outstanding Capital Stock

 

After giving effect to the Transactions, the Units sold in the Offering, the options granted under the 2007 Plan (that were exchanged for ITHC Options upon Pubco’s assumption of options issued under the 2007 Plan), and the warrants issued to the Placement Agent in connection with the Offering, there are issued and outstanding securities of the Company on the closing of the Transactions:

§

49,161,268 shares of Common Stock;

§

Options to purchase 5,915,615 shares of Common Stock granted under the 2007 Plan that will be issued to holders at the closing of the Merger pursuant to the assumption of the 2007 Plan;

§

Investor Warrants to purchase 10,514,097 shares of Common Stock at $1.40 per share issued to the investors in the Offering and warrants to purchase 2,102,819 shares of Common Stock at a price of $1.00 per share and 2,102,819 warrants exercisable at a price of $1.40 per share to be issued to the Placement Agent in connection with this Offering; and

§

New Bridge Warrants issued to Bridge Investors in the Bridge Financing to purchase 500,000 shares of Common Stock at $1.00 per share and 100,000 New Bridge Warrants exercisable at a price of $1.00 per share issued to the Placement Agent in connection with the Bridge Financing.

 

 

Description of Common Stock

The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of Common Stock that are present in person or represented by proxy. Except as otherwise provided by law, amendments to the articles of incorporation generally must be approved by a majority of the votes entitled to be cast by all outstanding shares of Common Stock. The amended and restated Articles of Incorporation do not provide for cumulative voting in the election of directors. The Common Stock holders will be entitled to such cash dividends as may be declared from time to time by the Board from funds available. Upon liquidation, dissolution or winding up of the Company, the Common Stock holders will be entitled to receive pro rata all assets available for distribution to such holders.

 

Registration Rights Agreement

 

The Company is required to file within 90 days of the date of the final Closing of the Offering (the “ Filing Deadline ”), a Registration Statement registering for resale all shares of Common Stock issued in the Offering, including Common Stock (i) included in the Units; and (ii) issuable upon exercise of the Investor Warrants; consistent with the terms and provisions of the Registration Rights Agreement, attached hereto as an Exhibit 10.4.  The holders of any registrable securities removed from the Registration Statement a result of a Rule 415 or other comment from the SEC shall have “piggyback” registration rights for the shares of Common Stock or Common Stock underlying such warrants with respect to any registration statement filed by the Company following the effectiveness of the Registration Statement which would permit the inclusion of these shares. The Company has agreed to use its reasonable efforts to have the registration statement declared effective within 180 days of filing the registration statement (the “ Effective Deadline ”).

 

If the Registration Statement is not filed on or before the Filing Deadline or not declared effective on or before the Effectiveness Deadline, the Company shall pay to each holder of registrable securities an amount in cash equal to one-half of one percent (0.5%) of such holder’s investment herein or in the Bridge Financing on every thirty (30) day anniversary of such Filing Deadline or Effectiveness Deadline failure until such failure is cured. The payment amount shall be prorated for partial thirty (30) day periods. The maximum aggregate amount of payments to be made by the Company as the result of such failures, whether by reason of a Filing Deadline failure, Effectiveness Deadline failure or any combination thereof, shall be an amount equal to 9% of each holder’s investment amount. Notwithstanding the foregoing, no payments shall be owed with respect to any period during which all of the holder’s registrable securities may be sold by such holder under Rule 144 or pursuant to another exemption from registration.  Moreover, no such payments shall be due and payable with respect to any registrable securities the Company is unable to register due to limits imposed by the SEC’s interpretation of Rule 415 under the Securities Act.

 

The Company shall keep the Registration Statement “evergreen” for one (1) year from the date it is declared effective by the SEC or until Rule 144 of the Securities Act is available to Investors herein with respect to all of their shares, whichever is earlier.

 

 

Description of Investor Warrants

 

After the consummation of the Merger and the simultaneous closing of the Offering, there were Investor Warrants issued to purchase 10,514,097 shares of Common Stock held by investors purchasing Units in the Offering. Each Investor Warrant entitles the holder to purchase one share of Common Stock at a purchase price of $1.40 during the five (5) year period commencing on the issuance of the Investor Warrants. The Investor Warrants may be called by the Company at any time the Common Stock trades above $2.80 for twenty (20) consecutive days following the effectiveness of the registration statement covering the resale of the underlying Investor Warrant shares. The Investor Warrants can only be called if a registration statement registering the shares underlying the Investor Warrants is in effect at the time of the call.

The Investor Warrants, at the option of the holder, may be exercised by cash payment of the exercise price to the Company. The Investor Warrants may be exercised on a cshless basis commencing one year after issuance if no registration statement registering the shares underlying the Investor Warrants is then in effect.  The Placement Agent shall receive a warrant solicitation fee equal to 5% of the funds solicited by the Placement Agent upon exercise of the Investor Warrants if the Company elects to call the Investor Warrants. The exercise price and number of shares of Common Stock issuable on exercise of the Investor Warrants may be adjusted in certain circumstances including a weighted average adjustment in the event of future issuances of the Company’s equity securities at a price less than the exercise price of the Investor Warrant, in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.

 

No fractional shares will be issued upon exercise of the Investor Warrants. If, upon exercise of the Investor Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number, the number of shares of Common Stock to be issued to the Investor Warrant holder.

 

New Bridge Warrants

 

In September 2010, InVivo completed a Bridge Financing, wherein it sold $500,000 in principal amount of its Bridge Notes and 36,310 Bridge Warrants to accredited investors. The Bridge Warrants converted into 500,000 new Bridge Warrants, each exercisable at a price of $1.00 per New Bridge Warrant, upon the closing of the Offering and the Merger. Holders of the New Bridge Warrants received the same registration rights with respect to the shares of Common Stock issuable upon exercise of the New Bridge Warrants as the investors in the Offering.

 

Placement Agent Warrants

 

The Placement Agent Warrants permit the Placement Agent or its designees, to purchase for a five-year period, (i) 2,102,819 shares of Common Stock at an exercise price of $1.00 per share and (ii) 2,102,819 shares of Common Stock at an exercise price of $1.40 per share.. The Placement Agent Warrants have no registration rights and contain weighted average anti-dilution and immediate cashless exercise provisions.

 

 

Anti-Takeover Effects of Provisions of Nevada State Law

 

We may be or in the future we may become subject to Nevada’s control share laws. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and if the corporation does business in Nevada, including through an affiliated corporation. This control share law may have the effect of discouraging corporate takeovers. The Company currently has less than 200 stockholders.

 

The control share law focuses on the acquisition of a “controlling interest,” which means the ownership of outstanding voting shares that would be sufficient, but for the operation of the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (1) one-fifth or more but less than one-third; (2) one-third or more but less than a majority; or (3) a majority or more. The ability to exercise this voting power may be direct or indirect, as well as individual or in association with others.

 

The effect of the control share law is that an acquiring person, and those acting in association with that person, will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to take away voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares no not become permanent non-voting shares. The acquiring person is free to sell the shares to others. If the buyer or buyers of those shares themselves do not acquire a controlling interest, the shares are not governed by the control share law.

 

If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, and stockholder of record, other than the acquiring person, who did not vote in favor of approval of voting rights, is entitled to demand fair value for such stockholder’s shares.

 

In addition to the control share law, Nevada has a business combination law, which prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after the interested stockholder first becomes an interested stockholder, unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an interested stockholder is any person who is: (a) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation, or (b) an affiliate or associate of the corporation and at any time within the previous three years was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding shares of the corporation. The definition of “business combination” contained in the statute is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.

 

 

The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of the Company from doing so if it cannot obtain the approval of our board of directors.

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information  

 

The Common Stock is currently available for trading in the over-the-counter market and is quoted on the OTC Bulletin Board under the symbol “NVIV.OB” As of the Closing Date, there was no bid history for the Common Stock, because the Common Stock had never been traded.

 

Trades in the Common Stock may be subject to Rule 15g-9 of the Exchange Act, which imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, broker/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction before the sale.

 

The SEC also has rules that regulate broker/dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities listed on certain national exchanges, provided that the current price and volume information with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require a broker/dealer, before effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing before effecting the transaction, and must be given to the customer in writing before or with the customer’s confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for shares of Common Stock. As a result of these rules, investors may find it difficult to sell their shares.

 

Holders

 

As of the date of this filing, there are approximately 212 record holders of 49,161,268 shares of the Common Stock. As of the date of this filing, 15,319,736 shares of Common Stock are issuable upon the exercise of outstanding warrants and options. The shares issued in connection with the Transactions, including the Common Stock issued to the former InVivo stockholders and investors in the Offering, are “restricted securities,” which may be sold or otherwise transferred only if such shares are first registered under the Securities Act or are exempt from the registration requirements. As discussed elsewhere in this Current Report, we have agreed to file a registration statement within 90 days of the Closing Date, to register the   shares of Common Stock and shares of Common Stock issuable upon exercise of the Investor Warrants issued in the Offering and the shares of Common Stock issuable upon exercise of the New Bridge Warrants.

 

 

Dividend   Policy

 

The Company has never declared or paid dividends. We do not intend to pay cash dividends on our Common Stock for the foreseeable future, but currently intend to retain any future earnings to fund the development and growth of our business. The payment of dividends if any, on the Common Stock will rest solely within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements, financial condition, and other relevant factors.

 

LEGAL PROCEEDINGS

 

From time to time, the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings or claims are pending against or involve the Company that, in the opinion of management, could reasonably be expected to have a material adverse effect on our business and financial condition.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

Sales by InVivo

 

Between November 2006 and June 2008, Messrs. Reynolds, Langer and Teng were issued 1,100,000, 600,000 and 100,000 shares of InVivo’s common stock respectively.  These shares converted into 15,147,66 shares, 8,262,360 shares and 1,377,060 shares of our Common Stock, respectively, upon the closing of the Merger.  Between August 2006 and the date of this Report, InVivo sold $4,181,000 of principal amount of convertible notes (the “ Convertible Notes ”) to 54 Accredited Investors and 79,536 shares of its common stock to one investor for $1,000,000. The Convertible Notes were converted into 379,989 shares of InVivo common stock on or before the Closing of this Offering. The 79,536 shares issued to the investor converted into 1,095,259 Shares of our Common Stock and the 379,989 shares issuable to the Convertible Note holders converted into 5,232,677 Shares of our Common Stock upon the closing of the Merger.

 

In July 2010, InVivo agreed, pursuant to an agreement with its counsel, to issue to counsel at the Closing of the Merger, $500,000 of InVivo common stock (500,000 shares of our Common Stock, following the Merger) for legal services.

 

In August 2010, InVivo sold $500,000 of principal amount of Bridge Notes and Bridge Warrants. $150,000 of principal amount of the Bridge Notes and Bridge Warrants were purchased by an affiliate of the Placement Agent. Principal and accrued interest on the Bridge Notes converted into and was used to acquire Units in the Offering and upon the closing of the Merger, the Bridge Warrants were exchanged for 500,000 New Bridge Warrants to acquire 500,000 shares of our Common Stock at a price of $1.00 per share. As consideration for locating investors to participate in the Bridge Financing, the Placement Agent received warrants from InVivo that were exchanged on the closing of the Merger for new Bridge Warrants to purchase 100,000 shares of Common Stock at a price of $1.00 per share. The Placement Agent received, upon conversion of the Bridge Notes, compensation in the same amount as it received for other Units sold in the Offering.

 

 

The transactions described above were exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

 

Nevada Revised Statutes (“ NRS ”) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors, officers, employees and agents. The person entitled to indemnification must have conducted himself in good faith, and must reasonably believe that his conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe that his conduct was unlawful.

 

Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he has met the standards for indemnification and will personally repay the expenses if it is determined that such officer or director did not meet those standards.

  

Our bylaws include an indemnification provision under which we have the power to indemnify our directors, officers, former directors and officers, employees and other agents (including heirs and personal representatives) against all costs, charges and expenses actually and reasonably incurred, including an amount paid to settle an action or satisfy a judgment to which a director or officer is made a party by reason of being or having been a director or officer of the Company. Our bylaws further provide for the advancement of all expenses incurred in connection with a proceeding upon receipt of an undertaking by or on behalf of such person to repay such amounts if it is determined that the party is not entitled to be indemnified under our bylaws. No advance will be made by the Company to a party if it is determined that the party acting in bad faith. These indemnification rights are contractual, and as such will continue as to a person who has ceased to be a director, officer, employee or other agent, and will inure to the benefit of the heirs, executors and administrators of such a person.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

PART F/S

 

Reference is made to the disclosure set forth under Item 9.01 of this Current Report, which disclosure is incorporated herein by reference.