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MNOV > SEC Filings for MNOV > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for MEDICINOVA INC


8-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 28, 2013. Past operating results are not necessarily indicative of results that may occur in future periods.

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results may differ from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II of this Quarterly Report on Form 10-Q under the caption "Item 1A. Risk Factors" and under the caption "Item 1A. Risk Factors" in our Annual Report on Form 10-K, and the differences may be material. Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to, statements regarding our plans, strategies, objectives, product development programs, clinical trials, industry, financial condition, liquidity and capital resources, future performance and other statements that are not historical facts. Such forward-looking statements include statements preceded by, followed by or that otherwise include the words "may," "might," "will," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "anticipate," "predict," "potential," "plan" or similar words. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not rely unduly on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Overview and Recent Developments

We are a development stage biopharmaceutical company focused on acquiring and developing novel, small molecule therapeutics for the treatment of serious diseases with unmet medical needs with a commercial focus on the U.S. market. We were incorporated in Delaware in September 2000.

We have incurred significant net losses since our inception. We incurred losses of $2.4 million for the three months ended March 31, 2013, and at March 31, 2013, from inception, our accumulated deficit was $298.7 million, including $50.6 million of non-cash stock-based compensation charges. We expect to incur substantial net losses for the next several years as we continue to develop certain of our existing product development programs, and over the long-term if we expand our research and development programs and acquire or in-license products, technologies or businesses that are complementary to our own. As of March 31, 2013, we had available cash and cash equivalents of $3.0 million and working capital of $2.8 million which is sufficient to fund operations through approximately September 30, 2013.

Between August 21, 2012 and the date of this report we have generated proceeds of $4.3 million under the common stock purchase agreement with Aspire Capital Fund LLC ("Aspire"). We have the right, subject to the terms of the common stock purchase agreement, to cause Aspire to acquire up to 3,231,096 shares for total gross proceeds not to exceed $20 million (including the shares issued or sold to Aspire to date for $4.3 million), subject to daily dollar limitations and subject to the maximum dollar amount we can sell from time to time under our registration statement on Form S-3. We expect to sell additional shares under this agreement. Between April 17, 2013 and the date of this report, we have generated net proceeds of $2.8 million under the at-the-market equity distribution agreement with Macquarie Capital (USA) Inc. ("MCUSA") on sales of 895,000 shares of our common stock (see "Subsequent Event" below). We may from time to time sell through MCUSA shares of our common stock up to an aggregate offering price of $6 million. We expect to sell additional shares under this agreement.


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We are also pursuing other opportunities to raise capital. There can be no assurances that there will be adequate financing available to us on acceptable terms, or at all. If the Company is unable to obtain additional financing, we may have to sell one or more of our programs or cease operations.

We are currently focusing our development activities on MN-166, an ibudilast-based drug candidate for the treatment of neurological disorders, and obtaining additional funding to advance clinical trial development of MN-221, a novel, highly selective 2 -adrenergic receptor agonist being developed for the treatment of acute exacerbations of asthma and COPD. We have decided that the funding of future MN-221 clinical trial development will be partner dependent.

Including MN-166 and MN-221, we have acquired licenses to eight compounds for the development of ten product candidates which include clinical development for the treatment of acute exacerbations of asthma, MS and other central nervous system (CNS) disorders, bronchial asthma, interstitial cystitis (IC), solid tumor cancers, generalized anxiety disorders/insomnia, preterm labor and urinary incontinence.

Kissei Stock Purchase

In October 2011, pursuant to a stock purchase agreement by and between us and Kissei Pharmaceutical Co., Ltd., or Kissei, Kissei purchased for $7.5 million
(i) an aggregate of 800,000 shares of our common stock, par value $0.001 per share, at a price of $2.50 per share, which approximated the fair value of our common stock at the time of the transaction, and (ii) 220,000 shares of our Series B Convertible Preferred Stock, par value $0.01 per share, at a price of $25.00 per share, which approximated the fair value of our preferred stock on an as converted basis at the time of the transaction. The purchase agreement contains customary representations, warranties and covenants and a standstill agreement from Kissei that terminates if Kissei beneficially owned less than three percent of our outstanding voting stock. Each share of the Series B Preferred Stock is convertible into 10 shares of common stock. The Series B Preferred ranks pari passu (on an as-if-converted-to-common-stock basis) with the common stock in liquidation and dividend rights. The holders of the Series B Preferred do not have voting rights, and the consent of a majority of the outstanding Series B Preferred is required for certain actions of the Company.

Kissei Services Agreement

In October 2011, we entered into an agreement with Kissei to perform research and development services relating to MN-221 in exchange for a non-refundable upfront payment of $2.5 million. We assessed the deliverables in accordance with the authoritative guidance and concluded the existence of one deliverable, which was research and development services. Under the terms of the agreement, we are responsible for all costs to be incurred in the performance of these services. As such, we are recognizing the $2.5 million payment as revenue as the research and development services are performed. Certain of these research and development services were completed in 2012 and the remaining services are expected to be delivered and completed after 2013.

Common Stock Purchase Agreement

On August 20, 2012, we entered into a common stock purchase agreement with Aspire pursuant to which the Company may sell to Aspire, and Aspire would be obligated to purchase, up to an aggregate of $20 million of our common stock over the two year term of the agreement including $1 million in common stock purchased by Aspire in connection with execution of the agreement. Periodic sales of our common stock to Aspire are subject to certain limitations and the per share sales price is based on closing stock prices at or near each transaction date. No more than 3,231,096 shares of our common stock can be issued under this agreement, including the 363,636 shares issued to Aspire in consideration of entering into the agreement. Our net proceeds will depend on the frequency and number of shares of our common stock sold to Aspire and the per share purchase price of each transaction. As of March 31, 2013, the Company had completed sales to Aspire totaling 1,656,060 shares of common stock at prices ranging from $1.60 to $2.07 per share, generating gross proceeds of $3.0 million.


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Between August 21, 2012 and the date of this report, we have generated proceeds of $4.3 million under the common stock purchase agreement with Aspire including proceeds of $1.4 million on sales of 497,612 shares of our common stock subsequent to March 31, 2013.

Lease of Corporate Headquarters

We leased office space at our headquarters at 4350 La Jolla Village Drive, Suite 950, San Diego, California under a lease that expired on February 28, 2013. On February 27, 2013, we entered into a sublease agreement effective March 1, 2013 (the "Sublease") with Denali Advisors, LLC, the sublessor, to which Irvine Company, the master landlord, has provided its consent. The Sublease is for the Company's new headquarters located at 4275 Executive Square, Suite 650, La Jolla, California, 92037. The Sublease has a term of 4 years and 9 months and provides that the Company will pay Irvine Company a monthly base rent of $10,699 for the premises during the first year.

Subsequent Event

At-The-Market Equity Distribution Agreement

On April 17, 2013, we entered into an at-the-market equity distribution agreement with MCUSA pursuant to which the Company may from time to time sell through MCUSA acting as a sales agent, shares of our common stock up to an aggregate offering price of $6 million. Unless mutually agreed otherwise, no sale of an amount of shares of our common stock may be greater than the lower of $50,000 and 10% of the lower of the 5-day or 3-month average daily traded value of our common stock as reported by Bloomberg as of the date of the applicable issuance notice, and the price per share may not be less than the greater of $1.19 or the last available closing price of a share of common stock on The Nasdaq Global Market. MCUSA will use its commercially reasonable efforts consistent with its customary trading and sales practices and applicable laws, rules and regulations to sell shares of our common stock and may sell such shares by any method permitted by law deemed to be "at the market". We will pay MCUSA an aggregate commission rate of 8.0% of the gross proceeds of any common stock sold through MCUSA under the sales agreement. MCUSA is under no obligation to purchase shares pursuant to this agreement and there are no assurances that MCUSA will be successful in selling shares. Our net proceeds will depend on the number of shares of our common stock sold to MCUSA and the per share purchase price of each transaction. The agreement with MCUSA provides both MCUSA and the Company the right to terminate the agreement in its sole discretion upon giving five business days written notice. Between April 17, 2013 and the date of this report, we have generated net proceeds of $2.8 million under this agreement on sales of 895,000 shares of our common stock.

Revenues and Cost of Revenues

In the three months ended March 31, 2013 and 2012, we recognized approximately $3,000 and $191,000, respectively, of revenue related to the Kissei services agreement based on the development services we performed during that period. To date through March 31, 2013 we have recognized approximately $806,000 of Kissei services revenue, and all expenses incurred related to these services have been recorded as research and development expenses. Other than the Kissei services revenue, our revenues to date have been from development services revenues under service agreements pursuant to which we billed consulting fees and our pass-through clinical contract costs.

Research and Development

Our research and development expenses consist primarily of the license fees related to our product candidates, salaries and related employee benefits, costs associated with the preclinical and clinical development of our product development programs, costs associated with non-clinical activities, such as regulatory expenses, and pre-commercialization manufacturing development activities. We use external service providers to manufacture our compounds to be used in clinical trials and for the majority of the services performed in


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connection with the preclinical and clinical development of our product candidates. Research and development expenses include fees paid to consultants, contract research organizations, contract manufacturers and other external service providers, including professional fees and costs associated with legal services, patents and patent applications for our intellectual property. Internal research and development expenses include costs of compensation and other expenses for research and development personnel, supplies, facility costs and depreciation. Research and development costs are expensed as incurred.

The following table summarizes our research and development expenses for the periods indicated for each of our product development programs. To the extent that costs, including personnel costs, are not tracked to a specific product development program, such costs are included in the "Unallocated" category (in thousands):

                                                                         Three months ended
Product                                                                       March 31,
Candidate                 Product Development Program                   2013            2012
MN-166       Neurological disorders including opioid withdrawal,
             methamphetamine addiction, chronic MOH pain and MS       $     429       $     164
MN-221       Acute exacerbations of asthma/COPD                              94           1,246
MN-001       Bronchial asthma                                                20             121
MN-001       Interstitial cystitis                                           -               30
MN-029       Solid tumors                                                     9              41
MN-305       Generalized anxiety disorder/insomnia                           -                2
MN-246       Urinary incontinence                                             1               2
MN-447       Thrombotic disorders                                            -                6
MN-462       Thrombotic disorders                                            -               -
Unallocated                                                                 143             266

Total research and development $ 696 $ 1,878

We are currently focusing our development activities on MN-166, an ibudilast-based drug candidate for the treatment of neurological disorders, and obtaining additional funding to advance clinical trial development of MN-221, a novel, highly selective 2 -adrenergic receptor agonist being developed for the treatment of acute exacerbations of asthma and chronic obstructive pulmonary disease, or COPD. In February 2013 we received Fast Track designation from the FDA for MN-166, which is a process designed to facilitate development and expedite the review of drugs intended to treat serious diseases that have the potential to fill an unmet medical need. The FDA's Fast Track program emphasizes early and frequent communication between the FDA and the sponsor throughout the development process to improve product development efficiency, potentially leading to a shortened timeline to ultimate drug approval. Clinical development of MN-166 is ongoing in both methamphetamine addiction and opioid addiction with clinical trials being conducted by experts in these two areas. A Phase 1b clinical trial of MN-166 in methamphetamine dependence is near completion at UCLA. A Phase 2 outpatient clinical trial of MN-166 in methamphetamine dependence, led by investigators at UCLA, has been funded by NIDA. In opioid addiction, a second NIDA-funded clinical trial of MN-166 in prescription opioid or heroin abusers is currently ongoing with the investigators at Columbia University and the New York State Psychiatric Institute. Regarding future MN-221 development, in a meeting with the FDA in October 2012, the FDA provided a clear MN-221 development path, identified the risk/benefit profile of MN-221 as a focal point for further development and advised that a clinical outcome, such as a reduction in hospitalizations, would need to be a pivotal trial primary endpoint. We have decided that future MN-221 development will be designed according to the feedback received from the FDA and have decided that the funding of future MN-221 clinical trial development will be partner dependent. Our research and development expenses may increase in connection with new clinical trials related to MN-166 or with new clinical trials related to MN-221 should we decide to fund such activities ourselves.

We will continue to limit our expenditures on the remainder of our existing product candidates to only those activities deemed necessary to maintain our license rights or maximize the value of such product candidates


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while pursuing a variety of initiatives to monetize such product development. As a result, we expect that research and development expenses will remain low for the remainder of our existing product candidates in the foreseeable future.

General and Administrative

Our general and administrative costs primarily consist of salaries, benefits and consulting and professional fees related to our administrative, finance, human resources, business development, legal, information systems support functions, facilities and insurance costs. General and administrative costs are expensed as incurred.

Our general and administrative expenses may increase in future periods if we are required to expand our infrastructure based on the success of our product development programs and in raising capital to support our product development programs or otherwise in connection with increased business development activities related to partnering, out-licensing or product disposition.

Other Income and Expense

Other income primarily consists of interest earned on our cash and cash equivalents. Other expense primarily consists of losses from the joint venture and net foreign exchange gains and losses related to vendor invoices denominated in foreign currencies. We held no debt and had no interest expense in 2012 or in the first quarter of 2013.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with principles generally accepted in the U.S. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. We review our estimates on an ongoing basis, including those related to our significant accruals. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Our significant accounting policies and estimates are the same as those noted in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 28, 2013.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2012

Revenues

Revenue for the three months ended March 31, 2013 was approximately $3,000, a decrease of approximately $188,000 when compared to approximately $191,000 for the three months ended March 31, 2012. The decrease in revenue is due to the completion of the Phase 1b/2a COPD clinical trial (MN 221-CL-012) in 2012 for which we recorded revenue related to the development services we performed under the Kissei services agreement.

Research and Development

Research and development expenses for the three months ended March 31, 2013 were $0.7 million, a decrease of $1.2 million when compared to $1.9 million for the three months ended March 31, 2012. This decrease in research and development expenses primarily related to a decrease of $1.0 million in spending on MN-221 due to the completion of the CL-007 and CL-012 clinical trials in 2012, and a decrease in employee compensation expense including $0.2 million related to stock based compensation.


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General and Administrative

General and administrative expenses for the three months ended March 31, 2012 were $1.7 million, a decrease of $0.5 million when compared to $2.2 million for the three months ended March 31, 2012. This decrease in general and administrative expenses was due primarily to a decrease in employee compensation expense including $0.5 million related to stock-based compensation.

Other Expense

Other expense for the three months ended March 31, 2013 was approximately $4,000, as compared to approximately $5,000 for the three months ended March 31, 2012. In the first quarter of 2013 and 2012, other expense consisted of losses from the joint venture accounted for under the equity method and net foreign exchange gains and losses related to vendor invoices denominated in foreign currencies.

Other Income

Other income for the three months ended March 31, 2013 was approximately $1,000, as compared to approximately $11,000 for the three months ended March 31, 2012. The decrease is due to a decrease in interest income on lower cash equivalents.

Liquidity and Capital Resources

We have incurred losses of $2.4 million for the three months ended March 31, 2013, and $11.0 million for the year ended December 31, 2012. At March 31, 2013, from inception, our accumulated deficit was $298.7 million including $50.6 million of non-cash stock-based compensation charges. We have used net cash of $2.6 million and $11.9 million to fund our operating activities for the three months ended March 31, 2013 and for the year ended December 31, 2012, respectively. Our operating losses to date have been funded primarily through the private placement of our equity securities, the public sale of our common stock, long-term debt, development agreements with partners and the exercise of founders' warrants, net of treasury stock repurchases. As of March 31, 2013, we had available cash and cash equivalents of $3.0 million and working capital of $2.8 million which is sufficient to fund operations through approximately September 30, 2013. These factors raise substantial doubt about the Company's ability to continue as a going concern.

In October 2011, pursuant to a stock purchase agreement by and between us and Kissei, Kissei purchased (i) an aggregate of 800,000 shares of our common stock, par value $0.001 per share, at a price of $2.50 per share, and (ii) 220,000 shares of our Series B Convertible Preferred Stock, par value $0.01 per share, at a price of $25.00 per share. In October we received gross proceeds of $7.5 million related to this purchase agreement.

In October 2011, we entered into an agreement with Kissei to perform research and development services relating to MN-221 in exchange for a non-refundable upfront payment of $2.5 million. We are responsible for all costs incurred and to be incurred in the performance of these services. The amount received from Kissei, net of the amount recorded as revenue to date, is included on the balance sheet as deferred revenue and will be recognized as revenue as we perform the remaining services. Revenue recorded in the three months ended March 31, 2013 and 2012 was approximately $3,000 and $191,000, respectively.

On August 20, 2012 we entered into a common stock purchase agreement with Aspire, pursuant to which the Company may sell to Aspire, and Aspire would be obligated to purchase, up to an aggregate of $20 million of our common stock over the two year term of the agreement including $1 million in common stock purchased by Aspire in connection with execution of the agreement. Periodic sales of our common stock to Aspire are subject to certain limitations and the per share sales price is based on closing stock prices at or near each transaction date. No more than 3,231,096 shares of our common stock can be issued under this agreement, including the 363,636 shares issued to Aspire in consideration of entering into the agreement. Our net proceeds will depend on


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the frequency and number of shares of our common stock sold to Aspire and the per share purchase price of each transaction. We may, on any business day over the term of the agreement, direct Aspire to purchase up to 50,000 shares, up to a maximum of $500,000 per business day. The purchase price shall be the lower of
(i) the lowest sale price of the Company's common stock on the date of the sale, or (ii) the average of the three lowest closing stock prices during the 12 consecutive business days ending on the business day immediately preceding the purchase date. In addition, we may on any business day over the term of the agreement, direct Aspire to make a volume-weighted average purchase ("VWAP") of stock not to exceed 15% (which limitation may be increased up to 30% by the mutual agreement of the parties) of the aggregate shares of our stock traded on the next business day, the purchase price of which shall be the lower of the closing price on the date of the sale, or 95% of the next business day's Nasdaq volume weighted average price, subject to a minimum market price threshold established by us and certain other exceptions. We initially issued 363,636 shares of our common stock to Aspire as consideration for entering into the agreement. As of March 31, 2013, the Company had completed sales to Aspire totaling 1,656,060 shares of common stock at prices ranging from $1.60 to $2.07 per share, generating gross proceeds of $3.0 million.

The agreement with Aspire provides Aspire certain termination rights, including rights under an event of default as defined therein, under which the Company may not require and Aspire would not be obligated to purchase any shares of our common stock. The Company and Aspire may also not effect any sales under the agreement on any purchase date where the closing price of our common stock is less than $1.00 per share. We have the right, subject to the terms of the common stock purchase agreement, to cause Aspire to purchase as of March 31, 2013 up to approximately 1.2 million additional shares for total gross proceeds not to exceed $20 million (including the $3.0 million sold to Aspire as of that date) subject to daily dollar limitations and subject to the maximum dollar amount we . . .

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