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MNOV > SEC Filings for MNOV > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for MEDICINOVA INC

Form 10-K for MEDICINOVA INC


27-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with "Item 6. Selected Financial Data" and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption "Item 1A. Risk Factors."

Overview

Background

We are a biopharmaceutical company focused on acquiring and developing novel, small molecule therapeutics for the treatment of serious diseases with unmet medical needs and 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. For the year ended December 31, 2013, we had a net loss of $4.0 million. At December 31, 2013, from inception, our accumulated deficit was $301.4 million, including $51.6 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.

We are focused on 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 are currently focusing our development activities on MN-166,(Ibudilast) for the treatment of neurological disorders, MN-221(Bedoradrine), for the treatment of acute exacerbations of asthma, MN-001(Tipelukast) for the treatment of NASH (nonalcoholic steatohepatitis), and MN-029 (Denibulin) for the treatment of solid tumors.

We entered into an agreement to form a joint venture company with Zhejiang Medicine Co., Ltd. and Beijing Make-Friend Medicine Technology Co., Ltd. effective September 27, 2011. The joint venture agreement provides for the joint venture company, Zhejiang Sunmy Bio-Medical Co., Ltd. ("Zhejiang Sunmy"), to develop and commercialize MN-221 in China and search for additional compounds to develop. A sublicense would be required under which Zhejiang Sunmy would license MN-221 from us. In accordance with the joint venture agreement, in March 2012 we paid $680,000 for our 30% interest in Zhejiang Sunmy. The other parties to the joint venture agreement provided funding for their combined 70% interest. We have not entered into the sublicense of MN-221 with the joint venture company as of the date of this report. There is no assurance the sublicense will be executed and there is no assurance that Zhejiang Sunmy will be able to proceed with the development of MN-221 in China. A. Zhejiang Sunmy is a variable interest entity for which we are not the primary beneficiary as we do not have a majority of the board seats and we will not have power to direct or significantly influence the actions of the entity. We therefore account for the activities of Zhejiang Sunmy under the equity method whereby we absorb any loss or income generated by Zhejiang Sunmy according to our percentage ownership. At December 31, 2013 we reflect a long-term asset on our consolidated balance sheet which represents our investment in Zhejiang Sunmy, net of our portion of any generated loss or income.

Upon completion of proof-of-concept Phase 2 clinical trials, we intend to enter into strategic alliances with leading pharmaceutical or biotech companies who seek late stage product candidates, such as MN-221, to support further clinical development and product commercialization. Depending on decisions we may make as to further clinical development, we may seek to raise addition capital. We may also pursue potential partnerships and potential acquirers of license rights to our programs in markets outside the U.S.


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Revenues and Cost of Revenues

We recognized approximately $6,003,000 of revenue for the year ending December 31, 2013 and $803,000 in revenue for the ended December 31, 2012. In 2013 we recorded $6,000,000 in revenues earned through a licensing arrangement held by Avigen, Inc., or Avigen, which we acquired in December 2009. There were no expenses incurred during 2013 related to this milestone.

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. Under the terms of the agreement, we are responsible for all costs incurred and to be incurred in the performance of these services. Certain of the development services were completed in 2013 and 2012, and the remaining services are expected to be delivered and completed after 2013. We assessed the deliverables in accordance with the authoritative guidance and concluded the existence of one deliverable, which was research and development services. The $2.5 million was initially recorded as deferred revenue. Revenue was recorded in 2013 and 2012 of $3,000 and $0.8 million, respectively, as the research and development services were delivered. All expenses incurred during 2013 and 2012 related to these services were recorded as research and development expenses.

Research, Development and Patent Expenses

Our research, development and patent 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 connection with the preclinical and clinical development of our product candidates. Research, development and patent 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, development and patent costs are expensed as incurred.

The following table summarizes our research, development and patent 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):

 Product                                                        Year ended December 31,
Candidate1     Disease/Indication                               2013                2012
MN-221         Acute exacerbations of asthma/COPD           $        216        $      3,578
MN-166         Neurological disorders including opioid
               withdrawal, methamphetamine addiction,
               chronic MOH pain and MS                             1,999                 661
MN-001         Bronchial asthma                                      242                 171
MN-029         Solid tumors                                           43                 101
MN-001         Interstitial cystitis                                   5                  34
MN-246         Urinary incontinence                                    3                   7
MN-447         Thrombotic disorders                                   -                    6
MN-305         Generalized anxiety disorder/insomnia                  17                   2
MN-221         Preterm labor                                          -                   -
MN-462         Thrombotic disorders                                    1                  -
Unallocated                                                          840                 453

Total research, development and patents $ 3,366 $ 5,013


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(1) We are pursuing our option to return four compounds, MN-246, MN-305, MN-447 and MN-462, to their respective Licensors in order to maximize our ability to pursue development of MN-166, MN-221, MN-001, and MN-029.

Our goal is to build a sustainable biopharmaceutical business through the successful development of differentiated products for the treatment of serious diseases with unmet medical needs in high-value therapeutic areas. Our focus is on the U.S. market. Key elements of our strategy are as follows:

Pursue the development of MN-166 for multiple potential indications primarily through non-dilutive financings.

We intend to advance our diverse MN-166 (ibudilast) program through a combination of investigator sponsored trials and trials funded through government grants or private and public grants. In addition to providing drug supply and safety regulatory support, we are funding portions of the consortium sponsored trials. For example, we have increased our financial participation in the Secondary and Primary Progressive Ibudilast NeuroNEXT Trial in Multiple Sclerosis (SPRINT-MS) Phase 2 clinical trial of MN-166 for the treatment of progressive MS. We intend to enter into additional strategic alliances to support further clinical development of MN-166.

Strategically partner with one or more leading pharmaceutical companies to complete late stage product development and successfully commercialize our products.

We develop and maintain relationships with pharmaceutical therapeutic area leaders. Upon completion of proof-of-concept Phase 2 clinical trials, we intend to enter into strategic alliances with leading pharmaceutical companies who seek late stage product candidates, such as MN-221, MN-001 and MN-029, to support further clinical development and product commercialization.

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, cash equivalents and investments. In 2013 and 2012, other expense primarily consists of losses from the joint venture and net foreign exchange losses related to vendor invoices denominated in foreign currencies. We had no outstanding debt and had no interest expense in 2013 or 2012.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting 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 are 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


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Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our most critical accounting estimates include research, development and patent expenses which impacts operating expenses and accrued liabilities, stock-based compensation which impacts operating expenses and goodwill and purchased intangibles. We review our estimates and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that the following accounting policies are critical to the judgments and estimates used in preparation of our consolidated financial statements.

Research, Development and Patent Expenses

Research, development and patent costs are expensed as incurred based on certain contractual factors such as estimates of work performed, milestones achieved, patient enrollment and experience with similar contracts. As actual costs become known, accruals are adjusted. To date, our accrued research, development and patent expenses have not differed significantly from the actual expenses incurred.

Stock-Based Compensation

We grant options to purchase our common stock to our employees and directors under our 2013 Stock Incentive Plan. Additionally, we have outstanding stock options that were granted under our Amended and Restated 2004 Stock Incentive Plan and 2000 General Stock Incentive Plan. The benefits provided under all of these plans requires stock-based compensation for an award of equity instruments, including stock options and employee stock purchase rights issued to employees to be recognized as a cost in the consolidated financial statements. The cost of these awards is measured according to the grant date fair value of the stock award and is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period. We occasionally issue employee performance based stock options, the vesting of which is subsequently based on a determination made by our board of directors as to the achievement of certain corporate objectives. The grant date of such awards is the date on which our board of directors makes its determination. For periods preceding the grant date, the cost of these awards is measured according to their fair value at each reporting date. In the absence of an observable market price for the stock award, the grant date fair value of the award would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate.

Valuation of our stock option grants requires us to estimate certain variables, such as estimated volatility and expected life. If any of our estimations change, such changes could have a significant impact on the stock-based compensation amount we recognize.

Goodwill and Purchased Intangibles

Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the identified net tangible and intangible assets of acquired businesses. The allocation of purchase price for acquisitions require extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. Additionally, we must determine whether an acquired entity is considered to be a business or a set of net assets as a portion of the purchase price can only be allocated to goodwill in a business combination. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The amounts and useful lives assigned to intangible assets that have finite useful lives require the use of estimates and the exercise of judgment. These judgments can significantly affect our net operating results. We recorded goodwill and in-process research and development, or IPR&D, of $9.6 million and $4.8 million, respectively, as of December 31, 2013 and 2012.


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At least annually in the fourth quarter, or more frequently if indicators of impairment exists, we complete an impairment test for goodwill and purchased indefinite life intangibles. We periodically re-evaluate the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of our long-lived assets. The criteria used for these evaluations include management's estimate of the asset's continuing ability to generate income from operations and positive cash flows in future periods as well as the strategic significance of any intangible assets in our business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.

Results of Operations

Comparison of the Years ended December 31, 2013 and 2012

Revenues

We recognized approximately $6,003,000 of revenue for the year ending December 31, 2013 of which $6,000,000 was related to a license arrangement acquired in December 2009 and $3,000 was related to research and development services delivered during the year. There were no expenses incurred during 2013 related to the milestone. We recognized approximately $803,000 in revenue for the year ended December 31, 2012 related to research and development services delivered.

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. The $2.5 million was initially recorded as deferred revenue. Revenue was recorded in 2012 and 2013 as the research and development services were delivered. All expenses incurred during 2013 and 2012 related to these services were recorded as research and development expenses.

Research, Development and Patent Expenses

Research, development and patent expenses for the year ended December 31, 2013 were $3.4 million, a decrease of $1.6 million compared to $5.0 million for the year ended December 31, 2012. This decrease in research, development and patent expenses primarily related to a decrease of $3.4 million in spending on MN-221 primarily due to the completion of the MN-221-CL-007 clinical trial, partially offset by an increase in costs related to the MN-166 clinical trials of $1.3 million and an increase in unallocated employee costs of $0.4 million.

General and Administrative

General and administrative expenses were $6.7 million for both the years ended December 31, 2013 and 2012.

Other Expense

Other expense for the year ended December 31, 2013 was approximately $25,000, as compared to approximately $30,000 for the year ended December 31, 2012. In 2012 and 2013, other expense consisted of losses from the joint venture accounted for under the equity method according to our percentage ownership, and net foreign exchange losses related to vendor invoices denominated in foreign currencies.

Other Income

Other income for the year ended December 31, 2013 was approximately $21,000, as compared to approximately $25,000 for the year ended December 31, 2012. In 2012 and 2013, other income consisted of interest income on our cash, cash equivalents, and restricted cash balances.


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Liquidity and Capital Resources

We incurred losses of $4.0 million and $11.0 million for the years ended December 31, 2013, and 2012, respectively. At December 31, 2013, from inception, our accumulated deficit was $301.4 million, including $51.6 million of non-cash stock-based compensation charges. We have used net cash of $10.6 million and $11.9 million to fund our operating activities for the years ended December 31, 2013 and 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.

In October 2011, pursuant to a stock purchase agreement by and between us and Kissei Pharmaceutical Co., Ltd., or 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, or Series B Preferred, at a price of $25.00 per share. In October we received gross proceeds of $7.5 million related to this purchase agreement. The purchase agreement contains a standstill agreement from Kissei that terminates if Kissei beneficially owns 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, however, the consent of holders of a majority of the outstanding Series B Preferred is required for certain actions.

On August 20, 2012 we entered into a common stock purchase agreement with Aspire, pursuant to which we could elect to 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. The common stock purchase agreement with Aspire was terminated on October 17, 2013, and as of such date, we had completed sales to Aspire totaling 2,504,532 shares of common stock at prices ranging from $1.60 to $3.82 per share, generating gross proceeds of $5.4 million.

On May 9, 2013, we entered into a Securities Purchase Agreement with certain accredited investors pursuant to which we agreed to sell to the investors 1,158,730 shares of our common stock at a price of $3.15 per share and warrants to purchase an aggregate of 869,047 shares of our common stock with an exercise price of $3.15 per share (the "Private Placement"). The Private Placement closed on May 14, 2013. The warrants will expire on May 9, 2018 and may be exercised for cash or, if the current market price of our common stock is greater than the per share exercise price, by surrender of a portion of the warrant in a cashless exercise. The aggregate purchase price for the shares and the warrants sold in the Private Placement was $3.7 million and associated expenses incurred were $0.3 million. In connection with the purchase by one investor of 158,730 shares of our common stock and a warrant to purchase 119,047 shares of our common stock, on May 29, 2013 the investor provided $51,389 additional consideration for the shares and the warrant, and we entered into an amendment to the warrant with the investor to reflect an exercise price of $3.38 per share.

On April 17, 2013, we entered into an at-the-market equity distribution agreement with Macquarie Capital (USA) Inc., or MCUSA, pursuant to which we could sell our common stock through MCUSA from time to time up to an aggregate offering price of $6 million. As of July 25, 2013, we had completed all available sales to MCUSA under this agreement, generating gross and net proceeds of $6.0 million and $5.5 million, respectively, on sales of 1,936,237 shares of common stock at prices ranging from $2.44 to $4.10 per share.

On October 16, 2013, we entered into a second at-the-market equity distribution agreement with MCUSA pursuant to which we may sell our common stock through MCUSA from time to time up to an aggregate offering price of $10 million. Under the terms of this agreement, unless otherwise mutually agreed, no daily sale of an amount of shares of our common stock is to exceed the lower of $50,000 or 10% of the lower of the 5-day or 3-month average daily traded value of our common stock on NASDAQ (unless 10% of the lower of the 5-day or 3-month average daily traded value of our common stock on the JASDAQ Market of the Tokyo Stock Exchange


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("TSE") is greater, in which case the value from the TSE will be used) as of the date of the applicable issuance notice. The price per share is not to be less than the greater of $1.29 or the last available closing price of a share of common stock on NASDAQ. MCUSA agreed to 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 is to sell such shares by any method permitted by law deemed to be "at the market." We agreed to pay MCUSA an aggregate commission rate of 7.0% of the gross proceeds of any common stock sold under this 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 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 us the right to terminate the agreement in our sole discretion upon giving five business days written notice. As of December 31, 2013, we have generated gross and net proceeds of $0.27 million and $0.25 million, respectively, under this agreement on sales of 117,500 shares of our common stock at prices ranging from $2.15 to $2.58 per share. Between October 16, 2013 and the date of this report, we have generated gross and net proceeds of $3.5 million and $3.3 million, respectively, on the sale of 1,607,500 shares of our common stock under the at-the-market equity distribution agreement with MCUSA, including gross and net proceeds of $3.2 million and $3.0 million, respectively, on the sale of 1,490,000 shares of our common stock subsequent to December 31, 2013. We expect to sell additional shares under this agreement during 2014.

As of December 31, 2013, we had available cash and cash equivalents of $6.7 million and working capital of $13.9 million. We expect to have approximately $13.8 million in available cash as of March 31, 2014, and we expect to spend approximately $4.3 million from April 1, 2014 through December 31, 2014 to execute our strategic plan and fund operations. As of the date of this report, we believe we have working capital sufficient to fund operations through June 30, 2015. We are also pursuing other opportunities to raise capital through the sale of our common stock or through other strategic initiatives. There can be no assurances that there will be adequate financing available to us on acceptable terms, or at all. If we are unable to obtain additional financing, we may have to sell one or more of our programs or cease operations.

Our future funding requirements will depend on many factors, including, but not limited to:

. . .

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