News Column

MINERVA NEUROSCIENCES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our annual audited consolidated financial statements included in the Prospectus for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on June 30, 2014.

Overview



We are a clinical-stage biopharmaceutical company focused on the development and commercialization of a portfolio of product candidates to treat patients suffering from central nervous system, or CNS, diseases. Leveraging our domain expertise, we have acquired or in-licensed four development-stage proprietary compounds that we believe have innovative mechanisms of action with potentially positive therapeutic profiles. Our lead product candidates are MIN-101, a compound we are developing for the treatment of patients with schizophrenia, and MIN-117, a compound we are developing for the treatment of patients suffering from major depressive disorder, or MDD. In addition, our portfolio includes MIN-202, a compound we are co-developing for the treatment of patients suffering from primary and secondary insomnia, and MIN-301, a compound we are developing for the treatment of patients suffering from Parkinson's disease. We believe our innovative product candidates have significant potential to transform the lives of a large number of affected patients and their families who are currently not well-served by available therapies in each of their respective indications.

We exclusively licensed MIN-101 from Mitsubishi Tanabe Pharma Corporation, or MTPC, in 2007 with the rights to develop, sell and import MIN-101 globally, excluding most of Asia. In November 2013, we merged with Sonkei Pharmaceuticals Inc., or Sonkei, a clinical-stage biopharmaceutical company and, in February 2014, we acquired Mind-NRG SA, or Mind-NRG, a pre-clinical-stage biopharmaceutical company. We refer to these transactions as the Sonkei Merger and Mind-NRG Acquisition, respectively. Sonkei licensed MIN-117 from MTPC in 2008 with the rights to develop, sell and import MIN-117 globally, excluding most of Asia. With the acquisition of Mind-NRG, we obtained exclusive rights to develop and commercialize MIN-301. We have also entered into a co-development and license agreement with Janssen for the exclusive rights to develop and commercialize MIN-202 in the European Union, subject to royalty payments to Janssen, and royalty rights for any sales outside the European Union.

We have not received regulatory approvals to sell any of our product candidates, and we have not generated any revenue from the sales or license of our product candidates. We have incurred significant operating losses since inception. In addition, neither Sonkei nor Mind-NRG have received any regulatory approvals to sell any product candidates and have also incurred significant operating losses since their respective inceptions in 2008 and 2010.

We have historically financed our operations, including the development of MIN-101, through the sale of common stock and convertible promissory notes. Likewise, Sonkei raised capital to fund the development of MIN-117 through the sale of common stock and convertible promissory notes. Funds managed by Care Capital and Index Ventures are our principal investors, and were the principal investors of Sonkei, and collectively owned approximately 76% of our capital stock at June 30, 2014. The operations of Mind-NRG were financed through the sale of preferred stock. Funds managed by Index Ventures were among the investors in Mind-NRG.

On June 30, 2014, our registration statement on Form S-1 was declared effective by the Securities and Exchange Commission for our initial public offering pursuant to which we sold an aggregate of 5,454,545 shares of our common stock pursuant to an underwriting agreement dated June 30, 2014, at a price to the public of $6.00 per share, or an aggregate of approximately $32.7 million. On July 7, 2014, we closed the sale of all such shares, resulting in net proceeds to us of approximately $25.2 million, after deducting the underwriting discount of $2.3 million, expenses of approximately $3.1 million, the repayment of the bridge loans of $1.4 million and the ProteoSys license fee payment of $0.7 million. On July 7, 2014 we also closed the sale of a private placement of 666,666 common shares resulting in net proceeds to us of approximately $3.7 million, after deducting the underwriting discount of $0.3 million.

On July 7, 2014, in accordance with our license agreement for MIN-202, JJDC purchased 3,284,353 shares of our common stock in a private placement resulting in net proceeds to us of approximately $19.7 million, representing approximately 18% of our outstanding common shares. In conjunction with the private placement and in accordance with our license agreement for MIN-202, on July7, 2014 we paid a $22.0 million license fee to Janssen. We expect to incur net losses and negative cash flow from operating activities for the foreseeable future in connection with the clinical development and the potential regulatory approval, infrastructure development and commercialization of our product candidates.

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Table of Contents Financial Overview Presentation



Our results include the accounts of Mind-NRG from February 12, 2014 to June 30, 2014, reflecting the Mind-NRG Acquisition, which was effective on February 11, 2014 and accounted for using the acquisition method. The purchase price of approximately $16.5 million was primarily assigned to in-process research and development of $15.2 million and goodwill of $7.2 million, offset by a deferred tax liability of $6.1 million. On the effective date of the acquisition, Mind-NRG had no employees and minimal clinical activity.

Financial Operations Overview

Revenue. None of our product candidates have been approved for commercialization and we have not received any revenue in connection with the sale or license of our product candidates.

Research and Development Expense. Research and development expense consists of costs incurred in connection with the development of our product candidates, including: fees paid to consultants and clinical research organizations, or CROs, including in connection with our non-clinical and clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis; licensing fees; costs related to acquiring clinical trial materials; costs related to compliance with regulatory requirements; and costs related to salaries, bonuses and stock-based compensation granted to consultants and employees in research and development functions. We expense research and development costs as they are incurred.

General and Administrative Expense. General and administrative expenses consist principally of consulting and professional services costs for functions in executive, finance, business development, legal, auditing and taxes. Historically, substantially all of these services were provided by third party consultants, as none of the three former companies had employees in 2011 through October 2013. Our general and administrative expenses in 2014 include non-cash stock-based compensation expense with respect to option grants to consultants and employees hired and directors who joined our board subsequent to October 2013. Other costs primarily include salaries, bonuses, facility costs and professional fees for accounting, consulting and legal services.

Foreign Exchange Gains. Foreign exchange gains are comprised primarily of foreign currency exchange gains or losses resulting from clinical trial expenses denominated in Euros. Since our initial planned clinical trials are expected to be in Europe, we expect to continue to incur expenses in Euros. We record expenses in U.S. dollars at the time the liability is incurred. Changes in the applicable foreign currency rate between the date an expense is recorded and the payment date is recorded as a foreign currency gain or loss.

Interest Expense (Income), Net. Interest expense consists of interest incurred under our debt obligations, including our 8.0% convertible promissory notes and our 8.0% working capital loans. Interest expense under our 8.0% convertible promissory notes includes the amortization of the debt discount related to the beneficial conversion feature of the convertible promissory notes as well as coupon interest. Interest income consists of interest earned on our cash and cash equivalents.

Costs Associated with the Acquisitions and Financings

On November 12, 2013, Cyrenaic Pharmaceuticals, Inc., or Cyrenaic, merged with Sonkei, with Cyrenaic being the surviving company, which was renamed Minerva. In the merger, each share of Sonkei common stock was converted into 0.383 shares of Cyrenaic common stock, resulting in the issuance of 2,423,368 shares of Cyrenaic common stock to the former Sonkei stockholders. Although there were certain venture funds that were common stockholders of each of Sonkei and Cyrenaic, since the underlying investors in the venture funds were not "substantially similar", the merger was accounted for a business combination with Cyrenaic being treated as the acquirer. The results of Sonkei are included in our accompanying financial statements commencing November 12, 2013. We merged with Sonkei in order to acquire Sonkei's lead product candidate, MIN-117.

At the date of the merger, a Sonkei consultant held 1,112,500 shares of Sonkei common stock with a nonrecourse note due to Sonkei, which was being treated as a stock option for accounting purposes. In connection with the merger, we issued 426,176 shares of common stock to this consultant in order to replace the holder's common stock in Sonkei. Due to the nonrecourse note, these shares were treated as stock options for accounting purposes and the holder of the option could only vest in the stock options if the holder continues to provide services to us through the time of a change in control. As a change in control was not deemed probable as of the merger date, the value of the options have not been included as part of the consideration transferred in the merger for accounting purposes. Rather, we will recognize all of the non-cash stock-based compensation expense of approximately $10.5 million for these stock options in our statement of operations upon the effective date of the IPO. The merger accounting purchase price was therefore determined based upon the remaining 1,997,192 shares of common stock issued in the merger at a valuation of $9.49 per share for a total purchase price of approximately $18.9 million.

The fair value of our common stock issued in the merger was determined based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector, discounted cash flows and the likelihood of achieving a liquidity event, such as an initial public offering of common stock or our sale. Substantially all of the purchase price was allocated to in-process research and development and goodwill. As part of the acquisition, we also assumed 0.5 million ($0.7 million as of June 30, 2014) of convertible notes, which have a stated interest rate of 8%. The outstanding principal balance of the notes and accrued but unpaid interest was converted into common stock on July 7, 2014 at the IPO offering price of $6.00 per share.

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We acquired Mind-NRG in February 2014 in order to acquire Mind-NRG's lead product candidate, MIN-301. The fair value of the 1,481,583 shares of common stock issued to the stockholders of Mind-NRG was approximately $16.5 million. The fair value of the common shares issued and the allocation of the purchase price was based upon our valuation of our common stock as approved by our board of directors. Substantially all of the purchase price was allocated to in-process research and development and goodwill.

In connection with the acquisition, we entered into loan agreements for working capital up to a maximum of $0.6 million. The Mind-NRG loans have an interest rate of 8% per annum that is added to the principal. The Mind-NRG loans, including accrued interest, were repaid in full in April 2014 for $0.5 million. We subsequently entered into two loan agreements with certain stockholders for $0.6 million and $1.0 million, the April Bridge Loan and the May Bridge Loan, respectively. The outstanding balance of these loans as of June 30, 2014 was $0.6 million and $0.8 million, respectively. Both bridge loans and accrued interest thereon were repaid in full in July 2014. As part of the Mind-NRG Acquisition, we have agreed to pay ProteoSys a final license payment of 0.5 million ($0.7 million as of June 30, 2014) following the closing of the IPO. This payment was made in July 2014.

Results of Operations



Comparison of Three Months Ended June 30, 2014 versus June 30, 2013

Research and Development Expenses

Research and development expenses totaled $14.6 million for the three months ended June 30, 2014 compared to $0.3 million for the same period in 2013, an increase of $14.3 million. Research and development expenses are summarized in the following table (in thousands):

Three Months Ended June 30, 2014 2013 Research and development expenses (1) $ 1,589 $ 250 Non-cash stock-based compensation (2) 12,966 - Total research and development expenses $ 14,555 $ 250



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(1) Research and development expenses were $1.6 million for the three months ended June 30, 2014 compared to $0.3 million for the same period in 2013, an increase of $1.3 million. This increase was principally attributable to $0.5 million higher drug development program costs primarily due to a study initiated in 2014 to evaluate the pharmacokinetic profile of MIN-101, $0.3 million higher development costs in 2014 due to the addition of MIN-117 as a result of the Sonkei Merger in November 2013 and $0.5 million in additional development costs related to MIN-301 as a result of the Mind-NRG Acquisition in February 2014.

(2) Research and development expenses included $13.0 million in non-cash stock-based compensation expense for the three months ended June 30, 2014 as compared to $0 for the same period in 2013. The increase in stock-based compensation expense was due to $10.5 million related to previously issued common shares that became probable of vesting upon the effective date of our IPO registration statement. An additional $2.3 million was related to an option grant to one employee on the effective date of the IPO registration statement that was 100% vested on that date.

In the future, we expect research and development expense to consist of the items described above as well as expense incurred in performing research and development activities, including compensation and benefits for full-time research and development employees and facilities expenses. These costs may also include non-cash stock-based compensation expense as part of our compensation strategy to attract and retain qualified staff. We expect research and development expense to be our largest category of operating expense and to increase as we continue our planned pre-clinical and clinical trials for our product candidates, including MIN-202, which we licensed from Janssen upon the completion of our IPO in July 2014. Under this license agreement we made a $22.0 million license fee payment in July 2014, which will be included in research and development expense in the third quarter of 2014.

Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success or failure of each product candidate, the estimated costs to continue the development program relative to the Company's available resources, as well as an ongoing assessment as to each product candidate's commercial potential. We will need to raise additional capital or may seek additional product collaborations in the future in order to complete the development and commercialization of our product candidates.

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General and Administrative Expenses

General and administrative expenses totaled $3.1 million for the three months ended June 30, 2014 compared to $0.1 million for the same period in 2013, representing an increase of approximately $3.0 million. General and administrative expenses are summarized in the following table (in thousands):

Three Months Ended June 30, 2014 2013 General and administrative expenses (1) $ 1,061 $ 129 IPO bonus expense (2) 486 - Non-cash stock-based compensation (3) 1,548 - Total general and administrative expenses $ 3,095 $ 129



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(1) General and administrative expenses were $1.1 million for the three months ended June 30, 2014 compared to $0.1 million for the same period in 2013, representing an increase of approximately $1.0 million. The increase in general and administrative expenses in 2014 was due primarily to higher legal and professional fees of $0.6 million related to intellectual property matters and preparing for our operation as a public reporting company and $0.4 million related to staffing, office leases and information systems as we invest in the infrastructure necessary to support the Company's operations.

(2) In accordance with three employment agreements, we recorded $0.5 million for IPO related bonus payments that were probable on June 30, 2014.

(3) General and administrative expenses included $1.5 million in non-cash stock-based compensation expense for the three months ended June 30, 2014 as compared to $0 for the same period in 2013. The increase in stock-based compensation expense was due to $0.3 million related to options granted in December 2013. An additional $1.2 million was due to certain option grants made on the effective date of the IPO registration statement.

In the future, we expect general and administrative expenses to consist primarily of salaries and related benefits, facility costs, information technology, travel expenses and professional fees for auditing, tax and legal services including non-cash stock-based compensation. General and administrative costs also include non-cash stock-based compensation expense as part of our compensation strategy to attract and retain qualified staff. We expect that general and administrative expenses will increase as a result of merging with Sonkei, the acquisition of Mind-NRG and licensing MIN-202 from Janssen. In addition, we expect to incur greater expenses relating to our operations as a public reporting company, including increased payroll, consulting, legal and compliance, accounting, insurance and investor relations costs.

Foreign Exchange Gains



Foreign exchange gains were $11 thousand for the three months ended June 30, 2014 compared to $0 for the same period in 2013. The increase in foreign exchange gains was due primarily to certain expenses of Mind-NRG and certain clinical activities being denominated in Euros, with more positive currency movements in 2014.

Interest (Income)/Expense, Net

Interest expense was $1.7 million for the three months ended June 30, 2014 compared to $0 for the same period in 2013. For the three months ended June 30, 2014, we recognized interest expense of approximately $1.7 million related to our convertible promissory notes, comprised primarily of the amortization of the debt discount related to the debt discount created upon allocation of proceeds to the beneficial conversion feature of the notes and $40 thousand in coupon interest. For the three months ended June 30, 2014, we also recorded $11 thousand in interest expense related to our 8% short term working capital loans.

The convertible promissory notes contain a beneficial conversion feature allowing noteholders to convert the notes and accrued interest into shares of our common stock at a conversion price of $3.50 per common share at any time after April 30, 2014. On April 25, 2014, the convertible promissory notes were amended to provide for conversion only after September 30, 2014. The notes were converted into common stock in conjunction with our IPO on July 7, 2014. The intrinsic value of the beneficial conversion feature was calculated by measuring the difference between the effective conversion price and the fair value of the common stock at initial recognition. We recorded a debt discount for the intrinsic value of the beneficial conversion feature which was limited to the proceeds of the convertible promissory notes received of approximately $2.0 million, with an offsetting increase to additional paid-in capital. The discount was amortized to interest expense using the effective interest method through the notes' maturity date of June 30, 2014.

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Comparison of Six Months Ended June 30, 2014 versus June 30, 2013

Research and Development Expenses

Research and development expenses totaled approximately $15.1 million for the six months ended June 30, 2014 compared to $0.4 million for the same period in 2013, an increase of $14.7 million. Research and development expenses are summarized in the following table (in thousands):

Six Months Ended June 30, 2014 2013 Research and development expenses (1) $ 2,175 $ 354 Non-cash stock-based compensation (2) 12,966 -



Total research and development expenses $ 15,141 $ 354

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(1) Research and development expenses were approximately $2.2 million for the six months ended June 30, 2014 compared to $0.4 million for the same period in 2013, an increase of $1.8 million. This increase was principally attributable to $0.6 million in higher drug development program costs associated with a study initiated in 2014 to evaluate the pharmacokinetic profile of MIN-101, $0.5 million in higher development costs in 2014 due to the addition of MIN-117 as a result of the Sonkei Merger in November 2013 and $0.7 million in additional development costs related to MIN-301 as a result of the Mind-NRG Acquisition in February 2014.

(2) Research and development expenses included $13.0 million in non-cash stock-based compensation expense for the six months ended June 30, 2014 as compared to $0 for the same period in 2013. The increase in stock-based compensation expense was due to $10.5 million related to previously issued common shares that became probable of vesting upon the effective date of our IPO registration statement. An additional $2.3 million was related to an option grant to one employee on the effective date of the IPO registration statement that was 100% vested on that date.

In the future, we expect research and development expense to consist of the items described above as well as expense incurred in performing research and development activities, including compensation and benefits for full-time research and development employees and facilities expenses. These costs may also include non-cash stock-based compensation expense as part of our compensation strategy to attract and retain qualified staff. We expect research and development expense to be our largest category of operating expense and to increase as we continue our planned pre-clinical and clinical trials for our product candidates, including MIN-202, which we licensed from Janssen upon the completion of our IPO in July 2014. Under this license agreement we made a $22.0 million license fee payment in July 2014, which will be included in research and development expense in the third quarter of 2014.

Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success or failure of each product candidate, the estimated costs to continue the development program relative to the Company's available resources, as well as an ongoing assessment as to each product candidate's commercial potential. We will need to raise additional capital or may seek additional product collaborations in the future in order to complete the development and commercialization of our product candidates.

General and Administrative Expenses

General and administrative expenses totaled $5.1 million for the six months ended June 30, 2014 compared to $0.3 million for the same period in 2013, representing an increase of approximately $4.8 million. General and administrative expenses are summarized in the following table (in thousands):

Six Months Ended June 30, 2014 2013



General and administrative expenses (1) $ 2,796 $ 296 IPO bonus expense (2)

486 - Non-cash stock-based compensation (3) 1,851 -



Total general and administrative expenses $ 5,133 $ 296

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(1) General and administrative expenses totaled $2.8 million for the six months ended June 30, 2014 compared to $0.3 million for the same period in 2013, representing an increase of approximately $2.5 million. The increase in general and administrative expenses in 2014 was due primarily to $1.1 million in higher legal and professional fees related to intellectual property matters and preparing for our operation as a public reporting company, and $1.4 million in higher costs related to staffing, consultants, office leases and information systems as we build the infrastructure necessary to support the Company's operations. We incurred legal and other professional fees associated with the acquisition of Mind-NRG in February 2014, which costs are expensed as incurred. We also incurred professional fees associated with entering into the co-development and licensing agreement with Janssen in February 2014 and engaging valuation specialists.

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(2) In accordance with three employment agreements, we recorded $0.5 million for IPO related bonus payments that were probable as of June 30, 2014.

(3) General and administrative expenses included approximately $1.9 million in non-cash stock-based compensation expense for the six months ended June 30, 2014 as compared to $0 for the same period in 2013. The increase in stock-based compensation expense was due to $0.6 million related to options granted in December 2013. An additional $1.3 million was due to certain option grants that became vested upon the effective date of the IPO registration statement.

In the future, we expect general and administrative expenses to consist primarily of salaries and related benefits, facility costs, information technology, travel expenses and professional fees for auditing, tax and legal services including non-cash stock-based compensation. General and administrative costs also include non-cash stock-based compensation expense as part of our compensation strategy to attract and retain qualified staff. We expect that general and administrative expenses will increase as a result of merging with Sonkei, the acquisition of Mind-NRG and licensing MIN-202 from Janssen. In addition, we expect to incur greater expenses relating to our operations as a public reporting company, including increased payroll, consulting, legal and compliance, accounting, insurance and investor relations costs.

Foreign Exchange Gains



Foreign exchange gains were $4 thousand for the three months ended June 30, 2014 compared to $0 for the same period in 2013. The increase in foreign exchange gains was due primarily to certain expenses of Mind-NRG and certain clinical activities being denominated in Euros, with more positive currency movements in 2014.

Interest (Income)/Expense, Net

Interest expense was approximately $2.0 million for the six months ended June 30, 2014 compared to $0 for the same period in 2013. For the six months ended June 30, 2014, we recognized interest expense of approximately $2.0 million related to our convertible promissory notes, comprised primarily of the amortization of the debt discount related to the debt discount created upon allocation of proceeds to the beneficial conversion feature of the notes and $79 thousand in coupon interest. For the six months ended June 30, 2014, we also recorded $11 thousand in interest expense related to our 8% short term working capital loans.

The convertible promissory notes contain a beneficial conversion feature allowing noteholders to convert the notes and accrued interest into shares of our common stock at a conversion price of $3.50 per common share at any time after April 30, 2014. On April 25, 2014, the convertible promissory notes were amended to provide for conversion only after September 30, 2014. The notes were converted into 352,000 common stock in conjunction with our IPO on July 7, 2014. The intrinsic value of the beneficial conversion feature was calculated by measuring the difference between the effective conversion price and the fair value of the common stock at initial recognition. We recorded a debt discount for the intrinsic value of the beneficial conversion feature which was limited to the proceeds of the convertible promissory notes received of approximately $2.0 million, with an offsetting increase to additional paid-in capital. The discount was amortized to interest expense using the effective interest method through the notes' maturity date of June 30, 2014.

Liquidity and Capital Resources

Sources of Liquidity



We have incurred losses and cumulative negative cash flows from operations since our inception in April 2007 and, as of June 30, 2014, we had an accumulated deficit of approximately $40.1 million. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development and potential commercialization of our product candidates and incur additional costs associated with being a public company. At June 30, 2014, we had $0.5 million in cash and cash equivalents.

Initial Public Offering



On June 30, 2014, our registration statement on Form S-1 was declared effective by the Securities and Exchange Commission for our initial public offering pursuant to which we sold an aggregate of 5,454,545 shares of our common stock pursuant to an underwriting agreement dated June 30, 2014, at a price to the public of $6.00 per share, or an aggregate of approximately $32.7 million. On July 7, 2014, we closed the sale of all such shares, resulting in net proceeds to us of approximately $25.2 million, after deducting the underwriting discount of $2.3 million, expenses of approximately $3.1 million, repayment of the bridge loans of $1.4 million and the ProteoSys license payment of $0.7 million.

Private Placement



On July 7, 2014 we also closed the sale of a private placement of 666,666 common shares resulting in net proceeds to us of approximately $3.7 million, after deducting the underwriting discount of $0.3 million.

Janssen Co-Development and License Agreement

On July 7, 2014, in accordance with our license agreement for MIN-202, JJDC purchased 3,284,353 shares of our common stock in a private placement resulting in net proceeds to us of approximately $19.7 million, representing approximately 18% of our outstanding common shares. In conjunction with the private placement and in accordance with our license agreement for MIN-202, on July7, 2014 we paid a $22.0 million license fee to Janssen.

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Table of Contents Convertible Promissory Notes



During November 2013, we issued 8% convertible promissory notes for approximately $1.3 million in aggregate to certain stockholders which are payable by us on June 30, 2014. During November 2013, prior to the merger of Sonkei into us, Sonkei issued convertible promissory notes for 0.5 million (or $0.7 million, as converted) in aggregate to certain stockholders which we assumed at the time of the merger with Sonkei and which are payable by us on June 30, 2014. The notes have a stated interest rate of 8% per annum. Upon completion of the IPO in July 2014, the outstanding principal balance of the notes and accrued interest were converted into common stock at the offering price of $6.00 per share, resulting in the issuance of 352,000 shares of common stock.

Working Capital Loans



In February 2014, we entered into loan agreements for working capital up to a maximum of $0.6 million in connection with the Mind-NRG Acquisition. As of March 31, 2014, the balance outstanding under these loans was $0.5 million, which were repaid in full with accrued interest in April 2014.

On April 30, 2014 we entered into the April Bridge Loan with certain stockholders and their affiliates. The April Bridge Loan provides loan facilities of $0.6 million, of which we have drawn $0.6 million, with an annual interest rate of 8% and is repayable at the time we complete an IPO or December 1, 2015. The April Bridge Loan contains standard terms of default, under which the interest rate would increase to 11% per annum. Any amount outstanding may be repaid at any time without penalty. As of June 30, 2014, the balance outstanding under these loans was $0.6 million, which were repaid in full with accrued interest in July 2014.

On May 22, 2014, we entered into the May Bridge Loan with certain stockholders and their affiliates. The May Bridge Loan provides loan facilities up to a maximum of $1.0 million, at an annual interest rate of 8% and is repayable at the time we complete an IPO or December 1, 2015. The May Bridge Loan contains standard terms of default, under which the interest rate would increase to 11% per annum. Any amount outstanding may be repaid at any time without penalty. As of June 30, 2014, the balance outstanding under these loans was $1.4 million, which were repaid in full with accrued interest in July 2014.

Cash Flows



The table below summarizes our significant sources and uses of cash for the six months ended June 30, 2014 and 2013:

Six Months Ended June 30, 2014 2013 (dollars in millions) Net cash provided by (used in): Operating activities $ (3.8 )$ (0.6 ) Investing activities 1.2 - Financing activities 1.3 1.9



Net (decrease) increase in cash $ (1.3 )$ 1.3

Net Cash Used in Operating Activities

Net cash used in operating activities of approximately $3.8 million during the six months ended June 30, 2014 was due primarily to our net loss of $22.3 million, partially offset by non-cash interest expense of $1.9 million, non-cash stock-based compensation expense of $14.8 million and a $1.8 million increase in accounts payable, accrued expenses and other liabilities. Net cash used in operating activities of $0.6 million during the six months ended June 30, 2013 was primarily a result of our net loss of $0.6 million.

Net Cash Provided by Investing Activities

Net cash provided by investing activities in the six months ended June 30, 2014 consisted of $1.2 million of cash acquired in February 2014 in conjunction with the Mind-NRG Acquisition.

Net Cash Provided by Financing Activities

Net cash provided by financing activities of $1.3 million during the six months ended June 30, 2014 was due to the net proceeds from several working capital loan agreements of $1.4 million, partially offset by IPO costs paid during the period of $0.1 million. Net cash provided by financing activities of $1.9 million during the six months ended June 30, 2013 was due to the proceeds from the sale of common stock.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations at June 30, 2014 and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

Payments Due by Period (in millions)

MORE THAN LESS THAN 1-3 3-5 FIVE TOTAL A YEAR YEARS YEARS YEARS



Contractual Obligations: Operating lease obligations(1) $ 0.1$ 0.1 - - - Bridge Loans(2)

$ 1.4$ 1.4 - - - License fee(3) 0.7 0.7 - - -



Total contractual cash obligations $ 2.2$ 2.2 $ - $ - $ -

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(1) Represents operating lease costs, consisting of leases for



office space in Cambridge, MA.

(2) Represent amounts payable under the April and May 2014



Bridge Loans as of June 30, 2014, discussed below.

(3) Represents license fee payable with respect to MIN-301 to



ProteoSys SA for 0.5 million ($0.7 million as of June 30, 2014). This license fee was paid in July 2014.

Payments under our licenses described below are not considered contractual obligations due to the uncertainty of the occurrence of the events requiring payment under these agreements, including our share of potential future milestone and royalty payments. These payments generally become due and payable only upon the achievement of certain clinical development, regulatory or commercial milestones.

In April 2014 we entered into the April Bridge Loan for a maximum of $0.6 million. In May 2014 we entered into the May Bridge Loan for up to a maximum of $1.0 million. All loan facilities were repaid with interest upon the completion of the IPO in July 2014.

On February 11, 2014, we entered into an agreement with Quotient Ltd, a Contract Research Organization based in Nottingham, UK to conduct a two-part study to evaluate the pharmacokinetic profile of MIN-101 modified release prototype formulations, and to evaluate the relationship between the pharmacokinetic profile and cardiovascular parameters following multiple dose administration. The total cost of the project is 1.6 million, ($2.2 million, as converted). As of June 30, 2014 we have paid approximately $0.4 million under the contract.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under Securities and Exchange Commission rules.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

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Table of Contents Stock-Based Compensation



Stock-based compensation for non-employees has been a significant expense of the Company. We had one warrant issuance which required stock based compensation consideration and which was terminated in 2012, as described below. We also had a share issuance to a non-employee subject to a non-recourse promissory note (described below in the section titled "Consultant Equity Issuance"), which is treated for accounting purposes as if it were a stock option, and therefore we would recognize expense under this accounting policy. We issued stock options to an employee and two consultants in December 2013.

We determine the fair value of share-based awards using the Black-Scholes option-pricing model to determine the fair value of stock option awards. Inputs to this model requires management to apply judgment and make assumptions and estimates, including with respect to:

the expected term of the issuance;



the risk free interest rate, which we estimate based on the U.S. Treasury instruments whose term was consistent with the term of the warrants;

the expected volatility of the underlying common stock, which we estimate based on the historical volatility of a peer group of comparable publicly traded life sciences and biotechnology companies with product candidates in similar stages of clinical development, as we do not have significant trading history for our common stock; and

the fair value of our common stock determined on the date of grant, as described below.

Consultant Equity Issuance

In February 2009, we entered into a warrant agreement with an affiliate of a consultant who provides services associated with the clinical development of our drug compound. The warrant was exercisable at any time through February 28, 2014. The number of shares of our common stock subject to this warrant was dependent upon an anti-dilution formula based upon maintaining a 20% ownership after each of the common stock purchase agreement closings by the Care Capital and Index Ventures family of venture capital funds, with the total warrant shares not to exceed 1,785,714 shares, or the Warrant Shares. The exercise price of the warrant equaled the sum of $3.50, or the Numerator, plus the quotient obtained by $142 thousand divided by the number of Warrant Shares outstanding, however the Numerator would increase by 2% for each quarter the warrant was outstanding. The warrant agreement also included a performance based provision for the quantity of the Warrant Shares that could be exercised. The warrant became fully vested on May 31, 2010 upon our successful completion of specific clinical milestones. Subsequent to the date of vesting, we increased the number of warrant shares on October 26, 2011 and April 25, 2012, as a result of the anti-dilution provision described above. We determined that the warrant qualified as an equity instrument.

As of April 25, 2012, the warrant was exercisable for 821,429 shares of common stock issuable at an exercise price of $3.71 per share. On April 26, 2012, the warrant agreement was cancelled and replaced with a common stock subscription agreement for the purchase of 821,429 shares of common stock, which was immediately exercised. We have accounted for the warrant cancellation and the concurrent replacement with a common stock subscription agreement as a modification in accordance with ASC 718-20-35-8 as further discussed below.

We estimated the fair value of the warrant using the Black-Scholes option-pricing model. On April 26, 2012 we issued 821,429 shares of common stock in exchange for a nonrecourse note payable in principal amount of $3.1 million (equivalent to approximately $3.71 per share, or the original price). The note payable was originally due in a single installment on February 28, 2014, which was extended to March 31, 2014. We have the option (a call option) to repurchase the shares if the holder ceases to provide services to us or after February 28, 2014, which was extended to March 31, 2014, at the original price. The holder has the option (a put option) to require us to repurchase the shares at any time at the original price. Through December 31, 2013, neither the put nor call options were exercised and the notes were settled as described below in March 2014.

In accordance with ASC 718-10-25, the purchase of stock in exchange for a non-recourse loan effectively is the same as granting a stock option. If the value of the underlying shares falls below the loan amount, the stockholder will relinquish the stock in lieu of repaying the loan and would be in the same position as if he or she never purchased the stock. Further, as the shares sold subject to the nonrecourse note are considered an option for accounting purposes, we have not recorded a note or reflected these shares as outstanding on our balance sheets. The ultimate holder of the option can only benefit from the instrument if he continues to provide services to us through the time of a change in control, as defined. As a change in control is not deemed probable, stock-based compensation expense will not be recorded until a change in control occurs at the then fair value of the option.

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Our arrangements with the holder of the 821,429 shares noted above include a continuing anti-dilution obligation with respect to the shares owned by that holder through the date of the our initial public offering. In connection with such arrangement, we have an obligation to issue additional shares to the holder each time we issue shares to certain investors, such that the holder's ownership percentage remains constant relative to the shares held by certain investors. Subsequent to the April 26, 2012 issuance of 821,429 shares to the holder discussed above, we sold an additional 171,429 and 528,571 shares to certain investors during 2012 and 2013, respectively. We issued 27,925 shares to the holder at a purchase price of $3.50 per share (subject to the corresponding note payable) in December 2013 in accordance with the anti-dilution agreement. Since Sonkei had a similar arrangement with the holder, upon the Sonkei Merger 426,176 shares of our common stock were issued under the same arrangement. The accounting for the additional share issuance is consistent with the 821,429 shares discussed above as the stock was purchased for a non-recourse loan, which is effectively the same as the granting of a stock option. At December 31, 2013 there were 1,275,530 shares issued under this arrangement subject to the promissory notes in the aggregate principal amount of $4.7 million.

Share Repurchase in Settlement of Nonrecourse Notes

In March 2014, the issuer of the $4.7 million nonrecourse notes, which includes accrued interest, remitted to us 348,926 shares of common stock with a fair value of $13.51 per share in full settlement of the outstanding notes in a cashless transaction. Additionally, we further modified the awards by cancelling the put option and adding a term providing for the award to vest. The original issuance of the shares and the nonrecourse notes were accounted for as a stock option, with no stock-based compensation expense recognized, as the ultimate holder of the option could only vest in the stock option if he continued to provide services to us through the time of a change in control, which is not deemed probable until the change in control occurs.

The remittance of the shares in exchange for settling the outstanding notes, the cancellation of the put option, and the addition of the vesting provision if an IPO occurs, represents a modification of the awards. This modification resulted in the conversion of approximately 1.3 million stock options with an aggregate exercise price of $4.7 million to 926,604 shares of stock that are considered non-vested stock for accounting purposes with no exercise price. These shares became probable of vesting for accounting purposes upon the effective date of the IPO registration statement on June 30, 2014. Accordingly we recognized stock-based compensation expense of approximately $10.5 million for the 926,604 shares multiplied by the fair value per share on May 1, 2014, the date the consultant became an employee, less previous compensation expense recorded.

Stock Options



We established our stock option plan in the fourth quarter of 2013, and we amended and restated our stock option plan in the second quarter of 2014. The amended and restated plan provides for the issuance of up to 3,543,754 shares of common stock, subject to automatic annual increases pursuant to the terms of the plan, each to be issued at the then fair value of our underlying common stock. We will recognize compensation cost relating to share-based payment transactions in net loss using a fair-value measurement method, in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) 718 "Compensation-Stock Compensation."

The following table presents the grant dates of stock options outstanding as of June 30, 2014 with the corresponding exercise price for each option grant and our current estimate of the fair value per share of our common stock on each grant date, which we utilize to calculate stock-based compensation.

CURRENT ESTIMATE NUMBER OF OF COMMON SHARES EXERCISE STOCK FAIR VALUE DATE OF UNDERLYING PRICE PER SHARE ON GRANT OPTIONS GRANTED PER SHARE GRANT DATE December 20, 2013 646,759 $ 9.49 $ 9.49 June 30, 2014 1,495,048 6.00 $ 6.00



We estimated the fair value of the options granted on June 30, 2014 using the Black-Scholes option pricing model with the following assumptions: (i) expected term of 6.25 years, (ii) volatility of 113%, (iii) risk free interest rate of 1.94% and (iv) a dividend yield of zero. At June 30, 2014, options to purchase 2,141,807 shares of our common stock were outstanding, 594,930 of which are vested as of June 30, 2014. The intrinsic value of outstanding options as of June 30, 2014 is zero.

Fair Value of Common Stock



We were a private company with no active public market for our common stock. We utilized significant estimates and assumptions in determining the fair value of our common stock. We performed these valuations as of April 26, 2012, November 12, 2013, December 31, 2013, February 11, 2014, and March 31, 2014, or the Valuation Dates. The April 26, 2012 and November 12, 2013 valuation dates were based upon the dates of warrants issued pursuant to the above warrant agreement. The November 13, 2013 and February 11, 2014 valuation dates were related to the date of the issuance of shares in connection with the Sonkei Merger on November 11, 2013 and the Mind-NRG Acquisition. The March 31, 2014 valuation date related to the share repurchase in settlement of non-recourse notes described above.

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In conducting the valuations, our board of directors, with input from management considered objective and subjective factors that we believed to be relevant for each valuation conducted, including our best estimate of our business condition, prospects and operating performance at each valuation date. Within the valuations performed, we used a range of factors, assumptions and methodologies. The significant factors included:

our results of operations, financial position and the status of research and development efforts;

the lack of liquidity of our common stock as a private company;



our stage of development and business strategy and the material risks related to our business and industry;

the achievement of enterprise milestones, including entering into collaboration and license agreements, and the likelihood of entering into such agreements;

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

any external market conditions affecting the life sciences and biotechnology industry sectors;

the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions;

the state of the IPO market for similarly situated privately held biotechnology companies;

general U.S. and global economic conditions; and



our most recent valuations prepared in accordance with methodologies outlined in the 2013 American Institute of Certified Public Accountants Technical Practice Aid.

We utilized various valuation methodologies in accordance with the framework of the 2013 American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common stock. The Practice Aid prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property, less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our company's future operations, discounting to the present value with an appropriate risk-adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. Given our stage of development we did not utilize the cost approach or market approach to determine our enterprise value for any of the periods discussed below. We utilized the income approach for the valuation periods.

The various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock in accordance with the Practice Aid include the following:

Current Value Method, or CVM. Under the current value method, once the fair value of the enterprise is established, the value is allocated to the various series of preferred and common stock based on their respective seniority, liquidation preferences or conversion values, whichever is greatest. This method was utilized in the valuations discussed below.

Option Pricing Method, or OPM. Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options. Given that we had one class of stock and one warrant arrangement issued through November 2013, this method was not utilized in the valuations discussed below.

Probability-Weighted Expected Return Method, or PWERM. The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. We utilized the PWERM in the valuations dated November 12, 2013, December 31, 2013, February 11, 2014, and March 31, 2014 to quantify the effect on valuation of common stock associated with the Sonkei Merger, the Mind-NRG Acquisition and implementation of the plan towards the IPO.

There are significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event and the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per common share could have been significantly different.

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We estimated the per share common stock fair value by allocating the enterprise value using the CVM or PWERM for the Valuation Dates. One of the key inputs into this model is the future estimated cash flows of us using management's estimate of patient populations, market penetration and compliance rates, expected launch date, price and costs per unit sold, selling, general and administrative expenses, capital expenditures, and long term growth factors. We used comparable companies to develop growth and other trend rates that we built into our expected cash flow model. We selected companies within the biopharmaceutical industry and in Phase II development, or those that were in Phase III with similar characteristics. We selected a group of comparable publicly traded companies and we calculated market multiples using each company's stock price and other financial data. We used industry standard studies to assess cumulative technical success probabilities for each phase of development. Using this data, we computed an estimate of our enterprise value. This expected future cash flows model was utilized for all periods in which the valuations were done, without changes to expected timing or net financial outcome. The December 2013, November 2013, February 11, 2014 and March 31, 2014 valuations utilized this discounted expected future cash flows, and also the expected outcomes as derived from the PWERM model.

The estimated future cash flows were then converted to present value using a 20% discount rate. The 20% discount was based on studies done of similar-stage biopharmaceutical companies, and reflected the single capital instrument that we had outstanding (common stock) until November 2013 when our capital structure also included the convertible bridge loans. After the issuance of the bridge loans we changed our discount rate to 17% to reflect the change in capital structure.

In addition, we applied a discount to reflect the lack of marketability of our common stock for those PWERM scenarios that did not utilize an IPO option. We based this discount on various put option analyses and considered the degree of risk for companies in the biotechnology industry.

Valuation of the Net Assets Acquired in the Sonkei Merger and Mind-NRG Acquisition

Pursuant to Accounting Standards Codification Topic 805, we are required to determine the fair value of the assets and liabilities acquired to provide insight as to the combined condensed pro forma balance sheet. The following summarizes the principle considerations utilized:

The purchase price was determined based upon the fair value of the shares issued utilizing the above discussed value of the Minerva shares ($9.49 per share) on the date of the Sonkei Merger and $11.17 on the date of the Mind-NRG Acquisition.

The fair value acquired net current assets and assumed convertible promissory notes are approximate to the book value of such assets and liabilities due to the short term nature of the net current assets. The terms of the convertible promissory notes are similar to other venture stage instruments in the biotechnology industry, and given the short term nature of the notes, the fair value of the notes is considered to be approximate to its carrying value.

The intangible assets acquired are the significant assets of each company are valued at fair value as discussed below. The methods commonly used to develop indications of value for an intangible asset are the Income, Market, and Cost approaches.

The Income Approach focuses on the income-producing capability of an asset. The Income Approach incorporates the calculation of the present value of future economic benefits, such as cash earnings, cost savings, tax deductions and proceeds from disposition proceeds. Indications of value are developed by discounting expected cash flows to the present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the particular investment. The discount rate selected is generally based on rates of return available from alternative investments of similar type and quality.

The Market Approach measures the benefits of an asset through an analysis of recent sales or offerings of comparable property. Sales and offering prices are adjusted for differences in location, time of sale, utility and the terms and conditions of sale between the asset being appraised and comparable properties.

The Cost Approach measures the benefits related to an asset by the cost to reconstruct or replace it with another of like utility. To the extent that the assets being analyzed provide less utility than new assets, the reproduction or replacement cost new would be adjusted to reflect appropriate physical deterioration, functional obsolescence and economic obsolescence.

We measured the value of the acquired IPR&D using the Income Approach - Multi-Period Excess Earnings Method and assembled workforce using the Cost Approach (for contributory asset charge calculations). The Multi-Period Excess Earning Method measures the present value of the future earnings expected to be generated during the remaining lives of the subject assets. The computed fair value of the IPR&D represented substantially all of the purchase price, after consideration of the net current assets acquired and the assumed convertible promissory notes.

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Prior to determining the value of each intangible asset described above, it is standard methodology as part of an acquisition to perform a "business enterprise value" analysis. This analysis incorporates all potential economics that the acquired business would theoretically recognize under a fair value scenario. The business enterprise analysis incorporates a stand-alone forecast of us. The purpose of this is to provide a reasonableness check to substantiate the assumptions used in other portions of the analysis. The basis of the business enterprise analysis includes management's estimates regarding projected operating cash flows for the acquired businesses.

We utilized the net present value model under the Income Approach to arrive at the net cash flows attributable to each asset acquired. The estimated future cash flows were then converted to present value using a 17.5% discount rate in the case of the Sonkei acquisition and 19.9% in the case of Mind-NRG Acquisition. The 17.5% discount was based on studies done of similar-stage biopharmaceutical companies, and reflects the weighted average cost of capital including the convertible promissory notes. The 19.9% discount rate reflects the similar weighted average cost of capital, except that there was a greater weight to equity instruments after the issuance of the Sonkei merger shares.

We evaluated whether the fair value per share would be significantly different between December 31, 2013 and February 11, 2014, the date of the Mind-NRG Acquisition, and concluded that there was a change in fair value per share based upon the Mind-NRG Acquisition and proximity to the IPO. We estimated that a share of our common stock had a value of $11.17 per share at February 11, 2014, an increase of $1.68 from the prior valuation at December 31, 2013. This valuation utilized a 17% discount factor and a 10% discount for lack of marketability. We utilized a PWERM methodology to assign the possible enterprise values assuming various IPO pricing and technology sale scenarios in light of the closer proximity to our initial public offering. The discount factor reflects the weighted average cost of capital between the common stock and the convertible promissory notes. The board of directors did not believe there was a significant change in our clinical or regulatory status between December 2013 and February 2014.

IPO



We note that, as is typical in IPOs, the public offering price for the offering was not derived using a formal determination of fair value, but was determined by negotiation between us and the underwriters. Among the factors that were considered in setting this public offering price were the following: an analysis of the typical valuations seen in recent IPOs for companies in our industry; the general condition of the securities markets and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; an assumption that there would be a receptive public trading market for clinical stage biopharmaceutical companies such as us; and an assumption that there would be sufficient demand for our common stock to support an offering of the size contemplated.

In-Process Research and Development

In-process research and development, or IPR&D, assets represent a capitalized incomplete research project that we acquired through a business combination. Such assets are initially measured at their acquisition date fair values. The fair value of the research projects is recorded as intangible assets on the balance sheet, rather than expensed, regardless of whether these assets have an alternative future use. IPR&D represents projects that have not yet received regulatory approval and are required to be classified as indefinite-lived assets until the successful completion or the abandonment of the associated research and development efforts. These project costs include expenses incurred over the course of drug development programs such as previous and current pre-clinical trial expenses, intellectual property costs, drug product development, testing expenses and other related activities. These IPR&D projects represent a material demand on liquid resources to fund the completion of the development programs.

If regulatory approval is received, the associated IPR&D is amortized over the expected useful life. The determination of the useful life is estimated by management based on many inputs including: the number and types of patents that cover the drug product, the period of time before the related patent or patents expire, changes in the regulatory environment, the approval of competing therapies or compounds, changes in applicable laws or regulations and a variety of other circumstances.

Impairment testing is performed on the IPR&D asset at least annually or when a potential triggering event occurs, to determine whether the asset may be impaired. Potential triggering events that could indicate whether an impairment to the IPR&D may have occurred include: clinical trial results where the compound under investigation did not meet pre-established criteria or clinical endpoints, failure to obtain regulatory approval, the inability to fund future clinical trials, failure to obtain patent protection, adverse changes in the regulatory environment, the approval of competing therapies or compounds, adverse changes in applicable laws or regulations and a variety of other circumstances. The impairment of IPR&D could have a material adverse impact on our financial condition. In order to determine whether an impairment has occurred, management must evaluate the events and incorporate multiple assumptions including: costs associated with continuing the development program, competing therapies or compounds, potential market size, estimated future cash flows and other factors.

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Table of Contents Acquisitions



The Sonkei Merger and the acquisition of Mind-NRG were accounted for using the acquisition method of accounting, which requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies. We engaged a third party advisor to assist in the valuation of the intangible assets. These valuations incorporated many assumptions including calculations for projected cash flows based on estimates for market size, patient populations, expected launch dates, product development costs, capital expenditures and long term growth rates.

Acquisition costs are expensed as incurred. We recognize separately from goodwill the fair value of assets acquired and the liabilities assumed. We allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The goodwill recorded recognizes the synergies and value of the overall combined development programs, both the current pre-clinical development program in process and the future clinical trial development strategy.

Impairment testing is performed at least annually on November 30, or when a potential triggering event occurs, to determine whether the asset may be impaired. The impairment of goodwill could have a material adverse impact on our financial condition. In order to determine whether an impairment has occurred, management must evaluate the events and incorporate multiple assumptions about future cash flows including costs associated with continuing the development program, changes in strategy or potential market size and other factors.

Research and Development Expenses and Clinical Trial Accruals

Since our inception, we have focused our resources on our research and development activities, including conducting non-clinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our products. Substantially all of these services are recognized on an outsourced basis. We recognize research and development expenses as they are incurred.

We expense payments for the acquisition and development of technology as research and development costs if, at the time of payment: the technology is under development; is not approved by the U.S. Food and Drug Administration or other regulatory agencies for marketing; has not reached technical feasibility; or otherwise has no foreseeable alternative future use.

As part of the process of preparing our financial statements, we are required to estimate our expenses resulting from our obligations under contracts with vendors and consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. Our clinical trial accrual is dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.

Our objective is to reflect the appropriate clinical trial expenses in our financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. We determine accrual estimates through discussion with applicable personnel and outside service providers as to the progress or state of completion of clinical trials, or the services completed. During the course of a clinical trial, we adjust the rate of clinical trial expense recognition if actual results differ from the estimates. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known at that time. Although we do not expect that our estimates will be materially different from amounts actually incurred, our understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting amounts that are too high or too low for any particular period. Through June 30, 2014, there had been no material adjustments to our prior period estimates of accrued expenses for clinical trials. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by FASB and are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued accounting pronouncements will not have a material impact on consolidated financial position, results of operations, and cash flows, or do not apply to our operations.

In June 2014, the FASB issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915) which eliminates the definition of a development stage entity and removes the financial reporting distinction between development stage entities and other reporting entities under GAAP. We early adopted this standard and thus we eliminated the historical inception to date information in the financial statements.


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