NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
1. DESCRIPTION OF BUSINESS
Arno Therapeutics, Inc. (“Arno”
or the “Company”) develops innovative drug candidates for the treatment of patients with cancer. The following is a
summary of the Company’s product development pipeline:
|
·
|
Onapristone
–
Onapristone is an anti-progestin hormone blocker that has been shown to have
considerable anti-tumor activity in patients with breast cancer. In prior clinical studies, onapristone has demonstrated a
56% objective response rate as a first line “hormone” treatment of breast cancer. In connection with the
development of onapristone, the Company intends to develop a companion diagnostic product to selectively identify patients
who express the activated form of the progesterone receptor and would potentially be more likely to benefit from treatment
with onapristone. The Company is conducting pre-clinical toxicology studies and manufacturing activities in 2012 and plans to
file an
investigational new drug application (“IND”) or foreign equivalent in 2013.
|
|
·
|
AR-42
– AR-42 is an orally available, broad spectrum inhibitor of both histone and non-histone deacetylation
proteins, or Pan-DAC, which play an important role in the regulation of gene expression, cell growth and survival. AR-42
is currently being studied in an investigator-initiated Phase I/II clinical study in adult subjects with relapsed or refractory
multiple myeloma, chronic lymphocytic leukemia, or CLL, or lymphoma. The protocol has been amended to include a solid tumor dose
escalation cohort which is currently open for patient accrual.
|
|
·
|
AR-12
– AR-12 is an orally available, targeted anti-cancer agent that has been shown in early pre-clinical
studies to inhibit phosphoinositide dependent protein kinase-1, or PDK-1, a protein in the PI3K/Akt pathway that is involved in
the growth and proliferation of cells, including cancer cells. AR-12 has also been reported to cause cell death through the induction
of endoplasmic reticulum stress and work is ongoing to further understand the mechanism of action. Preliminary data
demonstrates that AR-12 may inhibit multiple different kinase targets. The Company is currently conducting a multi-centered
Phase I clinical study of AR-12 in adult subjects with advanced or recurrent solid tumors or lymphoma.
|
The Company was incorporated in Delaware
in March 2000, at which time its name was Laurier International, Inc. (“Laurier”). Pursuant to an Agreement and Plan
of Merger dated March 6, 2008 (as amended, the “Merger Agreement”), by and among the Company, Arno Therapeutics, Inc.,
a Delaware corporation formed on August 1, 2005 (“Old Arno”), and Laurier Acquisition, Inc., a Delaware corporation
and wholly-owned subsidiary of the Company (“Laurier Acquisition”), on June 3, 2008, Laurier Acquisition merged with
and into Old Arno, with Old Arno remaining as the surviving corporation and a wholly-owned subsidiary of Laurier. Immediately following
this merger, Old Arno merged with and into Laurier and Laurier’s name was changed to Arno Therapeutics, Inc. These two merger
transactions are hereinafter collectively referred to as the “Merger.” Immediately following the Merger, the former
stockholders of Old Arno collectively held 95% of the outstanding common stock of Laurier, assuming the issuance of all shares
issuable upon the exercise of outstanding options and warrants, and all of the officers and directors of Old Arno in office immediately
prior to the Merger were appointed as the officers and directors of Laurier immediately following the Merger. Further, Laurier
was a non-operating shell company prior to the Merger. The merger of a private operating company into a non-operating public shell
corporation with nominal net assets is considered to be a capital transaction in substance, rather than a business combination,
for accounting purposes. Accordingly, the Company treated this transaction as a capital transaction without recording goodwill
or adjusting any of its other assets or liabilities. All costs incurred in connection with the Merger have been expensed. Upon
completion of the Merger, the Company adopted Old Arno’s business plan.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company is a development stage enterprise
since it has not yet generated any revenue from the sale of products and, through September 30, 2012, its efforts have been principally
devoted to developing its licensed technologies, recruiting personnel, establishing office facilities, and raising capital. Accordingly,
the accompanying condensed financial statements have been prepared in accordance with the provisions of Accounting Standards Codification
(“ASC”) 915, “Development Stage Entities.” The Company has experienced net losses since its inception and
has an accumulated deficit of approximately $41.4 million at September 30, 2012. The Company expects to incur substantial and increasing
losses and to have negative net cash flows from operating activities as it expands its technology portfolio and engages in further
research and development activities, particularly from conducting manufacturing activities, pre-clinical studies and clinical trials.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
The accompanying unaudited Condensed Financial
Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q adopted under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete
financial statements. In the opinion of Arno’s management, the accompanying Condensed Financial Statements contain all adjustments
(consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations
and cash flows of the Company at the dates and for the periods indicated. The interim results for the periods ended September 30,
2012 are not necessarily indicative of results for the full 2012 fiscal year or any other future interim periods. Because the Merger
was accounted for as a reverse acquisition under generally accepted accounting principles, the financial statements for periods
prior to June 3, 2008, reflect only the operations of Old Arno.
These unaudited Condensed Financial Statements
have been prepared by management and should be read in conjunction with the financial statements and notes thereto included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange
Commission.
The preparation of financial statements
in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Estimates and assumptions principally
relate to services performed by third parties but not yet invoiced, estimates of the fair value and forfeiture rates of stock options
issued to employees and consultants, and estimates of the probability and potential magnitude of contingent liabilities. Actual
results could differ from those estimates.
Research and Development
Research and development costs are charged
to expense as incurred. Research and development includes employee costs, fees associated with operational consultants, contract
clinical research organizations, contract manufacturing organizations, clinical site fees, contract laboratory research organizations,
contract central testing laboratories, licensing activities, and allocated office, insurance, depreciation, and facilities expenses.
The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial and the invoices
received from its external service providers. As actual costs become known, the Company adjusts its accruals in the period when
actual costs become known. Costs related to the acquisition of technology rights for which development work is still in process
are charged to operations as incurred and considered a component of research and development expense.
Warrant Liability
The Company accounts for the warrants issued
in connection with the September 2010 Purchase Agreement (see Note 7) in accordance with the guidance on Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant
instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is
subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized as a component
of other income or expense. The fair value of warrants issued by the Company, in connection with private placements of securities,
has been estimated using a Monte Carlo simulation model and, in doing so, the Company’s management utilized a third-party
valuation report. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock
price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes
standard error.
3. LIQUIDITY AND CAPITAL RESOURCES
Cash resources as of September 30, 2012
were approximately $0.6 million, compared to $6.7 million as of December 31, 2011. As of September 30, 2012, the Company had current
liabilities of approximately $3.3 million, resulting in negative working capital of approximately $2.4 million. Accordingly, the
Company is in immediate need of substantial additional financing or it may be required to cease its operations altogether. The
Company’s continued operations depend entirely on its ability to raise additional funds through various potential sources,
such as equity or debt financing, or to license its product candidates to another pharmaceutical company. The Company cannot assure
that it will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
The success of the Company depends on its
ability to develop new products to the point of regulatory approval and subsequent commercialization and, accordingly, to raise
enough capital to finance these developmental efforts until it can achieve profitability, if ever. In order to finance the continued
operating and capital requirements of the Company, management has been actively seeking to raise additional capital through the
sale and issuance of its equity or debt securities or by granting a license to one or more of its products in exchange for cash
payments. While the Company engaged a financial advisor in May 2012 to assist with its ongoing financing efforts, the Company does
not have any committed sources of financing at this time. Amounts raised, if any, will be used to further develop the Company’s
product candidates, acquire rights to additional product candidates and for other working capital purposes. However, while the
Company continues to extend its best efforts to raise additional capital in order to continue funding its operations, management
can provide no assurances that the Company will be able to raise sufficient funds.
In addition, to the extent that the Company
raises additional funds by issuing shares of its common stock or other securities convertible or exchangeable for shares of common
stock, stockholders may experience significant dilution. In the event the Company raises additional capital through debt financings,
the Company may incur significant interest expense and become subject to covenants in the related transaction documentation that
may affect the manner in which the Company conducts its business. To the extent that the Company raises additional funds through
collaboration and licensing arrangements, it may be necessary to relinquish some rights to its technologies or product candidates,
or grant licenses on terms that may not be favorable to the Company. Any or all of the foregoing may have a material adverse effect
on the Company’s business and financial performance.
These factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company’s financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The financial statements do not include any adjustments that might result from the inability of the Company to continue as a going
concern.
4. BASIC AND DILUTED LOSS PER SHARE
Basic loss per share is computed by dividing
the loss available to common shareholders by the weighted-average number of
common shares outstanding.
Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net loss
|
|
$
|
(3,014,640
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(1,757,997
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(5,858,578
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(5,810,148
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(81,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(3,014,640
|
)
|
|
|
36,334,942
|
|
|
$
|
(0.08
|
)
|
|
$
|
(1,757,997
|
)
|
|
|
36,255,098
|
|
|
$
|
(0.05
|
)
|
|
$
|
(5,858,578
|
)
|
|
|
36,315,453
|
|
|
$
|
(0.16
|
)
|
|
$
|
(5,891,799
|
)
|
|
|
33,923,120
|
|
|
$
|
(0.17
|
)
|
For all periods presented, potentially dilutive
securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.
Potentially dilutive securities include:
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
Options to purchase common stock
|
|
|
-
|
|
|
|
129,532
|
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
For the periods ended September 30, 2012
and 2011, 14,968,048 and 15,867,581 warrants and options have been excluded from the computation of potentially dilutive securities,
respectively, as their exercise prices are greater than the fair market price per common share as of September 30, 2012 and 2011,
respectively.
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY
License Agreements
Onapristone License Agreement
The Company’s rights to onapristone
are governed by a license agreement with Invivis Pharmaceuticals, Inc. (“Invivis”), dated February 13, 2012. Under
this agreement, the Company holds an exclusive, royalty-bearing license for the rights to commercialize onapristone for all therapeutic
uses. The license agreement provides the Company with worldwide rights to onapristone with the exception of France; provided, however,
that the Company has an option to acquire French commercial rights from Invivis upon notice to Invivis together with additional
consideration.
The onapristone license agreement provides
the Company with exclusive, worldwide rights to a United States provisional patent application that relates to assays for predictive
biomarkers for anti-progestin efficacy. The Company intends to expand its patent portfolio by filing additional patent applications
covering the use of onapristone and/or a companion diagnostic product. If the pending patent application issues, the issued patent
would be scheduled to expire in 2031.
The Company made a one-time cash payment
of $500,000 to Invivis upon execution of the license agreement on February 13, 2012. Additionally, Invivis will receive performance-based
cash payments of up to an aggregate of $15.1 million upon successful completion of clinical and regulatory milestones relating
to onapristone, which milestones include the marketing approval of onapristone in multiple indications in the United States or
the European Union as well as Japan. The Company will make the first milestone payment to Invivis upon the dosing of the first
subject in the first Company-sponsored Phase I clinical trial of onapristone, which is anticipated in 2013. In addition, the Company
will pay Invivis low single digit sales royalties based on net sales of onapristone by the Company or any of its sublicensees.
Pursuant to a separate services agreement, Invivis will provide the Company with certain clinical development support services,
which includes the assignment of up to two full-time employees to perform such services, in exchange for a monthly cash payment.
Under the license agreement with Invivis,
the Company also agreed to indemnify and hold Invivis and its affiliates harmless from any and all claims arising out of or in
connection with the production, manufacture, sale, use, lease, consumption or advertisement of onapristone, provided, however,
that the Company shall have no obligation to indemnify Invivis for claims that (a) any patent rights infringe third party intellectual
property, (b) arise out of the gross negligence or willful misconduct of Invivis, or (c) result from a breach of any representation,
warranty confidentiality obligation of Invivis under the license agreement. The license agreement will terminate upon the later
of (i) the last to expire valid claim contained in the patent rights, and (ii) February 13, 2032. In general, Invivis may terminate
the license agreement at any time upon a material breach by the Company to the extent the Company fails to cure any such breach
within 90 days after receiving notice of such breach or in the event the Company files for bankruptcy. The Company may terminate
the agreement for any reason upon 90 days’ prior written notice.
AR-12 and AR-42 License Agreements
The Company’s rights to both AR-12
and AR-42 are governed by separate license agreements with The Ohio State University Research Foundation (“Ohio State”)
entered into in January 2008. Pursuant to each of these agreements, Ohio State granted the Company exclusive, worldwide, royalty-bearing
licenses to commercialize certain patent applications, know-how and improvements relating to AR-12 and AR-42 for all therapeutic
uses.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
In 2008, pursuant to the Company’s
license agreements for AR-12 and AR-42, the Company made one-time cash payments to Ohio State in the aggregate amount of $450,000
and reimbursed it for past patent expenses. Additionally, the Company is required to make performance-based cash payments upon
successful completion of clinical and regulatory milestones relating to AR-12 and AR-42 in the United States, Europe and Japan.
The license agreements for AR-12 and AR-42 provide for aggregate potential milestone payments of up to $6.1 million for AR-12,
of which $5.0 million is due only after marketing approval in the United States, Europe and Japan, and $5.1 million for AR-42,
of which $4.0 million is due only after marketing approval in the United States, Europe and Japan. In September 2009,
the Company paid Ohio State a milestone payment upon the commencement of the first Company-sponsored Phase I clinical study
of AR-12. The first milestone payment for AR-42 will be due when the first patient is dosed in the first Company-sponsored
clinical trial, which is not anticipated until early 2013. Pursuant to the license agreements for AR-12 and AR-42, the Company
must pay Ohio State royalties on net sales of licensed products at rates in the low-single digits. To the extent the
Company enters into a sublicensing agreement relating to either or both of AR-12 or AR-42, the Company will be required to pay
Ohio State a portion of all non-royalty income received from such sublicensee. The Company does not expect to be required to make
any milestone payments under these license agreements during 2012.
The license agreements with Ohio State further
provide that the Company will indemnify Ohio State from any and all claims arising out of the death of or injury to any person
or persons or out of any damage to property, or resulting from the production, manufacture, sale, use, lease, consumption or advertisement
of either AR-12 or AR-42, except to the extent that any such claim arises out of the gross negligence or willful misconduct of
Ohio State. The license agreements for AR-12 and AR-42 each expire on the later of (i) the expiration of the last valid claim contained
in any licensed patent and (ii) 20 years after the effective date of the license. Ohio State will generally be able to terminate
either license upon the Company’s breach of the terms of the license to the extent the Company fails to cure any such breach
within 90 days after receiving notice of such breach or the Company files for bankruptcy. The Company may terminate either license
upon 90 days prior written notice.
AR-67 License Agreement
The Company’s rights to AR-67 were
governed by an October 2006 license agreement with the University of Pittsburgh (“Pitt”). Under this agreement, Pitt
granted the Company an exclusive, worldwide, royalty-bearing license for the rights to commercialize technologies embodied by certain
issued patents, patent applications and know-how relating to AR-67 for all therapeutic uses.
In 2006, under the terms of the license
agreement with Pitt, the Company made a one-time cash payment of $350,000 to Pitt and reimbursed it for past patent expenses. Additionally,
Pitt was entitled to receive performance-based cash payments upon successful completion of clinical and regulatory milestones relating
to AR-67. The Company would have made the first milestone payment to Pitt upon the acceptance of the first new drug application
by the FDA for AR-67. The Company was also required to pay to Pitt an annual maintenance fee of $200,000 upon the third and fourth
anniversaries of the license agreement, $250,000 upon the fifth and sixth anniversaries, and $350,000 upon the seventh anniversary
and annually thereafter and to pay Pitt a royalty equal to a percentage of net sales of AR-67, pursuant to the license agreement.
Under the license agreement with Pitt, the
Company also agreed to indemnify and hold Pitt and its affiliates harmless from any and all claims, actions, demands, judgments,
losses, costs, expenses, damages and liabilities (including reasonable attorneys’ fees) arising out of or in connection with
(i) the production, manufacture, sale, use, lease, consumption or advertisement of AR-67, (ii) the practice by the Company or any
affiliate or sublicensee of the licensed patent; or (iii) any obligation of the Company under the license agreement unless any
such claim is determined to have arisen out of the gross negligence, recklessness or willful misconduct of Pitt.
On January 12, 2012, the Company received
a notice from Pitt, in which Pitt claimed that the Company was in default under the parties’ license agreement for failure
to pay a $250,000 annual license fee under the terms of that agreement and provided the Company with 60 days’ notice to remedy
the default. On March 29, 2012, following the Company’s determination not to proceed with further development of AR-67, the
parties agreed to terminate the license agreement. As of September 30, 2012, the Company has accrued for the outstanding annual
license fee of $250,000, while it is working to wind down its AR-67 program.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines fair value as the amount
at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties,
that is, other than in a forced or liquidation sale. The fair value estimates presented in the table below are based on information
available to the Company as of September 30, 2012.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
The accounting standard regarding fair value
measurements discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present
value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).
The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three levels:
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active.
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
The Company has determined the fair value
of certain liabilities using the market approach: the following table presents the Company’s fair value hierarchy for these
assets measured at fair value on a recurring basis as of September 30, 2012:
|
|
|
|
|
Quoted Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
September 30, 2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,599,493
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,599,493
|
|
The following table provides a summary of
changes in fair value of the Company’s liabilities, as well as the portion of losses included in income attributable to unrealized
appreciation that relate to those liabilities held at September 30, 2012:
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
|
|
|
Balance at January 1, 2012
|
|
$
|
(3,705,472
|
)
|
|
|
|
|
|
Purchases, sales and settlements
|
|
|
|
|
Warrants issued
|
|
|
-
|
|
|
|
|
|
|
Total gains or losses
|
|
|
|
|
Unrealized depreciation
|
|
|
2,105,979
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
(1,599,493
|
)
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
7. STOCKHOLDERS’ EQUITY
Common Stock
On November 15, 2010, the Company’s
stockholders authorized the amendment of the Company’s amended and restated certificate of incorporation in order to effect
a combination (reverse split) of its common stock at a ratio not to exceed one-for-eight, provided that the Company’s board
of directors shall have absolute discretion to determine and fix the exact ratio of such combination and the time at which such
combination shall become effective, if ever. The Company’s board of directors has taken no further action to implement
a combination of its common stock and reserves the right to abandon the proposed reverse stock split in its sole discretion.
On February 9, 2011, all 15,274,000 shares
of the Company’s outstanding Series A Convertible Preferred Stock automatically converted into 15,274,000 shares of common
stock upon the effectiveness of a registration statement that the Company filed with the SEC covering the resale of such conversion
shares. In addition, the Company elected to pay the $319,074 in accrued dividends on such preferred stock through the issuance
of shares of common stock resulting in the issuance of an additional 319,074 shares.
On April 25, 2011, the Company issued 250,000
shares of restricted common stock to its new Chief Executive Officer pursuant to his employment agreement. These shares vested
in 12 equal monthly installments and had a total fair value of $172,750, or $0.69 per share, as estimated by management using
a Monte Carlo simulation model using the significant assumptions described below in addition to a discount for the restrictions
and, in doing so, utilized a third-party valuation report (see Note 7 – Warrants). The shares were recognized
as compensation expense upon vesting. The Company recognized no expense for the three months ended September 30, 2012. The Company
recognized $57,584 and $172,752 of compensation expense for the nine months ended September 30, 2012 and for the period from August
1, 2005 (inception) through September 30, 2012, respectively, in connection with the restricted shares. As of April 25, 2012, all
250,000 shares had vested.
On June 27, 2012, the Company issued 30,000
shares of its common stock to a financial advisor as an upfront fee for providing services in connection with the Company’s
ongoing financing efforts. These shares were valued at $28,500 based on the Company’s per share price of $0.95 as of May
30, 2012, the date of the advisor’s engagement.
As of September 30, 2012, the Company has
36,334,942 shares of common stock issued and outstanding.
Preferred Stock
On August 11, 2010, the Company amended
and restated its certificate of incorporation, increasing the number of shares of preferred stock authorized for issuance thereunder
from 10,000,000 to 35,000,000.
On September 3, 2010, the Company entered
into a Securities Purchase and Registration Rights Agreement, or the Purchase Agreement, with a number of institutional and accredited
investors pursuant to which the Company sold in a private placement an aggregate of 15,274,000 shares of newly-designated Series
A Convertible Preferred Stock, par value $0.0001 per share, or Series A Preferred Stock, at a per share purchase price of $1.00. In
accordance with the Purchase Agreement, the Company also issued two-and-one-half-year Class A warrants to purchase an aggregate
of 1,221,920 shares of Series A Preferred Stock at an initial exercise price of $1.00 per share and five-year Class B warrants
to purchase an aggregate of 6,415,080 shares of Series A Preferred Stock at an initial exercise price of $1.15 per share. The terms
of the Class A and Class B warrants contain an anti-dilutive price adjustment provision, such that, in the event the Company issues
common shares at a price below the current exercise price of the warrants, the exercise price of the Class A and Class B warrants
will be adjusted based on the lower issuance price. The sale of the shares and warrants resulted in aggregate gross proceeds of
approximately $15.2 million, before expenses.
The terms, conditions, privileges, rights
and preferences of the Series A Preferred Stock are described in a Certificate of Designation filed with the Secretary of
State of Delaware on September 3, 2010.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
The Certificate of Designation provided
that each share of Series A Preferred Stock was initially convertible at the holder’s election into one share of common
stock. The Certificate of Designation further provided that all shares of Series A Preferred Stock would automatically
convert into common stock upon the effective date of a registration statement covering the resale under the Securities Act of the
conversion shares of common stock. In addition, the Class A and B warrants provided that, upon the automatic conversion of the
Series A Preferred Stock, such warrants would automatically convert into the right to purchase shares of common stock. On
February 9, 2011, a registration statement filed under the Securities Act covering the resale of the shares of common stock issuable
upon conversion of the Series A Preferred Stock was declared effective, resulting in the automatic conversion of all 15,274,000
shares of Series A Preferred Stock into an equal number of shares of common stock.
The holders of Series A Preferred Stock
were entitled to an annual per share cumulative dividend equal to 5% of the original issuance price of $1.00 per share, which dividends
were paid upon the conversion of the Series A Preferred Stock into common stock, and which the Company elected to pay
in the form of additional shares of common stock in lieu of cash. The accrued dividend through February 9, 2011, the effective
date of the registration statement and date of conversion of the Series A Preferred Stock into common stock, was $319,074. The
dividend was paid in 319,074 shares of common stock at a $1.00 per share conversion price.
Issuance costs related to the financing
were approximately $1.8 million, of which approximately $0.5 million was non-cash for issuance of warrants (“Placement Warrants”)
to purchase 1,056,930 shares of the Company’s common stock at 110% of the Series A Preferred Stock purchase price per share
to designees of Riverbank Capital Securities, Inc. (“Riverbank”), a related party controlled by several officers and/or
directors of the Company (see Note 9), and I-Bankers Securities, Inc. (“IBS”), which acted as placement agents
for the Company in connection with the private placement. As of September 30, 2012, none of these warrants have been exercised.
Warrants
In accordance with the September 2010 Purchase
Agreement, the Company issued two-and-one-half-year Class A warrants to purchase an aggregate of 1,221,920 shares of Series A Preferred
Stock at an initial exercise price of $1.00 per share and five-year Class B warrants to purchase an aggregate of 6,415,080 shares
of Series A Preferred Stock at an initial exercise price of $1.15 per share. The terms of the warrants contain an anti-dilutive
price adjustment provision, such that, in the event the Company issues common shares at a price below the current exercise price
of the warrants, the exercise price will be adjusted based on the lower issuance price. Because of this anti-dilution provision
and the inherent uncertainty as to the probability of future common share issuances, the Black-Scholes option pricing model the
Company uses for valuing stock options could not be used. Management used a Monte Carlo simulation model and, in doing
so, utilized a third-party valuation report to determine the warrant liability to be approximately $1.6 million and approximately
$3.7 million at September 30, 2012 and December 31, 2011, respectively. This significant decrease compared to the December 2011
valuation is primarily attributable to a significant decrease in the trading price of the Company’s common stock during 2012.
The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in
order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard
error. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair
value recorded in other income (expense) on the statement of operations.
In connection with the September 2010 private
placement, the Company issued warrants (“Placement Warrants”) to purchase 1,056,930 shares of the Company’s common
stock at 110% of the Series A Preferred Stock purchase price per share to designees of Riverbank and IBS, that acted as placement
agents for the Company in connection with the private placement. As of September 30, 2012, none of these warrants have
been exercised.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
Below is a table that
summarizes all outstanding warrants to purchase shares of the Company’s common stock as of September 30, 2012.
Grant
Date
|
|
Warrants
Issued
|
|
|
Exercise
Price
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Expiration
Date
|
|
Exercised
|
|
|
Warrants
Outstanding
|
|
01/02/2008
|
|
|
299,063
|
|
|
$
|
2.42
|
|
|
$
|
2.42
|
|
|
01/02/2013
|
|
|
-
|
|
|
|
299,063
|
|
06/02/2008
|
|
|
196,189
|
|
|
$
|
2.42
|
|
|
$
|
2.42
|
|
|
06/02/2013
|
|
|
-
|
|
|
|
196,189
|
|
09/03/2010
|
|
|
1,221,920
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
03/03/2013
|
|
|
-
|
|
|
|
1,221,920
|
|
09/03/2010
|
|
|
6,415,080
|
|
|
$
|
1.15
|
|
|
$
|
1.15
|
|
|
09/03/2015
|
|
|
-
|
|
|
|
6,415,080
|
|
09/03/2010
|
|
|
1,056,930
|
|
|
$
|
1.10
|
|
|
$
|
1.10
|
|
|
09/03/2015
|
|
|
-
|
|
|
|
1,056,930
|
|
|
|
|
9,189,182
|
|
|
|
|
|
|
$
|
1.19
|
|
|
|
|
|
-
|
|
|
|
9,189,182
|
|
8. STOCK OPTION PLAN
The Company’s 2005 Stock Option Plan
(the “Plan”) was originally adopted by the Board of Directors of Old Arno in August 2005, and was assumed by the Company
on June 3, 2008 in connection with the Merger. After giving effect to the Merger, there were initially 2,990,655 shares of the
Company’s common stock reserved for issuance under the Plan. On April 25, 2011, the Company’s Board of Directors approved
an amendment to the Plan to increase the number of shares of common stock issuable under the Plan to 7,000,000 shares. Under the
Plan, incentives may be granted to officers, employees, directors, consultants, and advisors. Incentives under the Plan may be
granted in any one or a combination of the following forms: (a) incentive stock options and non-statutory stock options, (b) stock
appreciation rights, (c) stock awards, (d) restricted stock and (e) performance shares.
The Plan is administered by the Board of
Directors, or a committee appointed by the Board, which determines recipients and types of awards to be granted, including the
number of shares subject to the awards, the exercise price and the vesting schedule. The term of stock options granted under the
Plan cannot exceed 10 years. Options shall not have an exercise price less than the fair market value of the Company’s common
stock on the grant date, and generally vest over a period of three to four years.
As of September 30, 2012, an aggregate of
901,290 shares remained available for future grants and awards under the Plan, which covers stock options, warrants and restricted
awards. The Company issues unissued shares to satisfy stock options, warrants exercises and restricted stock awards.
For the three and nine months ended September
30, 2012, the Company did not issue any stock options. In previous periods, the Company estimated the fair value of each option
award granted using the Black-Scholes option-pricing model. The following assumptions were used for the three and nine months ended
September 30, 2011:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2011
|
|
|
September 30, 2011
|
|
Expected volatility
|
|
|
87
|
%
|
|
|
86 - 87%
|
|
Expected term
|
|
|
10 years
|
|
|
|
6 - 10 years
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
|
1.5 - 2.0%
|
|
Stock price
|
|
|
$0.71
|
|
|
|
$0.69 - $0.72
|
|
Forfeiture rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
A summary of the status of the options issued
under the Plan at September 30, 2012, and information with respect to the changes in options outstanding is as follows:
|
|
Shares
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
Available for
|
|
|
Stock
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Grant
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
Balance at January 1, 2012
|
|
|
51,601
|
|
|
|
6,628,555
|
|
|
$
|
1.09
|
|
|
|
|
|
Options granted under the Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
849,689
|
|
|
|
(849,689
|
)
|
|
$
|
1.00
|
|
|
|
|
|
Balance at September 30, 2012
|
|
|
901,290
|
|
|
|
5,778,866
|
|
|
$
|
1.11
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012
|
|
|
|
|
|
|
2,652,636
|
|
|
$
|
1.23
|
|
|
$
|
-
|
|
The following table summarizes information about stock options
outstanding at September 30, 2012:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
$
|
1.00
|
|
|
|
5,388,133
|
|
|
|
8.0
|
|
|
$
|
1.00
|
|
|
|
2,261,903
|
|
|
$
|
1.00
|
|
$
|
2.42
|
|
|
|
299,066
|
|
|
|
3.7
|
|
|
$
|
2.42
|
|
|
|
299,066
|
|
|
$
|
2.42
|
|
$
|
3.00
|
|
|
|
91,667
|
|
|
|
1.5
|
|
|
$
|
3.00
|
|
|
|
91,667
|
|
|
$
|
3.00
|
|
|
Total
|
|
|
|
5,778,866
|
|
|
|
7.8
|
|
|
$
|
1.11
|
|
|
|
2,652,636
|
|
|
$
|
1.23
|
|
Stock-based compensation costs under the Plan for the three
and nine months ended September 30, 2012 and 2011 and for the cumulative period from August 1, 2005 (inception) through September
30, 2012 are as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
Period from
August 1, 2005 (inception)
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
through September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
84,957
|
|
|
$
|
56,500
|
|
|
$
|
197,771
|
|
|
$
|
125,100
|
|
|
$
|
1,601,548
|
|
General and administrative
|
|
|
96,600
|
|
|
|
141,688
|
|
|
|
345,383
|
|
|
|
308,730
|
|
|
|
1,890,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
181,557
|
|
|
$
|
198,188
|
|
|
$
|
543,154
|
|
|
$
|
433,830
|
|
|
$
|
3,491,558
|
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
The fair value of options vested under the
Plan was approximately $117,228 and $104,186 for the three months ended September 30, 2012 and 2011, respectively, approximately
$446,897 and $230,929 for the nine months ended September 30, 2012 and 2011, respectively and approximately $2,801,762 for the
period from August 1, 2005 (inception) through September 30, 2012.
At September 30, 2012, total unrecognized
estimated compensation cost related to stock options granted prior to that date was approximately $1,470,862, which is expected
to be recognized over a weighted-average vesting period of 0.7 years. This unrecognized estimated employee compensation cost does
not include any estimate for forfeitures of performance-based stock options.
Common stock, stock options or other equity
instruments issued to non-employees (including consultants and all members of the Company’s Scientific Advisory Board) as
consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments
issued (unless the fair value of the consideration received can be more reliably measured). The fair value of stock options is
determined using the Black-Scholes option-pricing model and is expensed as the underlying options vest. The fair value of any options
issued to non-employees is recorded as expense over the applicable service periods.
9. RELATED PARTIES
On June 1, 2009, the Company entered into
a services agreement with Two River Consulting, LLC (“TRC”) to provide various clinical development, operational, managerial,
accounting and financial, and administrative services to the Company for a period of one year. David M. Tanen, a director of the
Company and at the time also its President, Arie S. Belldegrun, the Chairman of the Board of Directors, and Joshua A. Kazam, a
director until September 2010, are each partners of TRC. The terms of the Services Agreement were reviewed and approved by a special
committee of the Company’s Board of Directors consisting of independent directors. None of the members of the special committee
has any interest in TRC or the services agreement. As compensation for the services contemplated by the services agreement, the
Company paid TRC a monthly cash fee of $55,000. The services agreement with TRC expired on April 1, 2011 and until
a new agreement is in place, TRC is billing the Company for actual hours worked on a monthly basis. For the nine months
ended September 30, 2012, TRC billed Arno $199,631 for services rendered, an average of approximately $22,181 per month.
On occasion, some of the Company’s
expenses are paid by TRC. No interest is charged by TRC on any outstanding balance owed by the Company. For the three and nine
months ended September 30, 2012 and 2011 and for the period from August 1, 2005 (inception) through September 30, 2012 services
and reimbursed expenses totaled $76,240, $247,369, $158,366, $565,575 and $2,051,134 respectively. As of September 30, 2012, the
Company had a payable to TRC of $24,658, which was paid in full during October 2012.
In connection with the September 2010 private
placement, the Company engaged Riverbank to serve as placement agent. In consideration for its services, the Company paid
Riverbank a placement fee of $789,880. In addition, the Company issued to designees of Riverbank five-year warrants
to purchase an aggregate of 664,880 shares of Series A Preferred Stock at an initial exercise price of $1.10 per share. The warrants
issued to Riverbank are in substantially the same form as the Class A and Class B Warrants issued to the investors in the private
placement, except that they do not include certain anti-dilution provisions contained in the Class A and Class B Warrants. Each
of Messrs. Kazam, Tanen and Peter M. Kash, a director of Arno until April 2011, are principals of Riverbank.
The financial condition and results of operations
of the Company, as reported, are not necessarily indicative of results that would have been reported had the Company operated completely
independently.