NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(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:
|
·
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Onapristone
–
Onapristone is an anti-progestin
hormone blocker that has been shown to have 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 has engaged Clarient Diagnostic Services, Inc. to develop a diagnostic product
to selectively identify patients who express the activated form of the progesterone receptor and therefore may be more likely to
benefit from treatment with onapristone. The Company completed initial pre-clinical toxicology studies enabling the submission
of an Investigational Medicinal Product Dossier (“IMPD”), the foreign equivalent of an investigational new drug application
(“IND”) in the second quarter of 2013. The IMPD was accepted on July 31, 2013. The Company has completed
manufacturing activities of onapristone Phase I study supplies and plans on initiating a Phase I study in patients with progesterone
receptor positive carcinomas during the second half of 2013.
|
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·
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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 closed to accrual and is being amended to include
additional patients with solid tumors at the recommended phase 2 dose. The Company plans on supporting an investigator initiated
Phase I study of AR-42 in combination with decitabine in patients with hematological malignancies during the second half of 2013.
|
|
·
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AR-12
– AR-12 is an orally available, targeted
anti-cancer agent that has been shown in 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. The Company has completed a multi-centered Phase I clinical study of AR-12 in adult subjects
with advanced or recurrent solid tumors or lymphoma. During the first quarter of 2013, the last study subject completed the planned
dose-escalation phase of the study.
|
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.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
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 June 30, 2013, 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 $62.1 million at June 30, 2013. 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.
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 period ended June 30, 2013
are not necessarily indicative of results for the full 2013 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, 2012, 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. The Company adjusts its accruals 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.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(Continued)
Convertible Debentures and Warrant Liability
The Company accounts for the convertible
debentures and warrants issued in connection with the 2012 Purchase Agreement (see Note 6) and for the warrants issued in connection
with the 2010 Purchase Agreement (see Note 8) in accordance with the guidance on Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which provides that the Company classify 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 June 30, 2013 were
approximately $4.6 million, compared to approximately $10.9 million as of December 31, 2012. Based on its resources at June 30,
2013 and the current plan of expenditure on continuing development of the Company’s current product candidates, the Company
believes that it has sufficient capital to fund its operations through approximately the third quarter of 2013. However, the Company
will need substantial additional financing in order to fund its operations beyond such period and thereafter until it can achieve
profitability, if ever. The Company’s continued operations will depend on its ability to raise additional funds through various
potential sources, such as equity and debt financing, or to license its product candidates to another pharmaceutical company. The
Company will continue to fund operations from cash on hand and through sources of capital similar to those previously described.
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.
The success of the Company depends on its
ability to develop new products to the point of regulatory approval and subsequent revenue generation and, accordingly, to raise
enough capital to finance these developmental efforts. Management plans to raise additional capital either by selling shares of
its stock or other securities, issuing additional indebtedness or by licensing one or more of its products to finance the continued
operating and capital requirements of the Company. Amounts raised will be used to further develop the Company’s product candidates,
acquire rights to additional product candidates and for other working capital purposes. While the Company will extend its best
efforts to raise additional capital to fund all operations beyond the third quarter of 2013, management can provide no assurances
that the Company will be successful in raising 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.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
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.
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For the Three Months Ended June 30,
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For the Six Months Ended June 30,
|
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2013
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2012
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2013
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2012
|
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Loss
|
|
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Shares
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|
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Per Share
|
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|
Loss
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|
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Shares
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Per Share
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|
|
Loss
|
|
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Shares
|
|
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Per Share
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|
Loss
|
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Shares
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Per Share
|
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|
|
(Numerator)
|
|
|
(Denominator)
|
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|
Amount
|
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(Numerator)
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(Denominator)
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|
Amount
|
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|
(Numerator)
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|
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(Denominator)
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Amount
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(Numerator)
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(Denominator)
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Amount
|
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Net loss
|
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$
|
(11,304,830
|
)
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|
|
|
|
|
|
|
|
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$
|
(275,306
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)
|
|
|
|
|
|
|
|
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$
|
(12,238,718
|
)
|
|
|
|
|
|
|
|
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$
|
(2,843,937
|
)
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Basic and Diluted EPS
|
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|
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|
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Loss available to common stockholders
|
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$
|
(11,304,830
|
)
|
|
|
38,518,577
|
|
|
$
|
(0.29
|
)
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$
|
(275,306
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)
|
|
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36,306,261
|
|
|
$
|
(0.01
|
)
|
|
$
|
(12,238,718
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)
|
|
|
37,475,070
|
|
|
$
|
(0.33
|
)
|
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$
|
(2,843,937
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)
|
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36,305,601
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$
|
(0.08
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)
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For all periods presented, potentially
dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.
As of June 30, 2013, potentially dilutive
securities include:
Warrants to purchase common stock
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51,794,003
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Options to purchase common stock
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5,907,879
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Total potentially dilutive securities
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57,701,882
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|
There were no potentially dilutive securities
as of June 30, 2012.
For the three months ended June 30, 2013
and 2012, 58,330,500 and 14,968,048 options, warrants and convertible debentures 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 June
30, 2013 and 2012, 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.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY
(Continued)
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 the fourth quarter 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.
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 expected to occur in 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 2013.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY
(Continued)
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
In January 2012, the Company received a
notice from the University of Pittsburgh, (“Pitt”) claiming that the Company was in default under its license agreement
relating to AR-67 for failure to pay a $250,000 annual license fee under the terms of that agreement and providing 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 Company agreed with Pitt to terminate the license agreement. In February 2013, Pitt commenced
an action in the Court of Common Pleas of Allegheny County, Pennsylvania, seeking damages of $250,000, plus interest and costs,
based on its claim that the Company breached the license agreement by failing to pay the annual license fee. On March 28, 2013,
the Company entered into a settlement agreement with Pitt pursuant to which the Company agreed to pay $235,000 in full satisfaction
of all remaining obligations under the license agreement, which payment was made on April 2, 2013.
6. CONVERTIBLE DEBENTURES AND NOTES PAYABLE
On November 26, 2012, the Company entered
into a Securities Purchase Agreement, or the 2012 Purchase Agreement, with a number of institutional and accredited investors pursuant
to which the Company sold in a private placement an aggregate principal amount of $14,857,200 of three-year 8% Senior Convertible
Debentures, or the Debentures. In accordance with the 2012 Purchase Agreement, as amended on December 13, 2012, the Company also
issued five-year Series A warrants to purchase an aggregate of 49,524,003 shares of common stock at an initial exercise price of
$0.50 per share and 18-month Series B warrants to purchase an aggregate of 49,524,003 shares of common stock at an initial exercise
price of $0.30 per share. The sale of the Debentures and 2012 Warrants, which occurred in two closings on November 26, 2012 and
December 18, 2012, resulted in aggregate gross proceeds of approximately $14.9 million, before deducting placement agent fees and
other transaction-related expenses of approximately $1.2 million. The 2012 Warrants were valued at $12,430,524 on issuance and
recorded as a debt discount (see Note 7).
The conversion price of the Debentures is
subject to a “full-ratchet” anti-dilution provision, such that in the event the Company makes an issuance of common
stock (subject to customary exceptions) at a price per share less than the applicable exercise price of the Debentures, the applicable
conversion price will be reduced to the price per share applicable to such new issuance. However, after such time as the Company
has raised at least $12 million in subsequent equity financings, the conversion price of the Debentures will be subject to a customary
weighted-average price adjustment with respect to new issuances. This conversion feature of the Debentures is considered an embedded
derivative and was accounted for separately from the Debentures and was valued at $7,548,500 on issuance and recorded as a debt
discount (see Note 7).
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
6. CONVERTIBLE DEBENTURES AND NOTES PAYABLE
(Continued)
The following table reflects the debt discount
for the 2012 Warrants and the embedded conversion feature of the Debentures at their fair values on issuance:
|
|
Issuance
|
|
Debentures, principal
|
|
|
14,857,200
|
|
2012 Warrant liability
|
|
|
(12,430,524
|
)
|
Debenture conversion feature
|
|
|
(7,548,500
|
)
|
|
|
|
(5,121,824
|
)
|
The excess fair value over proceeds on the
date of issuance of approximately $5.1 million was recorded in interest expense on the statement of operations on the issuance.
As of June 30, 2013 and December 31, 2012, the Company recorded amortization on the debt discount of $1.9 million and $0.5 million,
respectively, to interest expense.
Pursuant to the terms of a Registration
Rights Agreement entered into on November 26, 2012 in connection with the Company’s entry into the 2012 Purchase Agreement,
the Company agreed to file a registration statement under the Securities Act of 1933, as amended, covering the resale of: (i) 100%
of the shares of common stock issuable as payment of accrued interest under the Debentures and upon exercise of the Series A Warrants;
and (ii) 150% of the shares of common stock issuable upon conversion of the Debentures and upon exercise of the Series B Warrants
(collectively, the “Registrable Securities”). The Company further agreed to cause such registration statement to be
filed within 30 days following the date of the Registration Rights Agreement, or by December 26, 2012, and to cause such registration
statement to be declared effective within 60 days following the date of the Registration Rights Agreement, or by January 25, 2013,
or, if the registration statement was subject to review by the SEC, to cause such registration statement to be declared effective
within 120 days following the date of the Registration Rights Agreement, or by March 26, 2013. If such registration statement,
covering 100% of the Registrable Securities, was not declared effective by the SEC by the applicable date, the Company agreed to
pay liquidated damages to the investors in the amount of 2% of each investor’s aggregate investment amount per month until
the registration statement is declared effective or until such earlier time as the Registrable Securities may be traded pursuant
to Rule 144.
On December 26, 2012, the Company filed
a registration statement seeking to register 100% of the Registrable Securities. However, the SEC determined that the number of
shares the Company was seeking to register exceeded the limitations imposed by the SEC under Rule 415, and the Company was thus
unable to register a significant amount of the Registrable Securities. As a result of the SEC’s determination, the Company
amended the registration statement to reduce the number of Registrable Securities covered thereby by including only the shares
issuable upon exercise of the Series B Warrants. As amended, the registration statement was declared effective by the SEC on April
18, 2013. Accordingly, because a registration statement covering 100% of the Registrable Securities was not declared effective
by March 26, 2013, the investors each became entitled to liquidated damages in the amount of 2% of their investment amount per
month, payable on March 27, 2013 and on each monthly anniversary thereafter until the Registrable Securities may be traded pursuant
to Rule 144. Because Rule 144 became available to the investors six months after the applicable closing date, the Company was required
to pay the investors approximately three months’ of liquidated damages, or approximately $0.9 million in the aggregate.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
6. CONVERTIBLE DEBENTURES AND NOTES PAYABLE
(Continued)
On March 25, 2013, the Company and holders
of approximately 80% of the principal amount of Debentures entered into an amendment to the Registration Rights Agreement, permitting
the Company, in its sole discretion, to elect to pay liquidated damages resulting from the Company’s failure to successfully
cause the registration statement covering the resale of 100% of the Registrable Securities to be declared effective by the SEC
by March 26, 2013, by issuing shares of common stock in lieu of cash. If electing to issue shares in lieu of paying cash, the Company
shall issue to each investor a number of shares of common stock equal to (a) the aggregate amount of liquidated damages that the
Company is electing to pay to such investor in the form of shares, divided by (b) $0.30. Pursuant to the terms of the Registration
Rights Agreement, because holders of over two-thirds of the Debentures consented in writing to the March 25, 2013 amendment, such
amendment is binding on all holders of Registrable Securities. On March 27, 2013, in accordance with the amendment to the Registration
Rights Agreement, the Company issued an aggregate of 990,477 shares of common stock to the investors in lieu of an aggregate cash
payment of $297,144, representing the first installment of liquidated damages under the Registration Rights Agreement, as amended.
On April 29, 2013, in accordance with the amendment to the Registration Rights Agreement, the Company issued an aggregate of 1,092,291
shares of common stock to the investors in lieu of an aggregate cash payment of $327,688, representing the second installment of
liquidated damages under the Registration Rights Agreement, as amended.
In May 2013, the Company determined that
investors were entitled to additional liquidated damages arising from the issuance of convertible debt in 2012 in the amount of
$288,674. The Company has assessed that this amount should have been accrued in 2012 as part of the debt issuance. The Company
determined that the impact of not reflecting this in 2012 is not material to the 2012 financial statements and has reflected this
as interest expense in the first quarter of 2013. This expense resulted in the issuance of additional shares to the
investors and will thus be a non-cash charge. On May 27, 2013, the Company issued an aggregate of 962,245 shares of common stock
to the investors in lieu of an aggregate cash payment of $288,674, representing the third and final installment of liquidated damages
under the Registration Rights Agreement, as amended.
In late March 2013, the Company sought the
agreement of the Debenture holders to amend their respective Debentures to provide for the accrual of all interest payments under
such Debentures until the applicable maturity date in November or December of 2015, with such interest accruing at the rate of
8% per annum, compounding quarterly. As of June 30, 2013, the Company had entered into such amendments with the holders of Debentures
in the aggregate principal amount of $12,230,000. Assuming no additional Debenture holders elect to enter into such amendments,
the Company will continue to make quarterly interest payments in cash of approximately $52,544 to the holders of Debentures in
the aggregate principal amount of $2,627,200, less any conversions. The unpaid accrued interest of $244,600 per quarter will not
be payable until the fourth quarter of 2015.
7. 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 June 30, 2013.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
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 June 30, 2013:
|
|
|
|
|
Quoted Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
June 30, 2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability - 2010 Series A&B
|
|
$
|
853,206
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
853,206
|
|
Debenture conversion feature -2012
|
|
|
8,212,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,212,000
|
|
Warrant liability - 2012 placement agent
|
|
|
608,360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
608,360
|
|
Warrant liability - 2012 Series A&B
|
|
|
12,727,669
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,727,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,401,235
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,401,235
|
|
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 June 30, 2013:
Fair Value Measurements Using
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
Warrant Liability
|
|
Balance at January 1, 2012
|
|
$
|
(3,705,472
|
)
|
Purchases, sales and settlements:
|
|
|
|
|
Warrants and other derivatives issued
|
|
|
(20,521,554
|
)
|
Total gains or losses:
|
|
|
|
|
Unrealized depreciation
|
|
|
2,806,750
|
|
Balance at January 1, 2013
|
|
|
(21,420,276
|
)
|
Total gains or losses:
|
|
|
|
|
Unrealized appreciation
|
|
|
(980,959
|
)
|
Balance at June 30, 2013
|
|
$
|
(22,401,235
|
)
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
8. STOCKHOLDERS’ EQUITY
Common Stock
On November 21, 2012, the Company amended
its Amended & Restated Certificate of Incorporation to increase the number of shares of common stock that the Company is authorized
to issue from 80,000,000 shares to 500,000,000 shares.
On March 27, 2013, in accordance with the
amendment to the Registration Rights Agreement, the Company issued an aggregate of 990,477 shares of common stock to the investors
in lieu of an aggregate cash payment of $297,144, representing the first installment of liquidated damages under the Registration
Rights Agreement, as amended.
On April 29, 2013, in accordance with the
amendment to the Registration Rights Agreement, the Company issued an aggregate of 1,092,291 shares of common stock to the investors
in lieu of an aggregate cash payment of $327,688, representing the second installment of liquidated damages under the Registration
Rights Agreement, as amended.
On May 27, 2013, in accordance with the
amendment to the Registration Rights Agreement, the Company issued an aggregate of 962,245 shares of common stock to the investors
in lieu of an aggregate cash payment of $288,674, representing the third and final installment of liquidated damages under the
Registration Rights Agreement, as amended.
As of June 30, 2013, the Company had 39,453,675
shares of common stock issued and outstanding and an additional 165,512,665 shares of common stock reserved for issuance upon the
exercise of outstanding options, warrants and convertible debentures.
Warrants
In accordance with the 2010 issuance of
preferred stock, 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 $0.9 million and approximately
$0.9 million at June 30, 2013 and December 31, 2012, respectively. 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. The
1,221,920 Class A warrants expired during the six months ended June 30, 2013.
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
8. STOCKHOLDERS’ EQUITY
(Continued)
Pursuant to the 2012 Purchase Agreement,
the Company issued five-year Series A warrants to purchase an aggregate of 49,524,003 shares of common stock at an initial exercise
price of $0.50 per share and 18-month Series B warrants to purchase an aggregate of 49,524,003 shares of common stock at an initial
exercise price of $0.30 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 and the number of shares purchasable thereunder increased such that the aggregate
exercise price of the warrants (exercise price per share multiplied by total number of shares underlying the warrants) remained
unchanged. 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 $12.7 million and $12.4 million at June 30, 2013 and December 31, 2012, respectively.
In connection with the 2012 offering of
Debentures and Warrants, the Company engaged Maxim Group LLC, or Maxim Group, to serve as placement agent. In consideration for
its services, the Company paid Maxim Group a placement fee of $1,035,000. In addition, the Company issued to Maxim Partners LLC,
or Maxim Partners, an affiliate of Maxim Group, 60,000 shares of common stock and five-year warrants to purchase an additional
2,270,000 shares of common stock at an initial exercise price of $0.33 per share. The warrants issued to Maxim Partners are in
substantially the same form as the Warrants issued to the investors, except that they do not include certain anti-dilution provisions
contained in the Warrants. However, the placement warrants do contain a provision that could require the Company to repurchase
the warrants from the holder under certain conditions. 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 $0.6 million and $0.5 million at June 30,
2013 and December 31, 2012, respectively.
Below is a table that
summarizes all outstanding warrants to purchase shares of the Company’s common stock as of June 30, 2013.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Expiration
|
|
|
|
|
Warrants
|
|
Grant Date
|
|
Warrants Issued
|
|
|
Price
|
|
|
Price
|
|
|
Date
|
|
Exercised
|
|
|
Outstanding
|
|
09/03/2010
|
|
|
6,415,080
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
09/03/2015
|
|
|
-
|
|
|
|
6,415,080
|
|
09/03/2010
|
|
|
1,056,930
|
|
|
$
|
1.10
|
|
|
$
|
1.10
|
|
|
09/03/2015
|
|
|
-
|
|
|
|
1,056,930
|
|
11/26/2012
|
|
|
42,350,002
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
05/26/2014
|
|
|
-
|
|
|
|
42,350,002
|
|
12/18/2012
|
|
|
7,174,001
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
06/18/2014
|
|
|
-
|
|
|
|
7,174,001
|
|
11/26/2012
|
|
|
42,350,002
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
11/26/2017
|
|
|
-
|
|
|
|
42,350,002
|
|
11/26/2012
|
|
|
2,090,000
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
11/26/2017
|
|
|
-
|
|
|
|
2,090,000
|
|
12/18/2012
|
|
|
7,174,001
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
12/18/2017
|
|
|
-
|
|
|
|
7,174,001
|
|
12/18/2012
|
|
|
180,000
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
12/18/2017
|
|
|
-
|
|
|
|
180,000
|
|
|
|
|
108,790,016
|
|
|
|
|
|
|
$
|
0.41
|
|
|
|
|
|
-
|
|
|
|
108,790,016
|
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
9. 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. On January
14, 2013, 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 7,562,210 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 June 30, 2013, there are no remaining
shares 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.
During the three and six months ended June
30, 2013, the Company issued 1,413,500 and 50,000 stock options, respectively. The Company did not issue any stock options during
the three and six months ended June 30, 2012. 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 six months ended June 30, 2013:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2013
|
|
|
June 30, 2013
|
|
Expected volatility
|
|
|
96.0
|
%
|
|
|
89
- 96
|
%
|
Expected term
|
|
|
5 years
|
|
|
|
4 - 6 years
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
0.77
|
%
|
|
|
.0.77%
- 0.89
|
%
|
Stock price
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Forfeiture rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
9. STOCK OPTION PLAN
(Continued)
A summary of the status of the options issued
under the Plan at June 30, 2013, and information with respect to the changes in options outstanding is as follows:
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
Available for
|
|
|
Stock
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Grant
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
Balance at January 1, 2013
|
|
|
901,290
|
|
|
|
5,778,866
|
|
|
$
|
1.11
|
|
|
|
|
|
Shares authorized for issuance
|
|
|
562,210
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options granted under the Plan
|
|
|
(1,463,500
|
)
|
|
|
1,463,500
|
|
|
$
|
0.30
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Balance at June 30, 2013
|
|
|
-
|
|
|
|
7,242,366
|
|
|
$
|
0.51
|
|
|
$
|
292,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2013
|
|
|
|
|
|
|
4,659,667
|
|
|
$
|
0.63
|
|
|
$
|
105,759
|
|
The following table summarizes information about stock options
outstanding at June 30, 2013:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
$
|
0.30
|
|
|
|
5,907,879
|
|
|
|
6.06
|
|
|
$
|
0.30
|
|
|
|
3,365,182
|
|
|
$
|
0.30
|
|
$
|
1.00
|
|
|
|
943,754
|
|
|
|
0.05
|
|
|
$
|
1.00
|
|
|
|
903,752
|
|
|
$
|
1.00
|
|
$
|
2.42
|
|
|
|
299,066
|
|
|
|
0.01
|
|
|
$
|
2.42
|
|
|
|
299,066
|
|
|
$
|
2.42
|
|
$
|
3.00
|
|
|
|
91,667
|
|
|
|
0.00
|
|
|
$
|
3.00
|
|
|
|
91,667
|
|
|
$
|
3.00
|
|
|
Total
|
|
|
|
7,242,366
|
|
|
|
6.11
|
|
|
$
|
0.51
|
|
|
|
4,659,667
|
|
|
$
|
0.63
|
|
Stock-based compensation costs under the Plan for
the three and six months ended June 30, 2013 and 2012 and for the cumulative period from August 1, 2005 (inception) through
June 30, 2013 are as follows:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2005 (inception)
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
through June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
106,416
|
|
|
$
|
84,057
|
|
|
$
|
324,682
|
|
|
$
|
112,814
|
|
|
$
|
2,311,292
|
|
General and administrative
|
|
|
128,855
|
|
|
|
109,996
|
|
|
|
374,616
|
|
|
|
248,784
|
|
|
|
2,059,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
235,271
|
|
|
$
|
194,053
|
|
|
$
|
699,298
|
|
|
$
|
361,598
|
|
|
$
|
4,370,513
|
|
ARNO THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2013
(unaudited)
9. STOCK OPTION PLAN
(Continued)
The fair value of options vested under the
Plan was approximately $156,999 and $322,688 for the three months ended June 30, 2013 and 2012, respectively, approximately $544,804
and $329,669 for the six months ended June 30, 2013 and 2012, respectively and approximately $3,760,368 for the period from August
1, 2005 (inception) through June 30, 2013.
At June 30, 2013, total unrecognized estimated
compensation cost related to stock options granted prior to that date was approximately $912,176, which is expected to be recognized
over a weighted-average vesting period of 1.6 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.
10. 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 three and
six months ended June 30, 2013, TRC billed the Company $67,974 and $144,126, respectively. For the three and six months ended June
30, 2012, TRC has billed the Company $63,210 and $132,825, respectively. For the period from inception to June 30, 2013, TRC has
billed the Company a total of $1,887,366.
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 six months
ended June 30, 2013 and 2012 and for the period from August 1, 2005 (inception) through June 30, 2013 services and reimbursed expenses
totaled $74,595, $160,203, $70,522, $171,129, and $2,291,420, respectively. As of June 30, 2013, the Company had a payable to TRC
of $27,874, which was paid in full during July 2013.
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.