Filed Pursuant to Rule 424(b)(3)
File No. 333-193115
Prospectus Supplement No. 3
(to Prospectus dated May 14, 2014)
This Prospectus Supplement No. 3 supplements
and amends our prospectus dated May 14, 2014 (the “Base Prospectus,” and together with Prospectus Supplement No. 1
dated May 15, 2014, and Prospectus Supplement No. 2 dated August 14, 2014, the “Prospectus”). The selling stockholders
identified beginning on page 19 of the Base Prospectus are offering on a resale basis a total of 44,861,891 shares of our common
stock, of which 36,448,537 are issuable upon the exercise of outstanding warrants.
Attached hereto and incorporated by reference
herein is our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, which we filed with the Securities and Exchange
Commission on November 14, 2014. The information set forth in the attached Quarterly Report supplements and amends the information
contained in the Prospectus.
This Prospectus Supplement No. 3 should
be read in conjunction with, and delivered with, the Prospectus and is qualified by reference to the Prospectus except to the extent
that the information in this Prospectus Supplement No. 3 supersedes the information contained in the Prospectus.
Our common stock is quoted on the OTCQB
tier of the OTC Markets under the symbol “ARNI.” On November 14, 2014, the last sale price of our common stock as reported
on the OTCQB was $0.70.
Investing in our common stock involves
a high degree of risk. See “Risk Factors” beginning on page 5 of the Base Prospectus.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these securities or determined that the Prospectus
or this Prospectus Supplement No. 3 is truthful or complete. A representation to the contrary is a criminal offense.
The date of this Prospectus Supplement
No. 3 is November 14, 2014.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 2014
OR
| ¨ | TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM
TO
Commission File Number: 000-52153
ARNO THERAPEUTICS, INC.
(Exact Name Of Registrant As Specified
In Its Charter)
Delaware |
52-2286452 |
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
200 Route 31 North, Suite 104, Flemington,
New Jersey 08822
(Address of principal executive offices)(Zip
Code)
(862) 703-7170
(Registrant’s telephone number,
including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
|
|
|
|
Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
x |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 14, 2014, there were 20,408,616
shares of common stock, par value $0.0001 per share, of Arno Therapeutics, Inc. issued and outstanding.
Index
Note Regarding Reverse Stock Split
Effective as of the close of business on
October 29, 2013, we amended our Certificate of Incorporation to effect a combination of our outstanding common stock at a ratio
of one-for-eight (the “Reverse Stock Split”). No fractional shares were issued as a result of the Reverse Stock Split,
but instead stockholders received cash in lieu of any fractional shares to which they would otherwise have been entitled, based
upon the last sale price of our common stock on October 29, 2013, as reported on the OTCQB of the OTC Markets. All historical share
and per share amounts have been adjusted to reflect the Reverse Stock Split. All stock options and warrants outstanding were appropriately
adjusted to give effect to the Reverse Stock Split.
References to “the Company,”
“we”, “us” or “our” in this Quarterly Report on Form 10-Q refer to Arno Therapeutics, Inc.,
a Delaware corporation, unless the context indicates otherwise.
Forward-Looking Statements
This Quarterly Report contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events and financial performance and may be identified
by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “plans,” “intends,” “may,” “will” or “should”
or, in each case, their negative, or other variations or comparable terminology, though the absence of these words does not necessarily
mean that a statement is not forward-looking. Forward-looking statements include all matters that are not historical facts and
include, without limitation, statements concerning our business strategy, outlook, objectives, future milestones, plans, intentions,
goals, future financial conditions, our research and development programs and planning for and timing of any clinical trials, the
possibility, timing and outcome of submitting regulatory filings for our product candidates under development, research and development
of particular drug products, the development of financial, clinical, manufacturing and marketing plans related to the potential
approval and commercialization of our drug products, and the period of time for which our existing resources will enable us to
fund our operations.
Forward-looking statements are subject
to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied
by the forward-looking statements. Examples of the risks and uncertainties include, but are not limited to:
| · | the risk that recurring losses, negative cash flows and the inability to raise additional capital could threaten our ability
to continue as a going concern; |
| · | the risk that we may not successfully develop and market our product candidates, and even if we do, we may not become profitable; |
| · | risks relating to the progress of our research and development; |
| · | risks relating to significant, time-consuming and costly research and development efforts, including pre-clinical studies,
clinical trials and testing, and the risk that clinical trials of our product candidates may be delayed, halted or fail; |
| · | risks relating to the rigorous regulatory approval process required for any products that we may develop independently, with
our development partners or in connection with any collaboration arrangements; |
| · | the risk that changes in the national or international political and regulatory environment may make it more difficult to gain
FDA or other regulatory approval of our drug product candidates; |
| · | risks that the FDA or other regulatory authorities may not accept any applications we file; |
| · | risks that the FDA or other regulatory authorities may withhold or delay consideration of any applications that we file or
limit such applications to particular indications or apply other label limitations; |
| · | risks that, after acceptance and review of applications that we file, the FDA or other regulatory authorities will not approve
the marketing and sale of our drug product candidates; |
| · | risks relating to our drug manufacturing operations, including those of our third-party suppliers and contract manufacturers; |
| · | risks relating to the ability of our development partners and third-party suppliers of materials, drug substance and related
components to provide us with adequate supplies and expertise to support manufacture of drug product for initiation and completion
of our clinical studies; and |
| · | risks relating to the transfer of our manufacturing technology to third-party contract manufacturers. |
Other risks that may affect forward-looking
statements contained in this report are described under Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2013. These risks, including those described above, could cause our actual results to differ materially from those described in
the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this document. The risks discussed in this report should be considered in
evaluating our prospects and future performance.
PART I — FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
ARNO THERAPEUTICS, INC.
CONDENSED BALANCE SHEETS
| |
September 30, 2014 (unaudited) | | |
December 31, 2013 | |
ASSETS | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 11,576,575 | | |
$ | 26,774,203 | |
Prepaid expenses and other current assets | |
| 177,663 | | |
| 86,266 | |
| |
| | | |
| | |
Total current assets | |
| 11,754,238 | | |
| 26,860,469 | |
| |
| | | |
| | |
Property and equipment, net | |
| 22,281 | | |
| 11,720 | |
Security deposit | |
| 10,455 | | |
| 10,455 | |
| |
| | | |
| | |
Total assets | |
$ | 11,786,974 | | |
$ | 26,882,644 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable | |
$ | 1,205,981 | | |
$ | 2,941,998 | |
Accrued expenses and other current liabilities | |
| 1,665,267 | | |
| 925,255 | |
Due to related party | |
| - | | |
| 26,039 | |
Deferred rent | |
| 2,735 | | |
| 7,797 | |
| |
| | | |
| | |
Total current liabilities | |
| 2,873,983 | | |
| 3,901,089 | |
| |
| | | |
| | |
Derivative liabilities | |
| 15,086,610 | | |
| 35,864,881 | |
| |
| | | |
| | |
Total liabilities | |
| 17,960,593 | | |
| 39,765,970 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' DEFICIT | |
| | | |
| | |
Preferred stock, $0.0001 par value, 35,000,000 shares authorized, none issued and outstanding | |
| - | | |
| - | |
Common stock, $0.0001 par value, 500,000,000 shares
authorized, 20,408,616 and 20,370,331 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | |
| 5,469 | | |
| 5,465 | |
Additional paid-in capital | |
| 80,171,041 | | |
| 76,668,966 | |
Accumulated deficit | |
| (86,350,129 | ) | |
| (89,557,757 | ) |
| |
| | | |
| | |
Total stockholders' deficit | |
| (6,173,619 | ) | |
| (12,883,326 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficit | |
$ | 11,786,974 | | |
$ | 26,882,644 | |
See accompanying notes to the unaudited
condensed financial statements.
ARNO THERAPEUTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Research and development | |
$ | 3,756,428 | | |
$ | 3,168,607 | | |
$ | 12,274,542 | | |
$ | 8,903,394 | |
General and administrative | |
| 1,919,070 | | |
| 617,826 | | |
| 5,328,227 | | |
| 2,137,673 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 5,675,498 | | |
| 3,786,433 | | |
| 17,602,769 | | |
| 11,041,067 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (5,675,498 | ) | |
| (3,786,433 | ) | |
| (17,602,769 | ) | |
| (11,041,067 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other (expense) income: | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 10,087 | | |
| 1,362 | | |
| 34,947 | | |
| 8,353 | |
Interest expense | |
| - | | |
| (1,858,539 | ) | |
| - | | |
| (5,876,148 | ) |
Other (expense) income | |
| 5,824,847 | | |
| 1,964,273 | | |
| 20,775,450 | | |
| 990,807 | |
| |
| | | |
| | | |
| | | |
| | |
Total other (expense) income | |
| 5,834,934 | | |
| 107,096 | | |
| 20,810,397 | | |
| (4,876,988 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income/(loss) | |
$ | 159,436 | | |
$ | (3,679,337 | ) | |
$ | 3,207,628 | | |
$ | (15,918,055 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income/(loss) per share - basic | |
$ | 0.01 | | |
$ | (0.75 | ) | |
$ | 0.16 | | |
$ | (3.34 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted-average shares outstanding- basic | |
| 20,376,573 | | |
| 4,932,064 | | |
| 20,372,435 | | |
| 4,767,851 | |
| |
| | | |
| | | |
| | | |
| | |
Net income/(loss) per share - diluted | |
$ | 0.01 | | |
$ | (0.75 | ) | |
$ | 0.13 | | |
$ | (3.34 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted-average shares outstanding- diluted | |
| 24,801,853 | | |
| 4,932,064 | | |
| 24,804,617 | | |
| 4,767,851 | |
See accompanying notes to the unaudited
condensed financial statements.
ARNO THERAPEUTICS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’
(DEFICIT) EQUITY
(unaudited)
| |
| | |
| | |
| | |
| | |
ADDITIONAL | | |
| | |
TOTAL | |
| |
PREFERRED
STOCK | | |
COMMON
STOCK | | |
PAID-IN | | |
ACCUMULATED | | |
STOCKHOLDERS' | |
| |
SHARES | | |
AMOUNT | | |
SHARES | | |
AMOUNT | | |
CAPITAL | | |
DEFICIT | | |
EQUITY
(DEFICIT) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at December 31, 2013 | |
| - | | |
| - | | |
| 20,370,331 | | |
| 5,465 | | |
| 76,668,966 | | |
| (89,557,757 | ) | |
| (12,883,326 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,207,628 | | |
| 3,207,628 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation for services | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,502,079 | | |
| - | | |
| 3,502,079 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock | |
| - | | |
| - | | |
| 38,285 | | |
| 4 | | |
| (4 | ) | |
| | | |
| 0 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at September 30, 2014 | |
| - | | |
| - | | |
| 20,408,616 | | |
$ | 5,469 | | |
$ | 80,171,041 | | |
$ | (86,350,129 | ) | |
$ | (6,173,619 | ) |
See accompanying notes to the unaudited
condensed financial statements.
ARNO THERAPEUTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| |
Nine months ended September 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows from operating activities: | |
| | | |
| | |
Net income/(loss) | |
$ | 3,207,628 | | |
$ | (15,918,055 | ) |
| |
| | | |
| | |
Adjustment to reconcile net income/(loss) to net cash
and cash equivalents used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 9,536 | | |
| 10,021 | |
Stock-based compensation | |
| 3,502,079 | | |
| 926,250 | |
Change in fair value of derivative liability | |
| (20,778,271 | ) | |
| (983,875 | ) |
Noncash interest expense | |
| - | | |
| 6,303,700 | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| (91,397 | ) | |
| 135,835 | |
Accounts payable | |
| (1,736,017 | ) | |
| 949,134 | |
Accrued expenses | |
| 740,012 | | |
| (800,486 | ) |
Deferred rent | |
| (5,062 | ) | |
| (3,499 | ) |
Due to related party | |
| (26,039 | ) | |
| 417 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (15,177,531 | ) | |
| (9,380,558 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (20,097 | ) | |
| - | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Deferred financing fees paid | |
| - | | |
| (22,206 | ) |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (15,197,628 | ) | |
| (9,402,764 | ) |
Cash and cash equivalents at beginning of period | |
| 26,774,203 | | |
| 10,943,437 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 11,576,575 | | |
$ | 1,540,673 | |
| |
| | | |
| | |
Supplemental schedule of cash flows information: | |
| | | |
| | |
| |
| | | |
| | |
Cash paid for interest | |
$ | - | | |
$ | 157,284 | |
| |
| | | |
| | |
Supplemental schedule of non-cash investing and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Conversion of debentures into common stock | |
$ | - | | |
$ | 14,293 | |
| |
| | | |
| | |
Issuance of common shares in lieu of liquidated
damages | |
$ | - | | |
$ | 913,510 | |
See accompanying notes to the unaudited condensed financial
statements.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
1. DESCRIPTION OF BUSINESS
Arno Therapeutics, Inc. (“Arno”
or the “Company”) is developing innovative drug candidates intended to treat patients with
cancer and other life threatening diseases. 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 has not yet generated any revenue from the sale of products and, through September 30, 2014, its efforts have been principally
devoted to developing its licensed technologies and raising capital. The Company has experienced net losses since its inception and has an accumulated deficit of approximately
$86.4 million at September 30, 2014. 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 clinical trials, manufacturing activities and pre-clinical studies.
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,
2014 are not necessarily indicative of results for the full 2014 fiscal year or any other future interim periods.
Effective as of the close of business on
October 29, 2013, the Company amended its Amended and Restated Certificate of Incorporation to effect a combination (“Reverse
Stock Split”) of the Common Stock at a ratio of one-for-eight. All historical share and per share amounts have
been adjusted to reflect the Reverse Stock Split.
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, 2013, 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.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
Warrant Liability
The Company accounts for the warrants issued
in connection with the 2013, 2012 and 2010 Purchase Agreements (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 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.
Recent Accounting Pronouncements
In June 2014, the FASB issued Accounting Standards Update
(“ASU”) No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable
Interest Entities Guidance in Topic 810, Consolidation. The objective of the amendments in this Update is to eliminate requirements
for entities which have either not commenced principal operations or have not generated significant revenue from principal operations
to present inception-to-date information in the financial statements. In addition, the Update eliminated the exception for evaluating
such entities as possible variable interest entities.
The Company has elected to early adopt
this guidance as permitted for its financial statements for the year ending December 31, 2014, including this quarterly report.
As a result of adopting this guidance, the Company has retrospectively removed the inception-to-date financial results that have
been historically included in the financial statements. Further, the Company has disclosed information about the risks and uncertainties
related to the activities in which the Company is currently engaged and information about the intended operations of the Company.
In August 2014, the FASB issued ASU No.
2014-15, “Presentation of Financial Statements-Going Concern (Topic 205-40)”. Under the standard, management
is required to evaluate for each annual and interim reporting period whether it is a probable that the entity will not be able
to meet its obligations as they become due within one year after the date that financial statements are issued, or are available
to be issued, where applicable. ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2016, and early adoption is permitted. Accordingly, the standard is effective for the Company on January 1,
2017. The Company will be evaluating the impact, if any, that the standard will have on its financial condition, results of operations,
and disclosures in the near future.
3. LIQUIDITY AND CAPITAL RESOURCES
Cash resources as of September 30, 2014
were approximately $11.6 million, compared to approximately $26.8 million as of December 31, 2013. Based on its resources at September
30, 2014 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 into the second quarter of 2015. 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 or biotechnology 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
the Company’s stock or other securities, issuing debt or by licensing one or more of the Company’s 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 second quarter of 2015, management can provide
no assurances that the Company will be successful in raising sufficient funds.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
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 will experience dilution, which may be significant. 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.
4. BASIC AND DILUTED INCOME/(LOSS) PER SHARE
Basic net income/(loss) per share is calculated
based on the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is calculated
based on the weighted-average number of shares of common stock and other dilutive securities outstanding during the period. The
potential dilutive shares of common stock resulting from the assumed exercise of stock options and warrants are determined under
the treasury stock method.
The following table is a reconciliation
of the numerator and denominator used in the calculation of basic and diluted net income/(loss) per share.
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Numerator: | |
| | | |
| | | |
| | | |
| | |
Net income/(loss) | |
$ | 159,436 | | |
$ | (3,679,337 | ) | |
$ | 3,207,628 | | |
$ | (15,918,055 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average shares of common stock outstanding used in the calculation of basic net income/(loss) per share | |
| 20,376,573 | | |
| 4,932,064 | | |
| 20,372,435 | | |
| 4,767,851 | |
| |
| | | |
| | | |
| | | |
| | |
Effect of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Warrants to purchase common stock | |
| 4,425,280 | | |
| - | | |
| 4,432,182 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Weighted-average shares of common stock outstanding used in the calculation of diluted net income/(loss) per share | |
| 24,801,853 | | |
| 4,932,064 | | |
| 24,804,617 | | |
| 4,767,851 | |
For all periods presented, potentially dilutive
securities are excluded from the computation of fully diluted net income/(loss) per share if their effect is anti-dilutive. The
aggregate number of common equivalent shares (related to options, warrants and convertible debentures) that have been excluded
from the computations of diluted net income/(loss) per common share at September 30, 2014 and 2013 were 50,740,369 and 7,288,812,
respectively, as their exercise prices are greater than the fair market price per common share as of September 30, 2014 and 2013,
respectively.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
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 develop and commercialize 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 patent portfolio claiming priority to a United States provisional patent application
that relates to assays for predictive biomarkers for anti-progestin efficacy. If the pending patent application issues, the issued
patent would be scheduled to expire in 2031. The Company intends to expand its patent portfolio by filing additional patent applications
covering the use of onapristone and/or a companion diagnostic product. The Company has filed patent applications directed to forms
of the onapristone compound.
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 first milestone was due upon the dosing of the first patient in a pharmacokinetic study
and was achieved during August 2013 and the Company made a $150,000 payment to Invivis during October 2013. The Company made its
next milestone payment of $100,000 to Invivis upon the dosing of the first subject in the first Company-sponsored Phase I clinical
trial of onapristone in January 2014. 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 which expired in April 2014,
Invivis provided 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 of approximately $70,833. Effective April 1, 2014, the
Company renewed the services agreement for a period of one year for a monthly cash payment of $50,000 and certain other performance
based milestones.
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.
University of Minnesota License
In February 2014, the Company entered
into an Exclusive Patent License Agreement with the Regents of the University of Minnesota (the “University”), pursuant
to which Arno was granted an exclusive, worldwide, royalty-bearing license for the rights to develop and commercialize technology
embodied by certain patent applications relating to a gene expression signature derived from archived breast cancer tissue samples.
The Company plans to develop and commercialize this technology as part of its companion diagnostic development program as a tool
to identify progesterone-stimulated pathway activation, which in turn may identify patients who would be more likely to benefit
from treatment with onapristone.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY (Continued)
The license agreement requires the Company
to use commercially reasonable efforts to commercialize the licensed technology as soon as practicable, and includes several performance
milestones relating to the development and commercialization of the technology to be achieved by specified dates beginning in the
second quarter of 2014 and continuing during the term of the agreement. Under the terms of the agreement, Arno made a small one-time
cash payment and reimbursed the University for past patent expenses it has incurred. The agreement also provides for royalties
to be paid to the University on net sales of “Licensed Products” (as defined in the agreement) at a rate in the low-single
digits, which royalty obligation terminates on a licensed product-by-licensed product and country-by-country basis upon the first
date when there is no longer a valid claim under a licensed patent or patent application covering such licensed product in the
country where the licensed product is made or sold.
The term of the license agreement continues
until the last date on which there is any active licensed patent or pending patent application. The University may terminate the
agreement earlier upon certain Arno breaches that remain uncured for a period specified in the agreement. The University may also
terminate the agreement if Arno voluntarily files for bankruptcy or similar proceeding, or if a petition for an involuntary bankruptcy
proceeding is filed and is not released for 60 days. The agreement may be immediately terminated upon notice to Arno if the Company
commences or maintains a proceeding in which it asserts that the licensed patents are invalid or unenforceable. Arno may terminate
the agreement at any time and for any reason upon 90 days’ written notice.
The license agreement further provides
that the Company will indemnify and hold the University and its affiliates harmless from any and all suits, actions, claims, liabilities,
demands, damages, losses or expenses relating to Arno’s exercise of its rights under the agreement, including the right to
commercialize the licensed technology. The University is required to indemnify Arno with respect to claims relating to or resulting
from its breach of the agreement.
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 2014. 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 2014.
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.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
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, 2014.
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, 2014:
| |
| | |
Quoted Market | | |
| | |
| |
| |
| | |
Prices in Active | | |
Significant Other | | |
Significant Other | |
| |
Fair Value | | |
Markets | | |
Observable Inputs | | |
Unobservable Inputs | |
| |
September 30, 2014 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrant liability - 2010 Series B | |
$ | 128,302 | | |
$ | - | | |
$ | - | | |
$ | 128,302 | |
Warrant liability - 2012 Series A&B | |
| 7,684,447 | | |
| - | | |
| - | | |
| 7,684,447 | |
Warrant liability - 2012 placement agent | |
| 175,922 | | |
| - | | |
| - | | |
| 175,922 | |
Warrant liability - 2013 Series D&E | |
| 7,051,985 | | |
| - | | |
| - | | |
| 7,051,985 | |
Warrant liability - 2013 placement agent | |
| 45,954 | | |
| - | | |
| - | | |
| 45,954 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 15,086,610 | | |
$ | - | | |
$ | - | | |
$ | 15,086,610 | |
The following table presents the Company’s
fair value hierarchy for these assets measured at fair value on a recurring basis as of December 31, 2013:
| |
| | |
Quoted Market | | |
| | |
| |
| |
| | |
Prices in Active | | |
Significant Other | | |
Significant Other | |
| |
Fair Value | | |
Markets | | |
Observable Inputs | | |
Unobservable Inputs | |
| |
December 31, 2013 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
| | |
| | |
| | |
| |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrant liability - 2010 Series B | |
$ | 362,452 | | |
$ | - | | |
$ | - | | |
$ | 362,452 | |
Warrant liability - 2012 Series A&B | |
| 16,703,983 | | |
| - | | |
| - | | |
| 16,703,983 | |
Warrant liability - 2012 placement agent | |
| 362,633 | | |
| - | | |
| - | | |
| 362,633 | |
Warrant liability - 2013 Series D&E | |
| 18,337,733 | | |
| - | | |
| - | | |
| 18,337,733 | |
Warrant liability - 2013 placement agent | |
| 98,080 | | |
| - | | |
| - | | |
| 98,080 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 35,864,881 | | |
$ | - | | |
$ | - | | |
$ | 35,864,881 | |
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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
depreciation that relate to those liabilities held September 30, 2014:
Fair Value Measurement Using Significant Unobservable Inputs (Level 3) |
| |
Total | | |
| | |
| | |
2013 | | |
| | |
| | |
2012 | | |
| | |
Debenture | |
| |
Warrant | | |
2013 | | |
2013 | | |
Placement | | |
2012 | | |
2012 | | |
Placement | | |
2010 | | |
Conversion | |
| |
Liability | | |
Series E | | |
Series D | | |
Agent | | |
Series B | | |
Series A | | |
Agent | | |
Series B | | |
Feature | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at January 1, 2013 | |
$ | 21,420,276 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 5,744,784 | | |
$ | 6,685,740 | | |
$ | 542,530 | | |
$ | 898,722 | | |
$ | 7,548,500 | |
Purchase, sales and settlements: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants and other derivatives issued | |
| 15,681,151 | | |
| 5,057,354 | | |
| 10,552,240 | | |
| 71,557 | | |
| | | |
| | | |
| | | |
| | | |
| | |
Settlement of derivatives | |
| (5,403,000 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (5,403,000 | ) |
Total gains or losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Unrealized depreciation/(appreciation) | |
| 4,166,454 | | |
| 797,852 | | |
| 1,930,287 | | |
| 26,523 | | |
| (2,928,108 | ) | |
| 7,201,567 | | |
| (179,897 | ) | |
| (536,270 | ) | |
| (2,145,500 | ) |
Balance at January 1, 2014 | |
$ | 35,864,881 | | |
$ | 5,855,206 | | |
$ | 12,482,527 | | |
$ | 98,080 | | |
$ | 2,816,676 | | |
$ | 13,887,307 | | |
$ | 362,633 | | |
$ | 362,452 | | |
$ | - | |
Total gains or losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Unrealized depreciation/(appreciation) | |
| (20,778,271 | ) | |
| (5,752,257 | ) | |
| (5,533,491 | ) | |
| (52,126 | ) | |
| (2,767,152 | ) | |
| (6,252,384 | ) | |
| (186,711 | ) | |
| (234,150 | ) | |
| | |
Balance at September 30, 2014 | |
$ | 15,086,610 | | |
$ | 102,949 | | |
$ | 6,949,036 | | |
$ | 45,954 | | |
$ | 49,524 | | |
$ | 7,634,923 | | |
$ | 175,922 | | |
$ | 128,302 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Value per Warrant | |
$ | 0.348 | | |
$ | 0.008 | | |
$ | 0.540 | | |
$ | 0.700 | | |
$ | 0.008 | | |
$ | 0.740 | | |
$ | 0.620 | | |
$ | 0.160 | | |
| | |
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
7. STOCKHOLDERS’ EQUITY
Common Stock
The Company amended its Amended & Restated
Certificate of Incorporation, effective as of October 29, 2013, to effect a combination of its common stock at a ratio of 1-for-8
(the “Reverse Split”). The Reverse Split was effective immediately prior to the entry into the 2013 Purchase Agreement
(defined below). The Reverse Split was authorized by the stockholders of the Company on November 10, 2010.
As a result of the Reverse Split, all references
to common stock, stock options and warrants and other securities convertible into common stock, and per share amounts for all prior
periods presented have been retroactively restated to reflect the 1-for-8 reverse stock split of common stock.
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, plus the 2012 Warrants (defined below). On October 29, 2013, the Company entered into a Conversion
Agreement (the “Conversion Agreement”) with the holders (the “Holders”) of its Debentures. Pursuant to
the Conversion Agreement, the Holders agreed to convert the entire outstanding principal amount of their Debentures, together with
accrued and unpaid interest through October 29, 2013, into shares of the Company’s common stock at a conversion price of
$2.40 per share for a total of approximately 6,530,154 shares, of which 345,606 shares were issued in satisfaction of accrued and
unpaid interest. As a result of such conversion, all of the Company’s obligations under the Debentures were fully satisfied.
The Company also entered into a Registration
Rights Agreement on November 26, 2012 (the “2012 Registration Rights Agreement”), with the purchasers of the Debentures
pursuant to which the Company agreed to register the resale of the common stock underlying the Debentures and the 2012 Warrants.
Pursuant to the terms of an amendment to the 2012 Registration Rights Agreement entered into on March 25, 2013, the Company was
permitted, in its sole discretion, to pay liquidated damages resulting from the Company’s failure to successfully cause the
registration statement covering the resale of 100% of the securities covered by the 2012 Purchase Agreement to be declared effective
by the SEC by March 26, 2013, in common stock. In accordance with the amended Registration Rights Agreement, the Company issued
common stock as follows:
| i) | On March 27, 2013, the Company issued an aggregate of approximately 123,809 shares of common stock to the investors in lieu
of an aggregate cash payment of $297,143, representing the first installment of liquidated damages under the Registration Rights
Agreement, as amended. |
| ii) | On April 29, 2013, the Company issued an aggregate of approximately 136,536 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. |
| iii) | On May 27, 2013, the Company issued an aggregate of approximately 120,280 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. |
On October 29, 2013, the Company entered
into a Securities Purchase Agreement (the “2013 Purchase Agreement”) with certain purchasers identified therein (the
“Purchasers”) pursuant to which the Company sold and the Purchasers purchased, an aggregate of 12,868,585 units of
the Company’s securities (the “Units”), with each Unit consisting of the following:
| (i) | either (a) one share of common stock (each a “Share,” and collectively, the “Shares”), or (b) a five-year
common stock warrant to purchase one share of common stock (collectively, the “Series C Warrant Shares”) at an exercise
price of $0.01 per share (collectively, the “Series C Warrants”); |
| (ii) | a five-year warrant to purchase one share of common stock (collectively, the “Series D Warrant Shares”) at an exercise
price of $4.00 per share (collectively, the “Series D Warrants”); and |
| (iii) | a warrant, expiring on October 31, 2014, to purchase one share of common stock (collectively, the “Series E Warrant Shares,”
and together with the Series C Warrant Shares and the Series D Warrant Shares, the “Warrant Shares”) at an exercise
price of $2.40 per share (collectively, the “Series E Warrants,” and together with the Series C Warrants and the Series
D Warrants, the “2013 Warrants”). |
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
7. STOCKHOLDERS’ EQUITY (Continued)
The Company sold and issued 8,413,354 Units
consisting of Shares, Series D Warrants and Series E Warrants at a purchase price of $2.40 per Unit, and 4,455,231 Units consisting
of Series C Warrants, Series D Warrants and Series E Warrants at a purchase price of $2.39 per Unit, for total gross proceeds to
the Company of $30.84 million, before deducting fees and other transaction related expenses of approximately $760,000. A closing
of the sale of 12,826,752 Units was completed on October 29, 2013, and the sale of the remaining 41,833 Units was completed on
October 30, 2013.
The 2013 Purchase Agreement contains customary
representations, warranties and covenants by each of the Company and the Purchasers. In addition, the 2013 Purchase Agreement provides
that each Purchaser has a right, subject to certain exceptions described in the agreement, to participate in future issuances of
equity and debt securities by the Company for a period of 18 months following the effective date of the Registration Statement
(defined below).
Contemporaneously with the entry into the
2013 Purchase Agreement, and as contemplated thereby, the Company entered into a Registration Rights Agreement with the Purchasers.
Pursuant to the terms of the Registration Rights Agreement, the Company agreed to file, on or before December 30, 2013, a registration
statement under the Securities Act covering the resale of the Shares and Warrant Shares (the “Registration Statement”),
and to cause such Registration Statement to be declared effective by the Commission as soon as practicable thereafter, but not
later than 120 days following the date of the Registration Rights Agreement. The Registration Statement was filed on December 27,
2013, and declared effective on January 27, 2014. The Company is required to maintain the effectiveness of the Registration Statement
until all of the shares covered thereby are sold or may be sold pursuant to Rule 144 under the Securities Act without volume or
manner of- sale restrictions and without the requirement that the Company be in compliance with the current public information
requirements of Rule 144.
As of September 30, 2014, the Company had
20,408,616 shares of common stock issued and outstanding and approximately 55,195,600 shares of common stock reserved for issuance
upon the exercise of outstanding options and warrants.
Warrants
In accordance with the 2010 sale and issuance
of Series A preferred stock, the Company issued two-and-one-half-year “Class A” warrants to purchase an aggregate of
152,740 shares of Series A Preferred Stock at an initial exercise price of $8.00 per share (the “2010 Class A Warrants”)
and five-year Class B warrants to purchase an aggregate of 801,885 shares of Series A Preferred Stock at an initial exercise price
of $9.20 per share (the “2010 Class B Warrants,” and together with the 2010 Class A Warrants, the “2010 Warrants”).
Upon the automatic conversion of the Series A Preferred Stock in January 2011, the 2010 Warrants automatically converted to the
right to purchase an equal number of shares of common stock. 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 2010 Warrants,
the exercise price will be decreased pursuant to a customary “weighted-average” formula. In accordance with this provision
and as a result of the issuances made pursuant to the 2012 Purchase Agreement and 2013 Purchase Agreement, the exercise price of
the 2010 Class B warrants has been adjusted to $3.55 per share. 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 $0.1 million and approximately $0.4 million at September 30, 2014
and December 31, 2013, 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 2010 Class A warrants, representing
the right to purchase an aggregate of 152,740 shares of common stock, expired unexercised during the year ended December 31, 2013.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
7. STOCKHOLDERS’ EQUITY (Continued)
Pursuant to the 2012 Purchase Agreement,
the Company issued five-year Series A warrants to purchase an aggregate of approximately 6,190,500 shares of common stock at an
initial exercise price of $4.00 per share and 18-month Series B warrants (together with the Series A warrant, the “2012 Warrants”)
to purchase an aggregate of approximately 6,190,500 shares of common stock at an initial exercise price of $2.40 per share. The
terms of the 2012 Warrants contain a “full-ratchet” anti-dilutive price adjustment provision. In accordance with such
full-ratchet anti-dilution provision, in the event that the Company sells or issues additional shares of common stock, including
securities convertible or exchangeable for common stock (subject to customary exceptions), at a per share price less than the applicable
2012 Warrant exercise price, such warrant exercise price will be reduced to an amount equal to the issuance price of such subsequently
issued shares; after such time as the Company has raised at least $12 million in additional equity financing, the 2012 Warrants
are subject to further anti-dilution protection based on a weighted-average formula. Further, the anti-dilution provisions of the
2012 Warrants provide that, in addition to a reduction in the applicable exercise price, the number of shares purchasable thereunder
is 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. In accordance with the terms of this anti-dilution provision and as a result of the
Company’s issuances under the 2013 Purchase Agreement, the exercise price of the Series A warrants was reduced to $2.40 per
share and the aggregate number of shares underlying such warrants was increased to 10,317,464 shares. The 2012 Warrants also contain
a provision that may require the Company to repurchase such warrants from their holders in connection with a sale of the Company
or similar transactions. As a result of such anti-dilution and repurchase provisions, the Company is required to record the fair
value of the 2013 Warrants as a liability on the accompanying balance sheet. 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 $7.7 million and $16.7 million at September
30, 2014 and December 31, 2013, respectively.
In connection with the sale of the Debentures
and 2012 Warrants, the Company engaged Maxim Group LLC, or Maxim, to serve as placement agent. In consideration for its services,
the Company paid Maxim a placement fee of $1,035,000. In addition, the Company issued to an affiliate of Maxim 7,500 shares of
common stock and five-year warrants to purchase an additional 283,750 shares of common stock at an initial exercise price of $2.64
per share. The warrants issued to Maxim are in substantially the same form as the 2012 Warrants issued to the investors,
except that they do not include certain anti-dilution provisions contained in the investors’ 2012 Warrants. However, the
placement warrants do contain a provision that could require the Company to repurchase the warrants from the holder in connection
with a sale of the Company or similar transaction. As a result of such repurchase provision, the Company
is required to record the fair value of such warrants as a liability on the accompanying balance sheet. 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
$0.2 million and $0.4 million at September 30, 2014 and December 31, 2013, respectively.
Under the terms of the 2013 Purchase Agreement,
each Purchaser had the option to elect to receive a Series C Warrant in lieu of a Share in connection with each Unit it purchased.
The Series C Warrants have a five-year term and are exercisable at an initial exercise price of $0.01 per share. The Series D Warrants
have a five-year term and are exercisable at an initial exercise price of $4.00 per share, subject to adjustment for stock splits,
combinations, recapitalization events and certain dilutive issuances (as described below). The Series E Warrants are exercisable
until October 31, 2014 at an initial exercise price of $2.40 per share, subject to adjustment for stock splits, combinations, recapitalization
events and certain dilutive issuances (as described below). The applicable exercise price of the Series D Warrants and Series E
Warrants (but not the Series C Warrants) is subject to a weighted-average price adjustment in the event the Company makes future
issuances of common stock or rights to acquire common stock (subject to certain exceptions) at a per share price less than the
applicable warrant exercise price. The 2013 Warrants also contain a provision that may require the Company to repurchase such warrants
from their holders in connection with a sale of the Company or similar transactions. As a result of such anti-dilution and repurchase
provisions, the Company is required to record the fair value of the 2013 Warrants as a liability on the accompanying balance sheet.
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 for the Series
D and Series E Warrants to be approximately $7.1 million and $18.3 million at September 30, 2014 and December 31, 2013, respectively.
The 2013 Warrants are
required to be exercised for cash, provided that if during the term of the Warrants there is not an effective registration statement
under the Securities Act covering the resale of the shares issuable upon exercise of the Warrants, then the Warrants may be exercised
on a cashless (net exercise) basis.
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
7. STOCKHOLDERS’ EQUITY (Continued)
Below is a table that
summarizes all outstanding warrants to purchase shares of the Company’s common stock as of September 30, 2014.
Grant Date | |
Warrants Issued | | |
Exercise Price | | |
Weighted Average Exercise Price | | |
Expiration Date | |
Exercised | | |
Warrants Outstanding | |
09/03/2010 | |
| 801,885 | | |
$ | 3.55 | | |
$ | 3.55 | | |
09/03/2015 | |
| - | | |
| 801,885 | |
09/03/2010 | |
| 132,116 | | |
$ | 8.80 | | |
$ | 8.80 | | |
09/03/2015 | |
| - | | |
| 132,116 | |
11/26/2012 | |
| 5,293,738 | | |
$ | 2.40 | | |
$ | 2.40 | | |
10/31/2014 | |
| - | | |
| 5,293,738 | |
12/18/2012 | |
| 896,748 | | |
$ | 2.40 | | |
$ | 2.40 | | |
10/31/2014 | |
| - | | |
| 896,748 | |
11/26/2012 | |
| 8,822,887 | | |
$ | 2.40 | | |
$ | 2.40 | | |
11/26/2017 | |
| - | | |
| 8,822,887 | |
11/26/2012 | |
| 261,250 | | |
$ | 2.64 | | |
$ | 2.64 | | |
11/26/2017 | |
| - | | |
| 261,250 | |
12/18/2012 | |
| 1,494,577 | | |
$ | 2.40 | | |
$ | 2.40 | | |
12/18/2017 | |
| - | | |
| 1,494,577 | |
12/18/2012 | |
| 22,500 | | |
$ | 2.64 | | |
$ | 2.64 | | |
12/18/2017 | |
| - | | |
| 22,500 | |
10/29/2013 | |
| 4,455,231 | | |
$ | 0.01 | | |
$ | 0.01 | | |
10/29/2018 | |
| - | | |
| 4,455,231 | |
10/29/2013 | |
| 12,868,585 | | |
$ | 2.40 | | |
$ | 2.40 | | |
10/31/2014 | |
| - | | |
| 12,868,585 | |
10/29/2013 | |
| 12,868,585 | | |
$ | 4.00 | | |
$ | 4.00 | | |
10/29/2018 | |
| - | | |
| 12,868,585 | |
10/29/2013 | |
| 65,650 | | |
$ | 2.64 | | |
$ | 2.64 | | |
10/29/2018 | |
| - | | |
| 65,650 | |
| |
| 47,983,752 | | |
| | | |
$ | 2.65 | | |
| |
| - | | |
| 47,983,752 | |
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
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 373,831 shares of the Company’s
common stock reserved for issuance under the Plan. On April 25, 2011, the Company’s Board of Directors (the “Board”)
approved an amendment to the Plan to increase the number of shares of common stock issuable under the Plan to 875,000 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 945,276 shares. On October 7, 2013, the Company’s Board of Directors adopted an amendment
to the Company’s 2005 Plan, as amended that increased the number of shares of common stock authorized for issuance thereunder
from 945,276 to 11,155,295. 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, 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, 2014, there are 3,903,468
shares available for future grants and awards under the Plan, which covers stock options, warrants and restricted awards.
The Company issued the following stock options
during the three and nine month periods ended September 30, 2014 and 2013, respectively:
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | | |
| | | |
| | | |
| | |
Options granted | |
| - | | |
| - | | |
| 2,186,957 | | |
| 182,938 | |
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, 2014 and September 30, 2013:
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Expected volatility | |
| N/A | | |
| N/A | | |
| 92% | | |
| 89% - 96% | |
Expected term | |
| N/A | | |
| N/A | | |
| 6 years | | |
| 4-6 years | |
Dividend yield | |
| N/A | | |
| N/A | | |
| 0.0% | | |
| 0.0% | |
Risk- free interest rate | |
| N/A | | |
| N/A | | |
| 1.57% - 1.58% | | |
| 0.77% - 0.89% | |
Stock price | |
| N/A | | |
| N/A | | |
| $2.23 - $2.90 | | |
$ | 2.40 | |
Forfeiture rate | |
| N/A | | |
| N/A | | |
| 0.0% | | |
| 0.0% | |
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
8. STOCK OPTION PLAN (Continued)
A summary of the status of the options issued
under the Plan at September 30, 2014, and information with respect to the changes in options outstanding is as follows:
| |
Shares | | |
Weighted- Average Exercise Price | | |
Aggregate Intrinsic Value | |
| |
| | |
| | |
| |
Options outstanding at December 31, 2013 | |
| 5,758,463 | | |
$ | 2.66 | | |
$ | - | |
Options granted | |
| 2,186,957 | | |
$ | 2.83 | | |
| - | |
Options exercised | |
| - | | |
| - | | |
| - | |
Options cancelled | |
| (733,573 | ) | |
$ | 2.97 | | |
| - | |
Options outstanding at September 30, 2014 | |
| 7,211,847 | | |
$ | 2.68 | | |
$ | - | |
| |
| | | |
| | | |
| | |
Exercisable at September 30, 2014 | |
| 2,347,762 | | |
$ | 2.98 | | |
$ | - | |
| |
| | | |
| | | |
| | |
Shares available for grant under the 2005 Plan | |
| 3,903,468 | | |
| | | |
| | |
The following table summarizes information about stock options
outstanding at September 30, 2014:
| | |
Outstanding | | |
Exercisable | |
Exercise Price | | |
Number of
Shares | | |
Weighted- Average Remaining Contractual Life (Years) | | |
Weighted- Average Exercise Price | | |
Number of Shares | | |
Weighted- Average Exercise Price | |
| | |
| | |
| | |
| | |
| | |
| |
$ | 2.23 | | |
| 223,445 | | |
| 9.40 | | |
$ | 2.23 | | |
| - | | |
$ | 2.23 | |
$ | 2.40 | | |
| 5,281,555 | | |
| 8.44 | | |
$ | 2.40 | | |
| 2,013,007 | | |
$ | 2.40 | |
$ | 2.90 | | |
| 1,554,620 | | |
| 9.32 | | |
$ | 2.90 | | |
| 182,528 | | |
$ | 2.90 | |
$ | 8.00 | | |
| 114,844 | | |
| 3.40 | | |
$ | 8.00 | | |
| 114,844 | | |
$ | 8.00 | |
$ | 19.38 | | |
| 37,383 | | |
| 3.53 | | |
$ | 19.38 | | |
| 37,383 | | |
$ | 19.38 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | | |
| 7,211,847 | | |
| 8.56 | | |
$ | 2.68 | | |
| 2,347,762 | | |
$ | 2.98 | |
Stock-based compensation costs under the Plan for the three
and nine month periods ended September 30, 2014 and 2013 are as follows:
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Research and development | |
$ | 209,411 | | |
$ | 107,343 | | |
$ | 756,997 | | |
$ | 432,025 | |
General and administrative | |
| 874,639 | | |
| 119,609 | | |
| 2,745,082 | | |
| 494,225 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 1,084,050 | | |
$ | 226,952 | | |
$ | 3,502,079 | | |
$ | 926,250 | |
ARNO THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)
8. STOCK OPTION PLAN (Continued)
The fair value of options vested under the
Plan was approximately $1,101,685 and $147,080 for the three months ended September 30, 2014 and 2013, respectively, approximately
$3,018,414 and $691,884 for the nine months ended September 30, 2014 and 2013, respectively.
At September 30, 2014, total unrecognized
estimated compensation cost related to stock options granted prior to that date was approximately $9,174,664 which is expected
to be recognized over a weighted-average vesting period of 2.4 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 and Secretary
of the Company and at the time also its President, Arie S. Belldegrun, M.D., 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 from that point until December 31, 2013, TRC billed the Company for actual hours worked on a monthly basis. For
the three and nine month periods ended September 30, 2013, TRC billed the Company $73,723 and $217,849, respectively. As of January
1, 2014, the Company no longer received services from TRC.
On occasion, some of the Company’s
expenses were paid by TRC. No interest is charged by TRC on any outstanding balance owed by the Company. There is no outstanding
payable to TRC as of September 30 2014.
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.
10. SUBSEQUENT EVENTS
On October 28, 2014, the Company notified
the holders of its Series B and Series E Warrants that the expiration date of such warrants had been extended from October 31,
2014 to December 31, 2014.
| Item 2. | Management’s Discussion and Analysis of Financial
Condition and Results of Operations. |
Overview
We are focused
on developing innovative products for the treatment of cancer and other life threatening diseases. We currently have exclusive
worldwide rights to three innovative clinical stage compounds with unique mechanisms of action that have the potential to be first-in-class
products for the treatment of various forms of cancer, including both hematologic malignancies and solid tumors.
The following is a summary of our product
development pipeline:
| · | Onapristone – We are currently developing onapristone, an oral anti-progestin hormone blocker that
has been shown to have considerable anti-tumor activity in patients with breast cancer. Onapristone appears to have a
unique ability
to block the activation of the progesterone receptor and inhibit tumor growth. Originally, onapristone was being
developed by Schering AG for potential use in the treatment of benign gynecological disorders (e.g., uterine leiomyoma,
endometriosis), as a contraceptive and an anti-endocrine treatment of breast cancer. In published clinical studies,
onapristone has demonstrated a 56% objective response rate as a first line “hormone” treatment of patients with
breast cancer. In connection with the development of onapristone, we have engaged Leica Biosystems to develop an
immunohistochemistry based diagnostic test to identify tumors with the activated form of the progesterone receptor (APR),
which is intended to identify which patients are more likely to benefit from treatment with onapristone. We have also
engaged
Clarient Diagnostic Services, Inc. to perform the interpretation/analysis of tumor samples with the developed diagnostic
test. |
In preparation for a proposed Phase II study in
women with endometrioid cancer that we plan to begin in 2015, we initiated a Phase I study in patients with progesterone
receptor expressing cancers in the fourth quarter of 2013 and began enrolling patients in early 2014. We completed the dose
escalation stage of this Phase I study in October 2014 and have opened enrollment in the expansion stage of the trial at the
recommended Phase II dose of 50mg twice daily. Preliminary data for the first 43 evaluable patients in this study include one
patient with serous ovarian cancer receiving 10mg twice daily of the extended release formulation with a durable partial
response (ongoing at 24 weeks). In addition, 5 of 26 patients with gynecologic tumors and 2 of 16 patients with breast tumors
had stable disease for greater than 16 weeks. Prior to
entering this study, these heavily pre-treated patients had, on average, previously received three chemotherapy
treatment regimens and one hormone therapy regimen. In general, onapristone was well tolerated without substantial dose
limiting toxicities. A total of three patients have experienced Grade 3 liver function test abnormalities associated with
progression of liver metastases and discontinued onapristone treatment. None of these adverse events were deemed to be
drug-related by an independent safety review committee. The proposed Phase II study in endometrioid cancer will be conducted
in conjunction with a diagnostic test targeting women with tumors expressing the APR. Currently, this Phase I study does not
prospectively select patients with tumors which test positive for the APR. Research conducted by Arno indicates that
approximately 45% of all endometrioid tumors are APR positive. We are also investigating onapristone as a potential treatment
for patients with prostate cancer and enrolled the first patient in an ongoing Phase I clinical study in adult male subjects
with castrate resistant prostate cancer during April 2014.
| · | AR-42 – AR-42 is being developed as 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. In preclinical studies, AR-42 has demonstrated greater potency and activity in solid tumors and
hematological malignancies when compared to vorinostat (also known as SAHA and marketed as Zolinza® by Merck). These data
demonstrate the potent and potential differentiating activity of AR-42. Additionally, pre-clinical findings presented at the
2009 American Society of Hematology Annual Meeting showed that AR-42 potently and selectively inhibits leukemic stem cells in
acute myeloid leukemia, or AML. AR-42 is currently being studied in an investigator-initiated Phase I/II clinical study in
adult subjects with relapsed or refractory hematological malignancies: multiple myeloma, chronic lymphocytic leukemia (CLL),
or lymphoma. The recommended Phase II dose, or RP2D, in patients with hematological malignancies has been determined and the
expansion phase of the program has been initiated. The protocol has been amended to include a separate solid tumor dose
escalation cohort and patients are being actively screened to enter into this cohort. We are also supporting an investigator
initiated Phase I study of AR-42 in combination with decitabine in patients with hematological malignancies that was
initiated during the third quarter of 2013. In preclinical studies, AR-42 has demonstrated anti-tumor activity in both
meningioma and schwannoma. Meningioma and schwannoma are rare, benign tumors that can present in different locations within
the brain and the spinal cord and may cause substantial morbidity for those affected individuals. The primary treatment
option for patients with these tumors is surgical excision. In February 2012, the FDA granted two orphan drug
designations for AR-42 for the treatment of meningioma and the treatment of schwannoma of the central nervous system.
Additionally, AR-42 has been granted three orphan drug designations by the European Medicines Agency, or EMA, for the treatment of
neurofibromatosis type 2 (NF2), the treatment of meningioma and the treatment of schwannoma. NF2 is a rare genetic disorder
characterized by the growth of noncancerous tumors in the brain and spinal cord, juvenile cataracts, and neurofibromas of the
skin. |
| · | AR-12 – We are also developing AR-12 as an orally available kinase inhibitor. Preliminary data demonstrates
that AR-12 may inhibit multiple different kinase targets. We believe AR-12 may also cause cell death through the induction of stress
in the endoplasmic reticulum and work is ongoing to further understand the mechanism of action. We are currently conducting a multi-centered
Phase I clinical study of AR-12 in adult patients with advanced or recurrent solid tumors or lymphoma. The Phase I study of AR-12
was originally designed to be conducted in two parts. The first part is a dose-escalating study, which we refer to as the Escalation
Phase, primarily designed to evaluate the safety of AR-12 in order to identify the MTD and RP2D for future studies of the compound.
We have completed the dose escalation phase of the Phase I trial, and have determined the RP2D and MTD of the current formulation.
Following the Escalation Phase, we planned to initiate the second part of the study, which we refer to as the Expansion Phase,
which would have involved enrolling an expanded cohort of additional patients at the RP2D in multiple tumor types. We will not
be moving forward with the Expansion Phase of this study as an improved formulation that has been shown to substantially increase
bioavailability in preclinical models has been developed. During the first quarter of 2013, the last study subject completed the
planned dose-escalation phase of the study. Based on additional pre-clinical research conducted
on AR-12, we are currently pursuing various opportunities with the potential for securing non-dilutive funding, via government
and philanthropic agency grants and contracts, for further research into the potential use of AR-12 as an anti-microbial agent. |
We have no product sales to date and we
will not generate any product revenue until we receive approval from the FDA or equivalent foreign regulatory bodies to begin selling
our pharmaceutical product candidates. Developing pharmaceutical products is a lengthy and very expensive process. Assuming we
do not encounter any unforeseen safety or other issues during the course of developing our product candidates, we do not expect
to complete the development of a product candidate for several years, if ever. To date, almost all of our development expenses
have been incurred on each of our product candidates: Onapristone, AR-42, AR-12 and AR-67 (a compound we are no longer developing).
As we proceed with the clinical development of our product candidates, primarily focusing our resources on onapristone, our research
and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for
our development pipeline, our need to finance further research and development will continue increasing. Accordingly, our success
depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of the
products. To date, our major sources of working capital have been proceeds from private and public sales of our common and preferred
stock and debt financings.
Research and development, or R&D, expenses
consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for pre-clinical,
clinical, and manufacturing development, legal expenses resulting from intellectual property prosecution, costs related to obtaining
and maintaining our product license agreements, contractual review, and other expenses relating to the design, development, testing,
and enhancement of our product candidates. We expense our R&D costs as they are incurred.
General and administrative, or G&A,
expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, accounting,
legal and other professional fees, business development expenses, rent, business insurance and other corporate expenses.
Our results include non-cash compensation
expense as a result of the issuance of stock options. We expense the fair value of stock options over the vesting period. When
more precise pricing data is unavailable, we determine the fair value of stock options using the Black-Scholes option-pricing model.
The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. Generally,
the awards vest based upon time-based or performance-based conditions. Performance-based conditions generally include the attainment
of goals related to our financial performance and product development. Stock-based compensation expense is included in the respective
categories of expense in the statements of operations. We expect to record additional non-cash compensation expense in the future,
which may be significant.
Results of Operations
General and
Administrative Expenses. G&A expenses for each of the three month periods ended September 30, 2014 and 2013 were
approximately $1.9 million and $0.6 million, respectively. The increase of approximately $1.3 million for the three months of
2014 over the same period in 2013 is primarily the result of increased compensation expense in 2014 of approximately $1.1
million, of which approximately $0.7 million is due to increased non-cash stock compensation expense and $0.4 million of
severance expense for our former Chief Executive Officer.
G&A expenses for each of the
nine month periods ended September 30, 2014 and 2013 were approximately $5.3 million and $2.1 million, respectively. The
increase of approximately $3.2 million for the nine months of 2014 over the same period in 2013 is primarily the result of
increased compensation expense in 2014 of approximately $2.8 million, of which approximately $2.2 million is due to increased
non-cash stock compensation expense, $0.4 million severance expense for our former Chief Executive Officer and $0.2 million
due to increased headcount. The remaining $0.4 million of increased G&A expenses in the first nine months of 2014
compared to the same period in 2013 is primarily the result of increased professional service fees and franchise taxes.
Research and
Development Expenses. R&D expenses for the three month periods ended September 30, 2014 and 2013 were
approximately $3.8 million and $3.2 million, respectively. The increase of approximately $0.6 million compared to the same
period in 2013 is primarily due to increased expenses incurred in further developing our lead product candidate, onapristone,
as we initiated and began enrolling patients in two ongoing Phase I clinical trials in 2014. Total direct onapristone
development costs for the quarter ended September 30, 2014 were approximately $3.0 million compared to approximately $2.3
million for the quarter ended September 30, 2013. This increase of approximately $0.7 million over the same period of 2013 is
primarily due to ongoing work related to the development of the onapristone companion diagnostic test.
R&D expenses for the nine month
periods ended September 30, 2014 and 2013 were approximately $12.3 million and $8.9 million, respectively. The increase of
approximately $3.4 million compared to the same period in 2013 is primarily due to increased expenses incurred in further
developing our lead product candidate, onapristone, as we initiated and began enrolling patients in two Phase I clinical
trials in 2014. Total direct onapristone development costs for the nine months ended September 30, 2014 were approximately
$9.8 million compared to approximately $6.1 million for the nine months ended September 30, 2013. This increase of
approximately $3.7 million over the same period of 2013 is primarily due to an increase of approximately $1.9 million for
clinical trial costs incurred for starting and running the two ongoing Phase I clinical trials and an increase of
approximately $1.6 million for work related to the continued development of the onapristone companion diagnostic test.
The following table summarizes our R&D
expenses incurred for preclinical support, contract manufacturing of clinical supplies, clinical trial services provided by third
parties and milestone payments for in-licensed technology for each of our product candidates for the three and nine months ended
September 30, 2014 and 2013, as well as the cumulative amounts since we began development of each product candidate through September
30, 2014. The table also summarizes unallocated costs, which consist of personnel, facilities and other costs not directly allocable
to specific development programs:
| |
| | |
| | |
Cumulative | |
| |
Three months ended September 30, | | |
Nine months ended September 30, | | |
amounts during | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | | |
development | |
| |
| | |
| | |
| | |
| | |
| |
Onapristone | |
$ | 2,987,597 | | |
$ | 2,310,934 | | |
$ | 9,812,547 | | |
$ | 6,125,638 | | |
$ | 24,209,410 | |
AR-42 | |
| 11,047 | | |
| 42,538 | | |
| (13,359 | ) | |
| 299,398 | | |
| 5,368,483 | |
AR-12 | |
| 211,134 | | |
| 255,040 | | |
| 403,298 | | |
| 658,697 | | |
| 10,892,007 | |
AR-67 | |
| 7,566 | | |
| 32,129 | | |
| 19,196 | | |
| 56,789 | | |
| 8,151,408 | |
Unallocated R&D | |
| 539,084 | | |
| 527,966 | | |
| 2,052,860 | | |
| 1,762,872 | | |
| 13,974,811 | |
Total | |
$ | 3,756,428 | | |
$ | 3,168,607 | | |
$ | 12,274,542 | | |
$ | 8,903,394 | | |
$ | 62,596,119 | |
Our expenditures on current and future clinical
development programs are expected to be substantial and to increase particularly in relation to our available capital resources.
For example, in fiscal year 2014, we plan to incur external development costs of approximately $13.7 million, $0.1 million and
$0.3 million on onapristone, AR-42 and AR-12, respectively. However, these planned expenditures are subject to many uncertainties,
including the results of clinical trials and whether we develop any of our drug candidates with a partner or independently. As
a result of such uncertainties, it is very difficult to accurately predict the duration and completion costs of our research and
development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of
our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result
of unanticipated events arising during clinical development and a variety of factors, including:
| · | the number of trials and studies in a clinical program; |
| · | the number of patients who participate in the trials; |
| · | the number of sites included in the trials; |
| · | the rates of patient recruitment and enrollment; |
| · | the duration of patient treatment and follow-up; |
| · | the costs of manufacturing our drug candidates; and |
| · | the costs, requirements, timing of, and ability to secure regulatory approvals. |
Interest Income. Interest income
for the three months ended September 30, 2014 and 2013 was $10,087 and $1,362 respectively. The increase in interest income compared
to the same period in 2013 is primarily due to higher average cash balances held during 2014 compared to the same period of 2013,
as a result of our fourth quarter 2013 equity and warrant offering.
Interest income for the nine months ended
September 30, 2014 and 2013 was $34,947 and $8,353 respectively. The increase in interest income compared to the same period in
2013 is primarily due to higher average cash balances held during 2014 compared to the same period of 2013, as a result of our
fourth quarter 2013 equity and warrant offering.
Interest Expense. Interest expense
for the three months ended September 30, 2014 and 2013 was approximately $0 and $1.9 million, respectively. The decrease in interest
expense in 2014 compared to the same period in 2013 is the result of the conversion of our convertible debentures as part of our
equity and warrant offering in the fourth quarter of 2013.
Interest expense for the nine months ended
September 30, 2014 and 2013 was approximately $0 and $5.9 million, respectively. The decrease in interest expense in 2014 compared
to the same period in 2013 is the result of the conversion of our convertible debentures as part of our equity and warrant offering
in the fourth quarter of 2013.
Other Income. Other income for the
three months ended September 30, 2014 was approximately $5.8 million compared to other income of approximately $2.0 million for
the three months ended September 30, 2013. The other income recorded for each of these periods was primarily due to decreases in
our stock price, resulting in non-cash adjustments to the warrant liability during the three months ended September 30, 2014 and
2013.
Other income for the nine months ended September
30, 2014 was approximately $20.8 million compared to other income of approximately $1.0 million for the nine months ended September
30, 2013. The other income recorded for each of these periods was primarily due to decreases in our stock price, resulting in non-cash
adjustments to the warrant liability during the nine months ended September 30, 2014 and 2013.
Liquidity and Capital Resources
The following table summarizes our liquidity
and capital resources as of September 30, 2014 and December 31, 2013 and our net changes in cash and cash equivalents for the nine
months ended September 30, 2014 and 2013 (the amounts stated are expressed in thousands):
| |
September 30, | | |
December 31, | |
Liquidity and capital resources | |
2014 | | |
2013 | |
| |
| | |
| |
Cash and cash equivalents | |
$ | 11,577 | | |
$ | 26,774 | |
Working capital | |
| 8,880 | | |
| 22,959 | |
Stockholders' (deficit) equity | |
| (6,174 | ) | |
| (12,883 | ) |
| |
Nine Months Ended September 30, | |
Cash flow data | |
2014 | | |
2013 | |
| |
| | |
| |
Cash used in: | |
| | | |
| | |
Operating activities | |
$ | (15,177 | ) | |
$ | (9,381 | ) |
Investing activities | |
| (20 | ) | |
| - | |
Financing activities | |
| - | | |
| (22 | ) |
Net decrease in cash and cash equivalents | |
$ | (15,197 | ) | |
$ | (9,403 | ) |
Our total cash resources as of
September 30, 2014 were approximately $11.6 million compared to approximately $26.8 million as of December 31, 2013. As of
September 30, 2014, we had approximately $18.0 million in liabilities (of which approximately $15.1 million represented
non-cash derivative liabilities), and approximately $8.9 million of net working capital. We realized net income of
approximately $3.2 million and had negative cash flow from operating activities of $15.2 million for the nine months ended
September 30, 2014. As we continue to develop our product candidates, we expect to incur substantial and
increasing losses, which will continue to generate negative net cash flows from operating activities as we expand our
technology portfolio and engage in further research and development activities, particularly the conducting of pre-clinical
studies and clinical trials.
From inception through September 30, 2014,
we have financed our operations through private sales of our equity and debt securities. As we have not generated any revenue
from operations to date, and we do not expect to generate revenue for several years, if ever, we will need to raise substantial
additional capital in order to continue to fund our research and development, including our long-term plans for clinical trials
and new product development, as well as to fund operations generally. We may seek to raise additional funds through various
potential sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can
give no assurances that we will be able to secure such additional sources of funds to support our operations, or if such funds
are available to us, that such additional financing will be sufficient to meet our needs.
Based on our current development plans,
we believe our existing cash resources are sufficient to fund our operations into the second quarter of 2015. However,
based on the various options for future clinical studies of onapristone, AR-42 and AR-12, our projected cash needs are difficult
to predict. In addition, there are other factors which may also cause our actual cash requirements to vary materially, including
changes in the focus and direction of our research and development programs; the acquisition and pursuit of development of new
product candidates; competitive and technical advances; costs of commercializing any of the product candidates; and costs of filing,
prosecuting, defending and enforcing any patent claims and any other intellectual property rights. If we are unable to raise
additional funds when needed, we may not be able to continue development and regulatory approval of our products, and we could
be required to delay, scale back or eliminate some or all our research and development programs and we may need to wind down our
operations altogether. Each of these alternatives would likely have a material adverse effect on our business and may result
in a loss of your entire investment in our common stock.
The actual amount of funds we will need
to operate is subject to many factors, some of which are beyond our control. These factors include the following:
| · | the progress of our research activities; |
| · | the costs of hiring additional full-time personnel; |
| · | the number and scope of our research programs; |
| · | the progress of our pre-clinical and clinical development activities; |
| · | the costs and timing of manufacturing our drug candidates; |
| · | the progress of the development efforts of parties with whom we have entered into research and development agreements; |
| · | our ability to maintain current research and development programs and to establish new research and development and licensing
arrangements; |
| · | the cost involved in prosecuting and enforcing patent claims and other intellectual property rights; and |
| · | the cost and timing of regulatory approvals. |
We have based our estimates on assumptions
that may prove to be wrong. We may need to obtain additional funds sooner than planned or in greater amounts than we currently
anticipate.
License Agreement Commitments
Onapristone License Agreement
Our rights to onapristone are governed by
a license agreement with Invivis dated February 13, 2012. Under this agreement, we hold an exclusive, royalty-bearing license for
the rights to commercialize onapristone for all therapeutic uses. The license agreement provides us with worldwide rights to onapristone
with the exception of France, although under the license agreement we have an option to acquire French commercial rights from Invivis
by providing notice to Invivis and making a cash payment.
The onapristone license agreement provides
us with exclusive, worldwide rights to a patent portfolio claiming priority to a U.S. provisional patent application that relates
to assays for predictive biomarkers for anti-progestin efficacy. If the pending patent application issues, the issued patent would
be scheduled to expire in 2031. We intend to expand our patent portfolio by filing additional patent applications covering the
use and manufacture of onapristone and/or a companion diagnostic product. We have filed patent applications directed to forms of
the onapristone compound.
We 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. In January 2014, we made the second milestone payment to Invivis upon the dosing of the first subject in the
first Company-sponsored Phase I clinical trial of onapristone. In addition, we will pay Invivis low single digit sales royalties
based on net sales of onapristone by us or any of our sublicensees. Pursuant to a separate services agreement, Invivis will provide
us 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,
we 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 we 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 us to the extent we fail to cure any such breach within 90 days after receiving notice of
such breach or in the event we file for bankruptcy. We may terminate the agreement for any reason upon 90 days’ prior written
notice.
University of Minnesota License
In February 2014, we entered into an Exclusive
Patent License Agreement with the Regents of the University of Minnesota (UM), pursuant to which we were granted an exclusive,
worldwide, royalty-bearing license for the rights to develop and commercialize technology embodied by certain patent applications
relating to a gene expression signature derived from archived breast cancer tissue samples. We plan to develop and commercialize
this technology as part of our companion diagnostic development program as a tool to identify progesterone-stimulated pathway activation,
which in turn may identify patients who would be more likely to benefit from treatment with onapristone.
The license agreement requires us to use
our commercially reasonable efforts to commercialize the licensed technology as soon as practicable, and includes several performance
milestones relating to the development and commercialization of the technology to be achieved by us at specified dates beginning
in the second quarter of 2014 and continuing during the term of the agreement. Under the terms of the agreement, we made a small
one-time cash payment and reimbursed UM for past patent expenses it has incurred. The agreement also provides that we will pay
royalties to the UM on net sales of “Licensed Products” (as defined in the agreement) at a rate in the low-single digits,
which royalty obligation terminates on a licensed product-by-licensed product and country-by-country basis upon the first date
when there is no longer a valid claim under a licensed patent or patent application covering such licensed product in the country
where the licensed product is made or sold.
The term of the license agreement continues
until the last date on which there is any active licensed patent or pending patent application. UM may terminate the agreement
earlier upon a breach by us of one or more of our obligations that remains uncured for a period specified in the agreement. UM
may also terminate the agreement if we voluntarily file for bankruptcy or similar proceeding, or if a petition for an involuntary
bankruptcy proceeding is filed and is not released for 60 days. The agreement may be immediately terminated upon notice to us if
we commence or maintain a proceeding in which we assert that the licensed patents are invalid or unenforceable. We may terminate
the agreement at any time and for any reason upon 90 days’ written notice.
The license agreement further provides that
we will indemnify and hold UM and its affiliates harmless from any and all suits, actions, claims, liabilities, demands, damages,
losses or expenses relating to our exercise of its rights under the agreement, including our right to commercialize the licensed
technology. UM is required to indemnify us with respect to claims relating to or resulting from its breach of the agreement.
AR-12 and AR-42 License Agreements
Our rights to AR-12 and AR-42 are governed
by separate license agreements with The Ohio State University Research Foundation, or Ohio State, entered into in January 2008.
Pursuant to each of these agreements, we have exclusive, worldwide, royalty-bearing licenses for the rights to commercialize technologies
embodied by certain issued patents, patent applications, know-how and improvements relating to AR-12 and AR-42 for all therapeutic
uses.
Under our license agreement for AR-12, we
have exclusive, worldwide rights to one issued U.S. patent and four pending U.S. patent applications that relate to AR-12 and particular
uses of AR-12 according to our business plan. The issued patent includes composition of matter claims. The issued patent is currently
scheduled to expire in 2024. If the pending patent applications issue, the latest of the issued patent or patents would be scheduled
to expire in 2028.
Under our license agreement for AR-42, we
have exclusive, worldwide rights to two pending U.S. patent applications that relate to AR-42 and particular uses of AR-42 according
to our business plan. If either or both of the pending patent applications issue, the issued patent or patents would both be scheduled
to expire in 2024. In addition, in 2010, we filed one U.S. provisional patent application directed primarily to particular methods
of using AR-42. If any U.S. patent claiming priority to the provisional patent applications issues, such a patent would be scheduled
to expire in 2031.
In 2008, pursuant to our license agreements
for AR-12 and AR-42, we made one-time cash payments to Ohio State in the aggregate amount of $450,000 and reimbursed it for past
patent expenses. Additionally, we are required to make performance-based cash payments upon successful completion of clinical and
regulatory milestones relating to AR-12 and AR-42 in the U.S., 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, we paid Ohio State a milestone payment upon the commencement of the
Phase I clinical study of AR-12. Pursuant to the license agreements for AR-12 and AR-42, we must pay Ohio State royalties on net
sales of licensed products at rates in the low-single digits. To the extent we enter into a sublicensing agreement relating to
either or both of AR-12 or AR-42, we will be required to pay Ohio State a portion of all non-royalty income received from such
sublicensee.
The license agreements with Ohio State further
provide that we 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, respectively, 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 our breach of the terms of the license the extent we fail to cure any such breach within
90 days after receiving notice of such breach or our bankruptcy. We may terminate either license upon 90 days’ prior written
notice.
Off -Balance Sheet Arrangements
There were no off-balance sheet arrangements
as of September 30, 2014.
Critical Accounting Policies and Estimates
Our financial statements are prepared in
accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate
our estimates and assumptions on an ongoing basis, including research and development and clinical trial accruals, and stock-based
compensation estimates. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable
under the circumstances. Our actual results could differ from these estimates. We believe the following critical accounting policies
reflect the more significant judgments and estimates used in the preparation of our financial statements and accompanying notes.
Research and Development Expenses and Accruals
R&D expenses consist primarily of salaries
and related personnel costs, fees paid to consultants and outside service providers for pre-clinical, clinical, and manufacturing
development, legal expenses resulting from intellectual property prosecution, costs related to obtaining and maintaining our product
licenses, contractual review, and other expenses relating to the design, development, testing, and enhancement of our product candidates.
Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments,
and payments upon the completion of milestones or receipt of deliverables.
Our cost accruals for clinical trials and
other R&D activities are based on estimates of the services received and efforts expended pursuant to contracts with numerous
clinical trial centers and clinical research organizations, or CROs, clinical study sites, laboratories, consultants, or other
clinical trial vendors that perform the activities. Related contracts vary significantly in length, and may be for a fixed amount,
a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of these elements. Activity levels
are monitored through close communication with the CROs and other clinical trial vendors, including detailed invoice and task completion
review, analysis of expenses against budgeted amounts, analysis of work performed against approved contract budgets and payment
schedules, and recognition of any changes in scope of the services to be performed. Certain CROs and significant clinical trial
vendors provide an estimate of costs incurred but not invoiced at the end of each quarter for each individual trial. The estimates
are reviewed and discussed with the CRO or vendor as necessary, and are included in R&D expenses for the related period. For
clinical study sites, which are paid periodically on a per-subject basis to the institutions performing the clinical study, we
accrue an estimated amount based on subject screening and enrollment in each quarter. All estimates may differ significantly from
the actual amount subsequently invoiced, which may occur several months after the related services were performed.
In the normal course of business we contract
with third parties to perform various R&D activities in the on-going development of our product candidates. The financial terms
of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments
under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, and the
completion of portions of the clinical trial or similar conditions. The objective of our accrual policy is to match the recording
of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related
to clinical trials and other R&D activities are recognized based on our estimate of the degree of completion of the event or
events specified in the specific contract.
No adjustments for material changes in estimates
have been recognized in any period presented.
Stock-Based Compensation
Our results include non-cash compensation
expense as a result of the issuance of stock, stock options and warrants. We have issued stock options to employees, directors,
consultants and Scientific Advisory Board members under our 2005 Stock Option Plan, as amended.
We expense the fair value of employee stock-based
compensation over the vesting period. When more precise pricing data is unavailable, we determine the fair value of stock options
using the Black-Scholes option-pricing model. This valuation model requires us to make assumptions and judgments about the variables
used in the calculation. These variables and assumptions include the weighted-average period of time that the options granted are
expected to be outstanding, the volatility of our common stock, the risk-free interest rate and the estimated rate of forfeitures
of unvested stock options.
Stock options or other equity instruments
to non-employees (including consultants and all members of our Scientific Advisory Board) issued as consideration for goods or
services received by us 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. The fair value of any options issued to non-employees is recorded as expense over the applicable service periods.
During the initial period in which our common
stock was registered under the Securities Exchange Act and publicly traded (October 3, 2008 through May 5, 2009), our management
used the following assumptions: On the option grant date, the current available quoted market price for determining the fair value
of our common stock, an expected volatility based on the average expected volatilities of a sampling of five companies with similar
attributes to us, including industry, stage of life cycle, size and financial leverage, an expected dividend rate of 0% based on
management plan of operations, a risk free interest rate based on the current U.S. Treasury 5-year Treasury Bill and an expected
forfeiture rate of 0%.
Subsequent to the deregistration of our
common stock in May 2009, for all options granted in 2009, management estimated the fair value of our common stock to be $1.00
based on the following factors. The stock was publicly trading at $1.00 per share prior to being deregistered. Subsequent to the
deregistration, we did not experience any significant events including clinical trial results, new product acquisitions or discoveries
which management believes would influence a material change in share price following the deregistration. In addition, our management
used the following assumptions for options granted during this period: An expected volatility based on the average expected volatilities
of a sampling of five companies with similar attributes to us, including industry, stage of life cycle, size and financial leverage,
an expected dividend rate of 0% based on management plan of operations, a risk free interest rate based on the current U.S. Treasury
5-year Treasury Bill and an expected forfeiture rate of 0%.
On February 9, 2011, the effective date
of the registration statement filed in connection with our September 2010 private placement of Series A Preferred Stock, we again
became subject to the reporting requirements of the Exchange Act. Due to the lack of an active public market for our common stock,
management estimated the fair value of our common stock using a Monte Carlo simulation model and, in doing so, 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 our future expected stock prices and minimizes standard error.
Management used this valuation for options granted in 2011 (no stock options were granted during the year ended December 31, 2012).
In addition, our management used the following assumptions for options granted during this period: An expected volatility based
on the average expected volatilities of a sampling of five companies with similar attributes to us, including industry, stage of
life cycle, size and financial leverage, an expected dividend rate of 0% based on management plan of operations, a risk free interest
rate based on the current U.S. Treasury 5-year Treasury Bill and an expected forfeiture rate of 0%.
The terms and vesting schedules for share-based
awards vary by type of grant and the employment status of the grantee. Generally, the awards vest based upon time-based or performance-based
conditions. Performance-based conditions generally include the attainment of goals related to our financial and development performance.
Stock-based compensation expense is included in the respective categories of expense in the Statements of Operations. We expect
to record additional non-cash compensation expense in the future, which may be significant.
Warrant Liability
We account for the warrants issued in connection
with the 2013 private placement, the 2012 private placement and the 2010 private placement in accordance with the guidance on Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that we classify the warrant
instrument as a liability at its fair value and adjust 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 us, in connection with private placements of securities, has been
estimated using a Monte Carlo simulation model. 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 our future expected stock prices
and minimizes standard error.
Recent Accounting Pronouncements
In June 2014, the FASB issued Accounting Standards Update
(“ASU”) No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable
Interest Entities Guidance in Topic 810, Consolidation. The objective of the amendments in this Update is to eliminate requirements
for entities which have either not commenced principal operations or have not generated significant revenue from principal operations
to present inception-to-date information in the financial statements. In addition, the Update eliminated the exception for evaluating
such entities as possible variable interest entities.
We have elected to early adopt this guidance
as permitted for financial statements for the year ending December 31, 2014, including this quarterly report. As a result of adopting
this guidance, we have retrospectively removed the inception-to-date financial results that have been historically included in
the financial statements. Further, we have disclosed information about the risks and uncertainties related to the activities in
which we are currently engaged and information about our intended operations.
In August 2014, the FASB issued ASU No.
2014-15, “Presentation of Financial Statements-Going Concern (Topic 205-40)”. Under the standard, management
is required to evaluate for each annual and interim reporting period whether it is a probable that the entity will not be able
to meet its obligations as they become due within one year after the date that financial statements are issued, or are available
to be issued, where applicable. ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2016, and early adoption is permitted. Accordingly, the standard is effective for the Company on January 1,
2017. We will be evaluating the impact, if any, that the standard will have on our financial condition, results of operations,
and disclosures in the near future.
| Item 3. | Quantitative and Qualitative Disclosures About Market
Risk. |
Not applicable.
| Item 4. | Controls and Procedures. |
We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and
that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Commission Rule 13a-15(b),
we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the quarter covered by this report. Based on the foregoing, our Principal Executive Officer and Principal Financial
Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal
control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
| Item 1. | Legal Proceedings. |
We are not involved in any pending legal
proceedings.
An investment in our common stock involves
significant risk. You should carefully consider the information described in the following risk factor, together with the other
information appearing elsewhere in this report, before making an investment decision regarding our common stock. You should also
consider the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Annual
Report”) under the caption “Item 1A. Risk Factors.” If any of the risks described below or in our
2013 Annual Report actually occur, our business, financial conditions, results of operation and future growth prospects would likely
be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose
all or a part of your investment in our common stock. Moreover, the risks described below and in our 2013 Annual Report are
not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect
our business, operating results, prospects or financial condition.
We need substantial additional funding
in order to continue our business operations and the further development of our product candidates. If we are unable to obtain
such additional capital, we will be forced to delay, reduce or eliminate our product development programs and may be forced to
cease our operations altogether.
We are in immediate need of additional capital
to fund our operations. As of September 30, 2014, we had approximately $11.6 million in cash and cash resources, and net working
capital of approximately $8.9 million. During the nine months ended September 30, 2014, we had negative cash flow from operating
activities of $15.2 million, and we expect our negative cash flows from operations to continue for the foreseeable future. Based
on our current development plans, we believe our existing cash resources are sufficient to fund our operations into approximately
the second quarter of 2015. Further, beyond funding our basic corporate activities, we require substantial additional funds to
support our continued research and development activities, and the anticipated costs of preclinical studies and clinical trials,
regulatory approvals and eventual commercialization.
Since we do not currently generate any revenue
from operations, nor do we expect to for the foreseeable future, the most likely sources of such additional capital include private
placements of our equity securities, including our common stock or securities convertible into or exchangeable for our common stock,
debt financing or funds from a potential strategic licensing or collaboration transaction in which we would license or otherwise
relinquish the rights to one or more of our product candidates. To the extent that we raise additional capital by issuing equity
securities, our stockholders will likely experience dilution, which may be significant depending on the number of shares we may
issue and the price per share. If we raise additional funds through collaborations and licensing arrangements, it may be necessary
to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable
to us. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to restrictive
covenants that could affect the manner in which we conduct our business.
We currently have no committed sources of
additional capital and our access to capital funding is always uncertain. Despite our ability to secure adequate capital in the
past, there is no assurance that additional equity or debt financing will be available to us when needed, on acceptable terms or
even at all. If we fail to obtain the necessary additional capital when needed, we may be required to delay, reduce the scope of,
or eliminate one or more of our research or development programs. In addition, we could be forced to discontinue product development,
reduce or forego attractive business opportunities and even cease our operations altogether
Our forecasts regarding the sufficiency
of our financial resources to support our current and planned operations are forward-looking statements and involve significant
risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in this
“Risk Factors” section and in our Annual Report on Form 10-K for the year ended December 31, 2013. We have based these
forecasts on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently
expect.
| Item 2. | Unregistered Sales of Securities and Use of Proceeds. |
Not applicable.
| Item 3. | Defaults Upon Senior Securities. |
Not applicable.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
| Item 5. | Other Information. |
Not applicable.
Exhibit No. |
|
Exhibit Description |
|
|
|
10.1 |
|
Separation Agreement between Arno Therapeutics, Inc. and Glenn R. Mattes dated July 25, 2014 (incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed July 31, 2014). † |
|
|
|
31.1 |
|
Certification of Principal Executive Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101 |
|
The following financial information from Arno Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Condensed Statements of Operations for the three and nine months ended September 30, 2014 and September 30, 2013 (iii) Condensed Statement of Stockholders’ (Deficit) Equity for the period from January 1, 2014 through September 30, 2014, (iv) Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013, and (v) Notes to Condensed Financial Statements. |
|
|
|
† |
|
Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q. |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
ARNO THERAPEUTICS, INC. |
|
|
|
Date: November 14, 2014 |
By: |
/s/ Lawrence A. Kenyon |
|
|
Lawrence A. Kenyon |
|
|
Chief Operating Officer and Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
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