NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 2015 and 2014
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. LIQUIDITY AND CAPITAL RESOURCES
Cash resources as of December 31, 2015 were
approximately $0.1 million, compared to approximately $7.9 million as of December 31, 2014. Based on resources at December 31,
2015, including the proceeds received from its recent financing transactions and the current plan of expenditure for continuing
the development of the Company’s current product, the Company believes that it has sufficient capital to fund its operations
through approximately May 2016. 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 depends on its ability to raise additional funds
through various potential sources, such as equity and debt financing, or from a transaction in which it would license rights to
its product candidates to another pharmaceutical company. The Company will continue to fund operations from cash on hand and through
sources of capital similar to those previously described. The Company cannot assure that it will be able to secure such additional
financing, or if available, that it will be sufficient to meet its needs.
The long-term success of the Company depends
on its ability to develop new products to the point of regulatory approval and subsequent revenue generation and, accordingly,
to raise enough capital to finance these developmental efforts. Management plans to raise additional capital either by selling
shares of its stock or other securities, issuing additional indebtedness or by licensing the rights to one or more of its product
candidates 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 through May 2016 and beyond,
management can provide no assurances that the Company will be successful in raising sufficient funds.
In addition, to the extent that the Company
raises additional funds by issuing shares of its common stock or other securities convertible or exchangeable for shares of common
stock, stockholders 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.
2. LIQUIDITY AND CAPITAL RESOURCES
(Continued)
These factors raise substantial doubt about
the Company’s ability to continue as a going concern. The Company’s financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The financial statements do not include any adjustments that might result from the inability of the Company to continue as a going
concern.
3. THE MERGER AND BASIS OF PRESENTATION
The accompanying audited financial statements
of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the
instructions to Form 10-K promulgated by the Securities and Exchange Commission (“SEC”).
(a) Description of the Merger and Private Placement Offering
The Company completed the Merger on June
3, 2008. In accordance with the terms of the Merger, each share of common stock of Old Arno that was outstanding
immediately prior to the Merger was exchanged for 1.99377 shares of the Company’s common stock. In addition, all
securities convertible into or exercisable for shares of Old Arno common stock outstanding immediately prior to the Merger were
cancelled, and the holders thereof received similar securities convertible into or exercisable for the purchase of an aggregate
of 1,611,760 shares of the Company’s common stock. In consideration for their shares of the Company’s pre-merger common
stock, the Company’s shareholders received an aggregate of 19,291,824 shares of Laurier common stock. Immediately
prior to the effective time of the Merger, 1,100,200 shares of Laurier’s common stock were issued and outstanding. Upon completion
of the Merger, the Old Arno shareholders owned approximately 95% of the Company’s issued and outstanding common stock, assuming
the exercise of all of the issued and outstanding common stock options and warrants.
Following the Merger, the business conducted
by the Company is the business conducted by Old Arno prior to the Merger. In addition, the directors and officers of Laurier were
replaced by the directors and officers of Old Arno.
As a condition and immediately prior to
the closing of the Merger, on June 2, 2008, Old Arno completed a private placement of its equity securities whereby it received
gross proceeds of approximately $17,732,000 through the sale of approximately 3,691,900 shares of Old Arno Common Stock to selected
accredited investors, which shares were exchanged for approximately 7,360,700 shares of Company Common Stock after giving effect
to the Merger. Contemporaneously with the June 2008 private placement, the Old Arno’s outstanding 6% Notes converted into
984,246 shares of Old Arno’s common stock and the holders of the Notes received warrants to purchase an aggregate of 98,409
shares of Old Arno common stock at an exercise price equal to $4.83 per share. The shares issued upon conversion were exchanged
for an aggregate of approximately 1,962,338 shares of the Company’s Common Stock and the warrants were exchanged for
five-year warrants to purchase an aggregate of approximately 196,189 shares of the Company’s Common Stock at an exercise
price equal to $2.42 per share.
All references to share and per share amounts
in these financial statements have been restated to retroactively reflect the number of common shares of Arno common stock issued
pursuant to the Merger.
(b) Accounting Treatment of the Merger; Financial Statement
Presentation
The Merger was accounted for as a reverse
acquisition pursuant to Accounting Standards Codification (“ASC”) 805-40-25, which provides that the “merger
of a private operating company into a non-operating public shell corporation with nominal net assets typically results in the owners
and management of the private company having actual or effective operating control of the combined company after the transaction,
with the shareholders of the former public shell continuing only as passive investors. These transactions are considered by the
Securities and Exchange Commission to be capital transactions in substance, rather than business combinations. That is, the transaction
is equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation, accompanied
by a recapitalization.” Accordingly, the Merger has been accounted for as a recapitalization, and, for accounting purposes,
Old Arno is considered the acquirer in a reverse acquisition.
3. THE MERGER AND BASIS OF PRESENTATION
(Continued)
Laurier’s historical accumulated
deficit for periods prior to June 3, 2008, in the amount of $120,538, was eliminated against additional-paid-in-capital, and the
accompanying financial statements present the previously issued shares of Laurier common stock as having been issued pursuant to
the Merger on June 3, 2008. The shares of common stock of the Company issued to the Old Arno stockholders in the Merger are presented
as having been outstanding since August 2005 (the month when Old Arno first sold its equity securities).
Because the Merger was accounted for as
a reverse acquisition under GAAP, the financial statements for periods prior to June 3, 2008 reflect only the operations of Old
Arno.
(c) Reverse Stock Split
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.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements
in conformity with GAAP 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, directors
and consultants, valuation of derivatives and estimates of the probability and potential magnitude of contingent liabilities. Actual
results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid
investments with a remaining maturity of three months or less at the time of acquisition to be cash equivalents.
(c) Convertible Notes Financing Fees
Finance costs relating to the convertible
notes issued are recorded as a direct reduction of the liability and amortized to interest expense over the expected term using
the effective interest method.
(d) Prepaid Expenses
Prepaid expenses consist of payments made
in advance to vendors relating to service contracts for clinical trial development, insurance policies and license fees. These
advanced payments are amortized to expense either as services are performed or over the relevant service period using the straight
line method.
(e) Property and Equipment
Property and equipment consist primarily
of furnishings, fixtures, leasehold improvements and computer equipment and are recorded at cost. Repairs and maintenance costs
are expensed in the period incurred. Depreciation of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the remaining
lease term or the life of the asset, whichever is shorter.
Description
|
|
Estimated Useful Life
|
|
|
|
Office equipment and furniture
|
|
5 to 7 years
|
Leasehold improvements
|
|
3 years
|
Computer equipment
|
|
3 years
|
Equipment under capitalized lease
|
|
Over life of lease
|
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(f) Fair Value of Financial Instruments
The Company measures fair value in accordance
with generally accepted accounting principles. Fair value measurements are applied under other accounting pronouncements that require
or permit fair value measurements. Financial instruments included in the Company’s balance sheets consist of cash and cash
equivalents, accounts payable, accrued expenses, due to related parties, and derivative liability. The carrying amounts of these
instruments reasonably approximate their fair values due to their short-term maturities.
(g) Convertible Debentures and Warrant Liability
The Company accounts for the convertible
debentures and warrants issued in connection with the 2013 Purchase Agreement, the 2012 Purchase Agreement and the 2010 Purchase
Agreement (see Note 10) 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.
(h) Concentration of Credit Risk
Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company deposits cash
and cash equivalents with high credit quality financial institutions and is insured to the maximum limitations. Balances in these
accounts may exceed federally insured limits at times, which expose the Company to institutional risk.
(i) 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 executive, human resources and facilities expenses.
The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial and the invoices
received from its external service providers. As actual costs become known, the Company adjusts its accruals in the period when
actual costs become known. Costs related to the acquisition of technology rights and patents for which development work is still
in process are charged to operations as incurred and considered a component of research and development expense.
(j) Stock-Based Compensation
Stock-based compensation cost is measured
at the grant date based on the value of the award and is recognized as expense over the required service period, which is generally
equal to the vesting period. Share-based compensation is recognized only for those awards that are ultimately expected to vest.
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. The fair value of any options issued to non-employees is recorded
as expense over the applicable service periods.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(k) Basic and Diluted Income/(Loss) per Common 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.
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(11,507,963
|
)
|
|
$
|
7,770,767
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding used in the calculation of basic net income/(loss) per share
|
|
|
20,408,616
|
|
|
|
20,381,554
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
-
|
|
|
|
4,428,441
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding used in the calculation of diluted net income/(loss) per share
|
|
|
20,408,616
|
|
|
|
24,809,995
|
|
For all periods presented, potentially dilutive
securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.
As of December 31, 2015 and 2014, potentially
dilutive securities include:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
4,455,231
|
|
|
|
4,455,231
|
|
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. In addition to the potentially dilutive securities, 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 December 31, 2015 and 2014 were 30,563,107 and 50,867,639, respectively, as their exercise
prices are greater than the fair market price per common share as of December 31, 2015 and 2014, respectively.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(l) Comprehensive Loss
The Company has no components of other comprehensive
loss other than its net loss, and accordingly, comprehensive loss is equal to net loss for all periods presented.
(m) Income Taxes
The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory
tax rates applicable to the period in which the differences are expected to affect taxable income. The Company provides a valuation
allowance when it appears more likely than not that some or all of the net deferred tax assets will not be realized. The Company
has not performed an Internal Revenue Section 382 limitation study. Depending on the outcome of such study, the gross amount of
net operating losses recognized in future tax periods could be limited.
A tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company’s policy is to include
interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes.
The Company recognized no amounts for interest and penalties related to unrecognized tax benefits in 2015 and 2014 respectively.
In addition, the Company had no amounts accrued for interest and penalties as of December 31, 2015 and 2014, respectively.
(n) Recently Issued Accounting Pronouncements
In August 2014, the FASB issued
Accounting Standards Update No. 2014-15, “Presentation of Financial Statements- Going Concern
(Topic 205-40)” (“ASU 2014-15”). 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.
In April 2015, the FASB issued
Accounting Standards Update No. 2015-03, “Interest- Imputation of Interest (Subtopic 835-30)”
(“ASU 2015-03”). This standard requires that debt issuance costs related to a recognized debt liability be
presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt
discounts. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015,
and interim periods within those years. Accordingly, the standard is effective for the Company on December 15, 2015. The
Company adopted ASU 2015-03 as for the fiscal year 2015 and has reported financing costs as a direct reduction from the
carrying amount of convertible notes. The Company’s addition of the standard did not have a material impact on its
financial condition, results of operations and disclosures.
In November 2015, the FASB
issued Accounting Standards Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU
2015-17”). The new standard requires all companies to prospectively classify all deferred tax assets and liabilities as
noncurrent on the balance sheet. ASU 2015-17 will be effective for public entities on January 1, 2017. However, early
adoption is permitted. The Company is evaluating the potential impact of adopting this standard on its financial
statements.
In January 2016, the FASB issued
Accounting Standards Update No. 2016-01, “Financial Instruments” (“ASU 2016-01”). Equity investments
not accounted for under the equity method of accounting will be measured at fair value, with changes in fair value recognized
in current earnings. ASU 2016-01 becomes effective for fiscal years beginning after December 15, 2017. Early adoption is
permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not
believe the adoption of this standard will have a material impact on its financial statements, results of operations or
related financial statement disclosures.
In February 2016, the FASB issued
Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Leasees will need to
recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. ASU
2016-02 becomes effective for the Company on January 1, 2019, and early adoption is permitted upon issuance. The Company is
evaluating the potential impact of adopting this standard on its financial statements.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31,
2015 and 2014 consist of the following:
|
|
2015
|
|
|
2014
|
|
Computer equipment and software
|
|
$
|
17,721
|
|
|
$
|
17,721
|
|
Office furniture and equipment
|
|
|
72,338
|
|
|
|
72,338
|
|
Leasehold improvements
|
|
|
8,449
|
|
|
|
8,449
|
|
Capital leases- equipment
|
|
|
11,500
|
|
|
|
11,500
|
|
Total property and equipment
|
|
|
110,008
|
|
|
|
110,008
|
|
Accumulated depreciation
|
|
|
(86,905
|
)
|
|
|
(79,278
|
)
|
Total property and equipment, net
|
|
$
|
23,103
|
|
|
$
|
30,730
|
|
Depreciation expense for the years ended
December 31, 2015 and 2014 was $7,627 and $12,586, respectively.
6. 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, that the Company has an option to acquire French commercial rights from Invivis upon notice to Invivis together
with additional consideration.
The onapristone license agreement provides
the Company with exclusive, worldwide rights to a United States provisional patent application that relates to assays for predictive
biomarkers for anti-progestin efficacy. The Company intends to expand its patent portfolio by filing additional patent applications
covering the use of onapristone and/or a companion diagnostic product. If the pending patent application issues, the issued patent
would be scheduled to expire in 2031.
The Company made a one-time cash payment
of $500,000 to Invivis upon execution of the license agreement on February 13, 2012. Additionally, Invivis will receive performance-based
cash payments of up to an aggregate of $15.1 million upon successful completion of clinical and regulatory milestones relating
to onapristone, which milestones include the marketing approval of onapristone in multiple indications in the United States or
the European Union as well as Japan. The 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. A milestone payment of $350,000 for the enrollment of the first patient in a Phase II clinical
trial sponsored by Arno was paid in July 2015. 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. The services agreement was not renewed upon its expiration on April 1, 2015.
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.
6. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY
(Continued)
AR-12 and AR-42 License Agreements
The Company’s rights to both AR-12
and AR-42 are governed by separate license agreements with The Ohio State University Research Foundation (“Ohio State”)
entered into in January 2008. Pursuant to each of these agreements, Ohio State granted the Company exclusive, worldwide, royalty-bearing
licenses to commercialize certain patent applications, know-how and improvements relating to AR-12 and AR-42 for all therapeutic
uses.
In 2008, pursuant to the Company’s
license agreements for AR-12 and AR-42, the Company made one-time cash payments to Ohio State in the aggregate amount of $450,000
and reimbursed it for past patent expenses. Additionally, the Company is required to make performance-based cash payments upon
successful completion of clinical and regulatory milestones relating to AR-12 and AR-42 in the United States, Europe and Japan.
The license agreements for AR-12 and AR-42 provide for aggregate potential milestone payments of up to $6.1 million for AR-12,
of which $5.0 million is due only after marketing approval in the United States, Europe and Japan, and $5.1 million for AR-42,
of which $4.0 million is due only after marketing approval in the United States, Europe and Japan. In September 2009,
the Company paid Ohio State a milestone payment upon the commencement of the first Company-sponsored Phase I clinical study
of AR-12. The first milestone payment for AR-42 will be due when the first patient is dosed in the first Company-sponsored
clinical trial, which is not expected to occur in 2013. Pursuant to the license agreements for AR-12 and AR-42, the Company must
pay Ohio State royalties on net sales of licensed products at rates in the low-single digits. To the extent the Company
enters into a sublicensing agreement relating to either or both of AR-12 or AR-42, the Company will be required to pay Ohio State
a portion of all non-royalty income received from such sublicensee. The Company was not required to make any milestone payments
during 2015 and does not expect to be required to make any milestone payments under these license agreements during 2016.
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.
7. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 2015
and 2014 consist of the following:
|
|
2015
|
|
|
2014
|
|
Accrued research and development expenses
|
|
$
|
902,723
|
|
|
$
|
744,240
|
|
Accrued compensation and related benefits
|
|
|
197,457
|
|
|
|
407,497
|
|
Accrued severance
|
|
|
-
|
|
|
|
250,605
|
|
Accrued interest on convertible notes
|
|
|
24,510
|
|
|
|
-
|
|
Accrued other expenses
|
|
|
-
|
|
|
|
7,951
|
|
|
|
$
|
1,124,690
|
|
|
$
|
1,410,293
|
|
8. CONVERTIBLE NOTES PAYABLE
On October 21, 2015, the Company
issued a 6% convertible promissory note (the “6% Note”) in the principal amount of $2,100,000 with an original
maturity date of October 21, 2016. The 6% Note was mandatorily convertible into shares of the Company’s equity
securities upon the closing of a financing in which the Company received cumulative gross proceeds of at least $3,500,000 (a
“Qualified Financing”), including the $2,100,000 from notes purchase, through the issuance of shares of its
equity securities or any securities convertible or exchangeable for equity securities, of one or more series (“Equity
Securities”). Contemporaneously with the closing of a Qualified Financing, the outstanding principal of the 6% Note and
all accrued but unpaid interest would automatically convert into the same kind of validly issued, fully paid and
non-assessable Equity Securities as issued in the Qualified Financing at a conversion price equal to the per share or unit
purchase price of the Qualified Financing. The Company incurred $12,528 of issuance costs related to the 6% Note.
The principal balance, unamortized financing costs and net carrying
amount of the 6% Note was as follows at December 31, 2015:
|
|
Principal
|
|
|
Unamortized Debt
Issuance Costs
|
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6% convertible notes, due October 21, 2016
|
|
$
|
2,100,000
|
|
|
$
|
10,091
|
|
|
$
|
2,089,909
|
|
As of December 31, 2015, the Company had $24,510 in accrued and
unpaid interest. See Note 14 for the subsequent conversion of the 6% Note in January 2016.
9. 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 December 31, 2015.
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 December 31, 2015:
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
|
|
|
|
|
Quoted Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
December 31,
2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability - 2012 Series
A
|
|
$
|
1,753,969
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,753,969
|
|
Warrant liability - 2012 placement agent
|
|
|
7,661
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,661
|
|
Warrant liability - 2013 Series D
|
|
|
2,985,512
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,985,512
|
|
Warrant liability - 2013
placement agent
|
|
|
3,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,750,687
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,750,687
|
|
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, 2014:
|
|
|
|
|
Quoted Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
December 31,
2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability - 2010 Class B
|
|
$
|
28,066
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,066
|
|
Warrant liability - 2012 Series A&B
|
|
|
3,520,319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,520,319
|
|
Warrant liability - 2012 placement agent
|
|
|
67,246
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,246
|
|
Warrant liability - 2013 Series D&E
|
|
|
3,036,986
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,036,986
|
|
Warrant liability - 2013
placement agent
|
|
|
18,907
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,671,524
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,671,524
|
|
9. 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 at December 31, 2015:
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
|
|
Total
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
Warrant
|
|
|
2013
|
|
|
2013
|
|
|
Placement
|
|
|
2012
|
|
|
2012
|
|
|
Placement
|
|
|
2010
|
|
|
|
Liability
|
|
|
Series E
|
|
|
Series D
|
|
|
Agent
|
|
|
Series B
|
|
|
Series A
|
|
|
Agent
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 appreciation
|
|
|
(29,193,357
|
)
|
|
|
(5,829,469
|
)
|
|
|
(9,471,278
|
)
|
|
|
(79,173
|
)
|
|
|
(2,804,295
|
)
|
|
|
(10,379,369
|
)
|
|
|
(295,387
|
)
|
|
|
(334,386
|
)
|
Balance at December 31, 2014
|
|
$
|
6,671,524
|
|
|
$
|
25,737
|
|
|
$
|
3,011,249
|
|
|
$
|
18,907
|
|
|
$
|
12,381
|
|
|
$
|
3,507,938
|
|
|
$
|
67,246
|
|
|
$
|
28,066
|
|
Total gains or losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation
|
|
|
(1,920,837
|
)
|
|
|
(25,737
|
)
|
|
|
(25,737
|
)
|
|
|
(15,362
|
)
|
|
|
(12,381
|
)
|
|
|
(1,753,969
|
)
|
|
|
(59,585
|
)
|
|
|
(28,066
|
)
|
Balance at December 31, 2015
|
|
$
|
4,750,687
|
|
|
$
|
-
|
|
|
$
|
2,985,512
|
|
|
$
|
3,545
|
|
|
$
|
-
|
|
|
$
|
1,753,969
|
|
|
$
|
7,661
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value per Warrant
|
|
$
|
0.202
|
|
|
$
|
-
|
|
|
$
|
0.232
|
|
|
$
|
0.054
|
|
|
$
|
-
|
|
|
$
|
0.170
|
|
|
$
|
0.027
|
|
|
$
|
-
|
|
Significant assumptions used at December
31, 2015 and 2014 for the warrants and embedded conversion discount derivative liability of the Debentures are as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
162
|
%
|
|
|
173
|
%
|
Risk-free interest rate
|
|
|
1.38
|
%
|
|
|
1.65
|
%
|
10. STOCKHOLDERS’ EQUITY
Common Stock
As of December 31, 2015, the Company had
20,408,616 shares of common stock issued and outstanding and approximately 35,018,338 shares of common stock reserved for issuance
upon the exercise of outstanding options and warrants.
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”).
|
10. 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 Purchase Agreement contains customary
representations, warranties and covenants by each of the Company and the Purchasers. In addition, the 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
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 (the “Filing
Date”), 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 “Effectiveness Date”). The
Registration Statement was 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.
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 $0.0 million at December 31, 2015 and December 31, 2014. 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, and the Class B warrants, representing the right to purchase an aggregate of 801,885 shares of common
stock, expired unexercised during September 2015.
10. 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 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. Because
of this anti-dilution provision and the inherent uncertainty as to the probability of future common share issuances, the Black-Scholes
option pricing model the Company uses for valuing stock options could not be used. Management used a Monte Carlo simulation
model and, in doing so, utilized a third-party valuation report to determine the warrant liability to be approximately $1.8 million
and $3.5 million at December 31, 2015 and December 31, 2014, respectively. The Debentures were converted to common stock in 2013.
At the time of the conversion of the Debentures, the expiration date of the 2012 Series B Warrants was extended to October 31,
2014, and was thereafter further extended to January 31, 2015. The 2012 Series B warrants, representing the right to purchase an
aggregate of approximately 6,190,500 shares of common stock, expired unexercised on January 31, 2015.
In connection with the 2012 offering of
the Debentures and 2012 Warrants, the Company engaged Maxim Group LLC, or Maxim Group, to serve as placement agent. In consideration
for its services, the Company paid Maxim Group a placement fee of $1,035,000. In addition, the Company issued to Maxim Partners
LLC, or Maxim Partners, an affiliate of Maxim Group, 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 Partners are in substantially
the same form as the Warrants issued to the investors, except that they do not include certain anti-dilution provisions contained
in the Warrants. However, the placement warrants do contain a provision that could require the Company to repurchase the warrants
from the holder under certain conditions. Management used a Monte Carlo simulation model and, in doing so, utilized a third-party
valuation report to determine the warrant liability to be approximately $0.0 million and $0.1 million at December 31, 2015 and
December 31, 2014, 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. 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 Warrants to be approximately $3.0 million at December 31, 2015 and approximately $3.0 million at December 31,
2014 for the Series D and Series E Warrants. The 2013 Series E Warrants, representing the right to purchase an aggregate of 12,868,585
shares of common stock, expired unexercised on January 31, 2015.
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.
Below is a table that
summarizes all outstanding warrants to purchase shares of the Company’s common stock as of December 31, 2015.
10. STOCKHOLDERS’ EQUITY
(Continued)
|
Grant Date
|
|
Warrants
Issued
|
|
|
Exercise
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Expiration
Date
|
|
Exercised
|
|
|
Warrants
Outstanding
|
|
|
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
|
|
|
$
|
4.00
|
|
|
$
|
4.00
|
|
|
10/29/2018
|
|
|
-
|
|
|
|
12,868,585
|
|
|
10/29/2013
|
|
|
65,650
|
|
|
$
|
2.64
|
|
|
$
|
2.64
|
|
|
10/29/2018
|
|
|
-
|
|
|
|
65,650
|
|
|
|
|
|
27,990,680
|
|
|
|
|
|
|
$
|
2.76
|
|
|
|
|
|
-
|
|
|
|
27,990,680
|
|
11. 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 December 31, 2015, there are 4,087,657
shares available for future grants and awards under the Plan, which covers stock options, warrants and restricted awards.
During the years ended December 31, 2015
and December 31, 2014 the Company issued the following stock options:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
73,399
|
|
|
|
2,423,742
|
|
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 years ended
December 31, 2015 and 2014:
11. STOCK OPTION PLAN
(Continued)
|
|
Year Ended December 31,
|
|
|
2015
|
|
2014
|
|
|
|
|
|
Expected volatility
|
|
82%
|
|
86% -
92%
|
Expected term
|
|
6 years
|
|
6 years
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
Risk- free interest rate
|
|
1.64%
|
|
1.57% - 1.63%
|
Stock price
|
|
$0.36 - $0.37
|
|
$0.85 - $2.90
|
Forfeiture rate
|
|
0.0%
|
|
0.0%
|
A summary of the status of the options issued
under the Plan at December 31, 2015, and information with respect to the changes in options outstanding is as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2014
|
|
|
7,339,118
|
|
|
$
|
2.59
|
|
|
$
|
-
|
|
Granted
|
|
|
73,399
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(384,859
|
)
|
|
$
|
2.51
|
|
|
|
-
|
|
Options outstanding at December 31, 2015
|
|
|
7,027,658
|
|
|
$
|
2.57
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2015
|
|
|
7,027,658
|
|
|
$
|
2.57
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
4,975,174
|
|
|
$
|
2.67
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for grant under the 2005 Plan
|
|
|
4,087,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. STOCK OPTION PLAN
(Continued)
The following table summarizes information
about stock options outstanding at December 31, 2015:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.36
|
|
|
|
48,399
|
|
|
|
9.84
|
|
|
$
|
0.36
|
|
|
|
1,344
|
|
|
$
|
0.36
|
|
$
|
0.37
|
|
|
|
25,000
|
|
|
|
9.84
|
|
|
$
|
0.37
|
|
|
|
-
|
|
|
$
|
0.37
|
|
$
|
0.85
|
|
|
|
136,785
|
|
|
|
8.84
|
|
|
$
|
0.85
|
|
|
|
49,394
|
|
|
$
|
0.85
|
|
$
|
1.30
|
|
|
|
100,000
|
|
|
|
8.77
|
|
|
$
|
1.30
|
|
|
|
31,250
|
|
|
$
|
1.30
|
|
$
|
2.23
|
|
|
|
97,757
|
|
|
|
0.25
|
|
|
$
|
2.23
|
|
|
|
97,757
|
|
|
$
|
2.23
|
|
$
|
2.40
|
|
|
|
5,097,075
|
|
|
|
7.21
|
|
|
$
|
2.40
|
|
|
|
3,752,444
|
|
|
$
|
2.40
|
|
$
|
2.90
|
|
|
|
1,420,259
|
|
|
|
8.07
|
|
|
$
|
2.90
|
|
|
|
940,602
|
|
|
$
|
2.90
|
|
$
|
8.00
|
|
|
|
65,000
|
|
|
|
4.57
|
|
|
$
|
8.00
|
|
|
|
65,000
|
|
|
$
|
8.00
|
|
$
|
19.38
|
|
|
|
37,383
|
|
|
|
2.28
|
|
|
$
|
19.38
|
|
|
|
37,383
|
|
|
$
|
19.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
7,027,658
|
|
|
|
7.32
|
|
|
$
|
2.57
|
|
|
|
4,975,174
|
|
|
$
|
2.67
|
|
Stock-based compensation
costs under the Plan for the year ended December 31, 2015 and 2014 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
804,739
|
|
|
$
|
979,792
|
|
General and administrative
|
|
|
2,668,021
|
|
|
|
3,543,876
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,472,760
|
|
|
$
|
4,523,668
|
|
The fair value of options vested under the
Plan was approximately $4,373,033 and $3,828,561 for the years ended December 31, 2015 and 2014, respectively.
At December 31, 2015, total unrecognized
estimated compensation cost related to stock options granted prior to that date was approximately $3,588,276 which is expected
to be recognized over a weighted-average vesting period of 2.9 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.
12. INCOME TAXES
The Company accounts for income taxes using
the liability method, which requires the determination of deferred tax assets and liabilities, based on the differences between
the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences
are expected to reverse. The net deferred tax asset is adjusted by a valuation allowance, if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. The income tax
returns of the Company are subject to examination by federal and state taxing authorities. Such examination could result in adjustments
to net income or loss, which changes could affect the income tax liabilities of the Company. The Company’s tax returns are
open for inspection for all tax years from 2009 to present.
12. INCOME TAXES
(Continued)
The Company’s policy is to include
interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes.
The Company recognized no amounts for interest and penalties related to unrecognized tax benefits in 2015 and 2014 and, as of December 31,
2015 and 2014, had no amounts accrued for interest and penalties.
At December 31, 2015, the Company had no
Federal income tax expense or benefit but did have Federal tax net operating loss carry-forwards of approximately $83.9 million.
The federal net operating loss carry-forwards will begin to expire in 2026, unless previously utilized.
Deferred income taxes reflect the net effect
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the Company’s net deferred tax assets at December 31, 2015 and 2014
are shown below.
|
|
For Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
33,413,500
|
|
|
$
|
30,133,600
|
|
Research tax credit
|
|
|
3,459,600
|
|
|
|
3,267,000
|
|
Accrued Expenses
|
|
|
80,000
|
|
|
|
267,000
|
|
Stock based compensation
|
|
|
4,194,500
|
|
|
|
2,451,000
|
|
Total deferred tax assets
|
|
|
41,147,600
|
|
|
|
36,118,600
|
|
Non-current deferred tax liability:
|
|
|
|
|
|
|
|
|
Bonus Section 401 adjustment
|
|
|
(30,400
|
)
|
|
|
(61,000
|
)
|
Depreciation and amortization
|
|
|
-
|
|
|
|
-
|
|
Total net deferred tax assets
|
|
|
41,117,200
|
|
|
|
36,057,600
|
|
Valuation allowance
|
|
|
(41,117,200
|
)
|
|
|
(36,057,600
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company records a valuation allowance
for temporary differences for which it is more likely than not that the Company will not receive future tax benefits. At December 31,
2015 and 2014 the Company recorded valuation allowances of $41.1 million and $36.1 million, respectively, representing
a change in the valuation allowance of $5.0 million for the previous fiscal year-ends, due to the uncertainty regarding the
realization of such deferred tax assets, to offset the benefits of net operating losses generated during those years.
A reconciliation of the statutory tax rates
and the effective tax rates for the years ended December 31, 2015 and 2014 are as follows:
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax
|
|
$
|
(3,912,707
|
)
|
|
|
34.0
|
%
|
|
$
|
2,642,000
|
|
|
|
34.0
|
%
|
State tax
|
|
|
(749,087
|
)
|
|
|
6.5
|
%
|
|
|
511,000
|
|
|
|
6.6
|
%
|
Interest expense
|
|
|
(653,085
|
)
|
|
|
5.7
|
%
|
|
|
(11,847,000
|
)
|
|
|
(152.5
|
)%
|
R&D credit
|
|
|
(330,928
|
)
|
|
|
2.9
|
%
|
|
|
(527,000
|
)
|
|
|
(6.8
|
)%
|
Other Adjustments
|
|
|
586,206
|
|
|
|
(5.1
|
)%
|
|
|
(1,133,000
|
)
|
|
|
(14.6
|
)%
|
Valuation allowance
|
|
|
5,059,601
|
|
|
|
(44.0
|
)%
|
|
|
10,354,000
|
|
|
|
133.3
|
%
|
Net
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
There was no income tax benefit recorded
for the years ended December 31, 2015 and 2014.
13. LEASES, COMMITMENTS AND CONTINGENCIES
On August 4, 2011, the Company entered into
a lease for office space of approximately 4,168 square feet in Flemington, New Jersey (the “Flemington Lease”). The
lease commencement date was November 17, 2011, with lease payments beginning in February 2012. The lease expiration date
is three years from the rent commencement date. The Company provided a cash security deposit of $10,455, or two months’
base rent. On June 17, 2014, the Company entered into an amendment to the lease extending expiration until January 31, 2018.
The Company is also responsible for payment of its share of common area maintenance costs and taxes. The aggregate remaining minimum
future payments under the Flemington Lease at December 31, 2015 are approximately $136,501 including common area maintenance charges
and taxes. The Flemington Lease contains a three-month free rent period and annual escalations, as such, the Company accounts for
rent expense on a straight-line basis. The Company recognized $90,571 and $84,833 in rent expense for the Flemington Lease for
the years ended December 31, 2015 and 2014, respectively.
Future minimum lease payments under operating
leases as of December 31, 2015 are as follows:
Future minimum lease payments under operating leases as of December
31, 2015
2016
|
|
|
64,430
|
|
2017
|
|
|
66,514
|
|
2018
|
|
|
5,557
|
|
Total future minimum lease payments
|
|
$
|
136,501
|
|
On November 19, 2014, the Company entered
into a lease for office equipment. The lease commencement date was November 25, 2014, with lease payments beginning in December
2014. The lease has an initial term of three years and cannot be cancelled or terminated prior to the end of the initial
lease term. After the end of the initial term the company can either enter into a new lease, purchase the equipment or return the
equipment. The office equipment lease is classified as a capital lease.
Future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of December 31, 2015 are as follows;
Future minimum lease payments under capital leases as of December
31, 2015
2016
|
|
|
4,778
|
|
2017
|
|
|
4,380
|
|
Total net future minimum lease payments
|
|
|
9,158
|
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
(1,235
|
)
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
7,923
|
|
On October 29, 2013, in connection with
the entry into the 2013 Purchase Agreement, the Company entered into an agreement (the “OPKO Agreement”) with OPKO
Health, Inc. (“OPKO”) and Frost Group, LLC (“Frost Group”). Under the terms of the OPKO Agreement, as in
inducement to the participation by OPKO and Frost Group (or its affiliates and associates) in the purchase and sale of the Units
under the Purchase Agreement, the Company granted OPKO with the following rights, so long as OPKO continues to hold at least 3%
of the total number of outstanding shares of the Company’s common stock, determined on a fully-diluted basis (i.e., assuming
the issuance of all shares underlying outstanding options, warrants and other rights to acquire common stock): (1) OPKO shall have
the right to appoint a non-voting observer to attend all meetings of the Company’s Board of Directors, provided that such
appointee enters into a confidentiality agreement with the Company and shall be subject to all applicable Company policies; and
(2) OPKO shall have a right of first negotiation that provides it with exclusive rights to negotiate with the company for a 45-day
period regarding any potential strategic transactions that the Company’s Board of Directors elects to pursue.
13. LEASES, COMMITMENTS AND CONTINGENCIES
(Continued)
The Company has entered into various contracts
with third parties in connection with the development of the licensed technology described in Note 6.
The aggregate minimum commitment under
these contracts as of December 31, 2015 is approximately $6.5 million, all expected to be due during 2016 and 2017.
In the normal course of business, the Company
enters into contracts that contain a variety of indemnifications with its employees, licensors, suppliers and service providers.
Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities.
The Company’s maximum exposure under these arrangements is unknown as of December 31, 2015. The Company does not anticipate
recognizing any significant losses relating to these arrangements.
14. SUBSEQUENT EVENTS
On January 12, 2016, the Company
entered into a Stock Purchase Agreement (the “Purchase Agreement”) with certain purchasers identified therein (the “Purchasers”)
pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, an aggregate of 21,153,997 shares of the Company’s
common stock (the “Shares”), at a purchase price of $0.35 per Share for an aggregate gross proceeds of approximately
$7.4 million, including approximately $2.1 million from the automatic conversion of outstanding promissory notes and accrued interest,
as described below. The Purchase Agreement contains customary representations, warranties and covenants by each of the Company
and the Purchasers. The purchase and sale of the shares was completed on January 12, 2016.
The number of Shares sold pursuant to the
Purchase Agreement included an aggregate of 6,081,858 Shares that were issued upon the automatic conversion of the Company’s 6%
Notes. The 6% Notes were originally issued in the principal amount of $2.1 million on October 21, 2015, and such principal amount
and $28,652 of accrued interest were converted into Shares.
The Purchasers included several officers
and directors of the Company, or entities affiliated with officers and directors of the Company All such officers and directors
made such investment on the same terms as all other Purchasers under the Purchase Agreement.
In connection with the entry into the Purchase
Agreement, and as contemplated thereby, on January 12, 2016, 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 March 12, 2016
(the “Filing Date”), a registration statement under the Securities Act covering the resale of the 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 “Effectiveness Date”). If the
Company does not file the Registration Statement by the Filing Date or obtain its effectiveness by the Effectiveness Date, then
the Company is required to pay liquidated damages to the Purchasers in an amount equal to 1% of the aggregate purchase price paid
by such Purchaser for the Shares per month until the Registration Statement is filed or declared effective, as applicable, subject
to a maximum of 10% of the aggregate purchase price paid by each Purchaser for the Units. 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. The Company filed the Registration Statement with the Commission
on March 11, 2016, satisfying its obligation to file the Registration Statement on or before the Filing Date.
14. SUBSEQUENT EVENTS
(Continued)
On March 14, 2016, the Board of the
Company adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan replaces the
Company’s 2005 Stock Option Plan, which will expire March 31, 2016, and no further awards will be made pursuant to such
plan. The Board will initially be the administrator of the 2016 Plan, but the Board may delegate the administration of the
2016 Plan to the Company’s Compensation Committee. The Board and any Committee to which it may delegate the
administration of the 2016 Plan are collectively referred to in the 2016 Plan as the “Administrator.”
Any employee, director, or consultant may participate in
the 2016 Plan; provided, however, that only employees are eligible to receive incentive stock options. Additionally, the
Company may grant certain performance-based awards to “covered employees” in compliance with Section 162(m) of
the Internal Revenue Code. These covered employees include our executive officers.
The stock to be awarded or optioned
under the 2016 Plan will consist of authorized but unissued or reacquired shares of common stock. The maximum aggregate
number of shares of common stock reserved and available for awards under the 2016 Plan is 9,000,000 shares; provided, that
all shares of stock reserved and available under the 2016 Plan will constitute the maximum aggregate number of shares of
stock that may be issued through incentive stock options. No person may be granted options, stock appreciation rights,
restricted stock awards, restricted stock units or performance awards under the 2016 Plan for more than 2,000,000 shares of
common stock in any calendar year.
The Administrator will adjust the number of shares and share
limit described above in the case of a stock dividend, recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-off, repurchase or exchange of shares, or other similar corporate transaction where such an adjustment is
necessary to prevent dilution or enlargement of the benefits available under the 2016 Plan. Any adjustment determination made by
the Administrator will be final, binding and conclusive.
The Administrator may grant
awards pursuant to the 2016 Plan until it is discontinued or terminated; provided, however, that incentive stock options may
not be granted after March 13, 2026.