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EX-32.1 - EXHIBIT 32.1 - Arno Therapeutics, Incv385436_ex32-1.htm

 

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 JUNE 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)

 

Detlaware 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 August 14, 2014, there were 20,370,331 shares of common stock, par value $0.0001 per share, of Arno Therapeutics, Inc. issued and outstanding.

 

 
 

 

Index

 

    Page
     
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited)
     
  Condensed Balance Sheets 4
     
  Condensed Statements of Operations 5
     
  Condensed Statement of Stockholders’ Deficit 6
     
  Condensed Statements of Cash Flows 7
     
  Notes to Condensed Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4. Controls and Procedures 32
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 33
     
Item 1A. Risk Factors 33
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
Item 3. Defaults Upon Senior Securities 33
     
Item 4. Mine Safety Disclosures 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 34
     
  Signatures 35
     
  Index to Exhibits Filed with this Report 36

 

1
 

 

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

 

2
 

 

  · 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.

 

3
 

 

PART I — FINANCIAL INFORMATION

Item1.Financial Statements.

 

ARNO THERAPUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS

 

   June 30, 2014
(unaudited)
   December 31, 2013 
ASSETS          
Current assets          
Cash and cash equivalents  $15,844,600   $26,774,203 
Other receivables   8,837    - 
Prepaid expenses and other current assets   58,633    86,266 
           
Total current assets   15,912,070    26,860,469 
           
Property and equipment, net   25,256    11,720 
Security deposit   10,455    10,455 
           
Total assets  $15,947,781   $26,882,644 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities          
Accounts  payable  $1,361,737   $2,941,998 
Accrued  expenses and other current liabilities   1,117,325    925,255 
Due to related party   -    26,039 
Deferred rent   4,423    7,797 
           
Total current liabilities   2,483,485    3,901,089 
           
Derivative liabilities   20,881,401    35,864,881 
           
Total liabilities   23,364,886    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, 20,370,331 shares issued and outstanding   5,465    5,465 
Additional paid-in capital   79,086,995    76,668,966 
Deficit accumulated during the development stage   (86,509,565)   (89,557,757)
           
Total stockholders' deficit   (7,417,105)   (12,883,326)
           
Total liabilities and stockholders' deficit  $15,947,781   $26,882,644 

  

See accompanying notes to the unaudited condensed financial statements.

 

4
 

  

ARNO THERAPUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

           Period from 
           August 1, 2005 
   Three months ended June 30,   Six months ended June 30,   (inception) to 
   2014   2013   2014   2013   June 30, 2014 
                     
Operating expenses:                         
Research and development  $4,083,398   $2,741,756   $8,518,114   $5,734,787   $58,839,691 
General and administrative   1,680,105    668,011    3,409,157    1,519,848    16,215,949 
                          
Total operating expenses   5,763,503    3,409,767    11,927,271    7,254,635    75,055,640 
                          
Loss from operations   (5,763,503)   (3,409,767)   (11,927,271)   (7,254,635)   (75,055,640)
                          
Other (expense) income:                         
Interest income   13,344    2,932    24,860    6,992    456,717 
Interest expense   -    (1,858,887)   -    (4,017,608)   (26,190,285)
Other (expense) income   9,244,792    (6,039,108)   14,950,603    (973,467)   14,279,643 
                          
Total other (expense) income   9,258,136    (7,895,063)   14,975,463    (4,984,083)   (11,453,925)
                          
Net income/(loss)  $3,494,633   $(11,304,830)  $3,048,192   $(12,238,718)  $(86,509,565)
                          
Net income/(loss) per share - basic  $0.17   $(2.35)  $0.15   $(2.61)     
                          
Weighted-average shares outstanding- basic   20,370,331    4,814,822    20,370,331    4,684,384      
                          
Net income/(loss) per share - diluted  $0.14   $(2.35)  $0.12   $(2.61)     
                          
Weighted-average shares outstanding- diluted   24,802,522    4,814,822    24,804,963    4,684,384      

 

See accompanying notes to the unaudited condensed financial statements.

 

5
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY

PERIOD FROM AUGUST 1, 2005 (INCEPTION) TO JUNE 30, 2014

(unaudited)

 

               DEFICIT     
               ACCUMULATED     
            ADDITIONAL   DURING THE   TOTAL 
   PREFERRED STOCK   COMMON STOCK   PAID-IN   DEVELOPMENT   STOCKHOLDERS' 
   SHARES   AMOUNT   SHARES   AMOUNT   CAPITAL   STAGE   EQUITY (DEFICIT) 
                             
Balance at August 1, 2005 (Inception)   -   $-    -   $-   $-   $-   $- 
                                    
Net loss   -    -    -    -    -    (27,603,887)   (27,603,887)
                                    
Issuance of common shares in 2005 to founders at $0.0001 per share   -    -    1,246,100    997    4,003    -    5,000 
                                    
Stock based compensation for services   -    -    -    -    2,125,952    -    2,125,952 
                                    
Common stock sold in 2008 private placement, net of issuance costs of $141,646   -    -    920,086    736    17,689,301    -    17,690,037 
                                    
Conversion of notes payable upon closing of 2008 private placement   -    -    245,292    196    4,278,322    -    4,278,518 
                                    
Note discount arising from 2008 note conversion   -    -    -    -    475,391    -    475,391 
                                    
Warrants issued in connection with 2008 note conversion   -    -    -    -    348,000    -    348,000 
                                    
Reverse merger transaction in 2008- elimination of accumulated deficit   -    -    -    -    (120,648)   -    (120,648)
previously issued Laurier common stock   -    -    137,525    110    120,538    -    120,648 
                                    
Warrants issued for 2008 services   -    -    -    -    480,400    -    480,400 
                                    
Stock option exercise   -    -    2,500    2    2,598    -    2,600 
                                    
Convertible preferred units issued in 2010 private placement, net of issuance costs of $1,299,770   1,909,250    1,527    -    -    13,507,983    -    13,509,510 
                                    
Warrants issued in connection with convertible preferred units issued in 2010 private placement   -    -    -    -    (3,340,421)   -    (3,340,421)
                                    
Warrants issues to placement agents in connection with 2010 private placement   -    -    -    -    464,720    -    464,720 
                                    
Balance at December 31, 2010   1,909,250    1,527    2,551,503    2,041    36,036,139    (27,603,887)   8,435,820 
                                    
Net loss   -    -    -    -    -    (7,909,113)   (7,909,113)
                                    
Stock based compensation for services   -    -    -    -    707,284    -    707,284 
                                    
Preferred stock conversion   (1,909,250)   (1,527)   1,909,250    1,527    -    -    0 
                                    
Issuance of stock dividend in connection with conversion of preferred stock   -    -    39,884    32    (32)   -    0 
                                    
Grant of restricted shares   -    -    31,250    -    115,168    -    115,168 
                                    
Stock option exercise   -    -    6,231    5    6,475    -    6,480 
                                    
Balance at December 31, 2011   -    -    4,538,118    3,605    36,865,034    (35,513,000)   1,355,639 
                                    
Net loss   -    -    -    -    -    (14,387,782)   (14,387,782)
                                    
Stock based compensation for services   -    -    -    -    722,811    -    722,811 
                                    
Issuance of common shares pursuant to placement agent agreement   -    -    7,500    6    43,494    -    43,500 
                                    
Balance at December 31, 2012   -    -    4,545,618    3,611    37,631,339    (49,900,782)   (12,265,832)
                                    
Net loss   -    -    -    -    -    (39,656,975)   (39,656,975)
                                    
Stock based compensation for services   -    -    -    -    1,456,776    -    1,456,776 
                                    
Issuance of common shares in lieu of liquidated damages   -    -    380,606    305    913,205    -    913,510 
                                    
Issuance of common shares upon debenture conversions and in satisfaction of accrued interest   -    -    7,030,753    708    22,276,390    -    22,277,098 
                                    
Common stock sold in private placement, net of issuance costs of $766,803   -    -    8,413,354    841    9,157,412    -    9,158,253 
                                    
Issuance of Units   -    -    -    -    5,233,844    -    5,233,844 
                                    
Balance at December 31, 2013   -    -    20,370,331    5,465    76,668,966    (89,557,757)   (12,883,326)
                                    
Net income   -    -    -    -    -    3,048,192    3,048,192 
                                    
Stock based compensation for services   -    -    -    -    2,418,029    -    2,418,029 
                                    
Balance at June 30, 2014   -    -    20,370,331   $5,465   $79,086,995   $(86,509,565)  $(7,417,105)

 

See accompanying notes to the unaudited condensed financial statements.

 

6
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

           Period from 
      August 1, 2005 
   Six months ended June 30,   (inception) to 
   2014   2013   June 30, 2014 
Cash flows from operating activities:               
Net income/(loss)  $3,048,192   $(12,238,718)  $(86,509,565)
                
Adjustment to reconcile net income/(loss) to net cash used in operating activities:               
Depreciation and amortization   6,561    6,679    134,658 
Stock-based compensation   2,418,029    699,298    7,546,020 
Change in fair value of derivative liability   (14,983,480)   980,959    (13,258,725)
Write-off of intangible assets   -    -    85,125 
Warrants issued for services   -    -    480,400 
Warrants issued in connection with note conversion   -    -    348,000 
Note discount arising from beneficial conversion feature   -    -    475,391 
Loss on disposal of assets   -    -    5,357 
Noncash interest expense   -    4,497,357    25,564,067 
                
Changes in operating assets and liabilities:               
Other Receivables   (8,837)   -    (8,837)
Prepaid expenses and other current assets   27,633    35,220    (58,633)
Security deposit   -    -    (10,455)
Accounts payable   (1,580,261)   627,612    1,361,737 
Accrued expenses   192,070    (994,727)   532,489 
Deferred rent   (3,374)   (2,333)   4,423 
Due to related party   (26,039)   (394)   - 
                
Net cash used in operating activities   (10,909,506)   (6,389,047)   (63,308,548)
                
Cash flows from investing activities:               
Purchase of property and equipment   (20,097)   -    (120,271)
Cash paid for intangible assets   -    -    (85,125)
Proceeds from related party advance   -    -    525,000 
Repayment of related party advance   -    -    (525,000)
Net cash used in investing activities   (20,097)   -    (205,396)
                
Cash flows from financing activities:               
Proceeds from issuance of common stock to founders   -    -    5,000 
Proceeds from issuance of preferred stock in private placement, net   -    -    13,974,230 
Proceeds from issuance of units in private placement, net   -    -    37,115,377 
Deferred financing fees paid   -    -    (1,217,345)
Proceeds from issuance of notes payable   -    -    1,000,000 
Repayment of notes payable   -    -    (1,000,000)
Proceeds from issuance of convertible notes payable   -    -    3,967,000 
Proceeds from issuance of convertible debentures payable   -    -    14,857,200 
Proceeds from issuance of Class C warrants   -    -    10,648,002 
Proceeds from exercise of stock options   -    -    9,080 
                
Net cash provided by financing activities   -    -    79,358,544 
                
Net increase (decrease) in cash and cash equivalents   (10,929,603)   (6,389,047)   15,844,600 
Cash and cash equivalents at beginning of period   26,774,203    10,943,437    - 
                
Cash and cash equivalents at end of period  $15,844,600   $4,554,390   $15,844,600 

  

See accompanying notes to the unaudited condensed financial statements.  

 

7
 

  

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS (cont’d)

(unaudited)

 

           Period from 
      August 1, 2005 
   Six months ended June 30,   (inception) to 
   2014   2013   June 30, 2014 
               
Supplemental schedule of cash flows information:               
                
Cash paid for interest  $-   $63,088   $342,318 
                
Supplemental schedule of non-cash investing and financing activities:               
                
Conversion of debentures into common stock  $-   $13,116   $14,293 
Conversion of notes payable and interest to common stock  $-   $-   $4,278,518 
Common shares of Laurier issued in reverse merger transaction  $-   $-   $110 
Issuance of common shares in lieu of liquidated damages  $-   $913,510   $913,510 
Issuance of common shares in lieu of accrued and additional interest  $-   $-   $2,016,804 
Issuance of warrants in connection with private placement of convertible preferred units  $-   $-   $3,340,421 
Issuance of warrants in connection with private placement of convertible debentures  $-   $-   $12,973,055 
Issuance of common stock  pursuant to placement agent agreement  $-   $-   $43,500 
                
Preferred stock dividends settled in common stock  $-   $-   $319,074 

 

See accompanying notes to the unaudited condensed financial statements.  

 

8
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2014

(unaudited)

 

1. DESCRIPTION OF BUSINESS

 

Arno Therapeutics, Inc. (“Arno” or the “Company”) develops innovative drug candidates intended to treat patients with cancer. The Company was incorporated in Delaware in March 2000, at which time its name was Laurier International, Inc. (“Laurier”). Pursuant to an Agreement and Plan of Merger dated March 6, 2008 (as amended, the “Merger Agreement”), by and among the Company, Arno Therapeutics, Inc., a Delaware corporation formed on August 1, 2005 (“Old Arno”), and Laurier Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Laurier Acquisition”), on June 3, 2008, Laurier Acquisition merged with and into Old Arno, with Old Arno remaining as the surviving corporation and a wholly-owned subsidiary of Laurier. Immediately following this merger, Old Arno merged with and into Laurier and Laurier’s name was changed to Arno Therapeutics, Inc. These two merger transactions are hereinafter collectively referred to as the “Merger.” Immediately following the Merger, the former stockholders of Old Arno collectively held 95% of the outstanding common stock of Laurier, assuming the issuance of all shares issuable upon the exercise of outstanding options and warrants, and all of the officers and directors of Old Arno in office immediately prior to the Merger were appointed as the officers and directors of Laurier immediately following the Merger. Further, Laurier was a non-operating shell company prior to the Merger. The merger of a private operating company into a non-operating public shell corporation with nominal net assets is considered to be a capital transaction in substance, rather than a business combination, for accounting purposes. Accordingly, the Company treated this transaction as a capital transaction without recording goodwill or adjusting any of its other assets or liabilities. All costs incurred in connection with the Merger have been expensed. Upon completion of the Merger, the Company adopted Old Arno’s business plan.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company is a development stage enterprise since it has not yet generated any revenue from the sale of products and, through June 30, 2014, its efforts have been principally devoted to developing its licensed technologies and raising capital. Accordingly, the accompanying condensed financial statements have been prepared in accordance with the provisions of Accounting Standards Codification (“ASC”) 915, “Development Stage Entities.” The Company has experienced net losses since its inception and has an accumulated deficit of approximately $86.5 million at June 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 June 30, 2014 are not necessarily indicative of results for the full 2014 fiscal year or any other future interim periods. Because the Merger was accounted for as a reverse acquisition under generally accepted accounting principles, the financial statements for periods prior to September 3, 2008, reflect only the operations of Old Arno.

 

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.

 

9
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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.

 

3. LIQUIDITY AND CAPITAL RESOURCES

 

Cash resources as of June 30, 2014 were approximately $15.8 million, compared to approximately $26.8 million as of December 31, 2013. Based on its resources at June 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 first 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 company. The Company will continue to fund operations from cash on hand and through sources of capital similar to those previously described. The Company cannot assure that it will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs.

  

The success of the Company depends on its ability to develop new products to the point of regulatory approval and subsequent revenue generation and, accordingly, to raise enough capital to finance these developmental efforts. Management plans to raise additional capital either by selling shares of its stock or other securities, issuing debt or by licensing one or more of its products to finance the continued operating and capital requirements of the Company. Amounts raised will be used to further develop the Company’s product candidates, acquire rights to additional product candidates and for other working capital purposes. While the Company will extend its best efforts to raise additional capital to fund all operations beyond the first quarter of 2015, 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.

 

10
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2014

(unaudited)

 

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 June 30,   Six months ended June 30, 
   2014   2013   2014   2013 
                 
Numerator:                    
Net income/(loss)  $3,494,633   $(11,304,830)  $3,048,192   $(12,238,718)
                     
Denominator:                    
Weighted-average shares of common stock outstanding used in the calculation of basic net income/(loss) per share   20,370,331    4,814,822    20,370,331    4,684,384 
                     
Effect of dilutive securities:                    
                     
Warrants to purchase common stock   4,432,191    -    4,434,632    - 
                     
Weighted-average shares of common stock outstanding used in the calculation of diluted net income/(loss) per share   24,802,522    4,814,822    24,804,963    4,684,384 

 

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 June 30, 2014 and 2013 were 51,464,983 and 7,291,312, respectively, as their exercise prices are greater than the fair market price per common share as of June 30, 2014 and 2013, respectively.

  

11
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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.

 

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.

 

12
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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.

 

13
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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 June 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 June 30, 2014:

 

       Quoted Market         
       Prices in Active   Significant Other   Significant Other 
   Fair Value   Markets   Observable Inputs   Unobservable Inputs 
   June 30, 2014   (Level 1)   (Level 2)   (Level 3) 
                 
Liabilities:                    
Warrant liability - 2010 Series B  $224,528   $-   $-   $224,528 
Warrant liability - 2012 Series A&B   10,338,102    -    -    10,338,102 
Warrant liability - 2012 placement agent   224,160    -    -    224,160 
Warrant liability - 2013 Series D&E   10,037,496    -    -    10,037,496 
Warrant liability - 2013 placement agent   57,115    -    -    57,115 
Total  $20,881,401   $-   $-   $20,881,401 

 

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 

 

14
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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 June 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   $- 
Purchase, sales and settlements:                                             
Warrants and other derivatives issued                                             
Settlement of derivatives                                             
Total gains or losses:                                             
Unrealized depreciation/(appreciation)   (14,983,480)   (4,310,976)   (3,989,261)   (40,965)   (2,073,816)   (4,292,065)   (138,473)   (137,924)     
Balance at June 30, 2014  $20,881,401   $1,544,230   $8,493,266   $57,115   $742,860   $9,595,242   $224,160   $224,528   $- 
                                              
Value per Warrant  $0.48   $0.12   $0.66   $0.87   $0.12   $0.93   $0.79   $0.28      

 

15
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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”).

 

16
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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 (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.

 

As of June 30, 2014, the Company had 20,370,331 shares of common stock issued and outstanding and approximately 55,920,214 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 $0.2 million and approximately $0.4 million at June 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 during the year ended December 31, 2013 unexercised.

 

17
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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 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. 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 $10.3 million and $16.7 million at June 30, 2014 and December 31, 2013, respectively.

 

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 $0.2 million and $0.4 million at June 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. 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 $10.0 million and $18.3 million at June 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.

 

18
 

  

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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 June 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 

 

19
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 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 June 30, 2014, there are 3,178,854 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 six month periods ended June 30, 2014 and June 30, 2013, respectively.

 

   Three months ended June 30,   Six months ended June 30, 
   2014   2013   2014   2013 
                     
Options granted   -    6,250    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 six months ended June 30, 2014 and June 30, 2013: 

 

  Three months ended June 30,   Six months ended June 30,
  2014   2013   2014   2013
               
Expected volatility N/A   96%   92%   89% - 96%
Expected term N/A   5 years   6 years   4-6 years
Dividend yield N/A   0.0%   0.0%   0.0%
Risk- free interest rate N/A   0.77%   1.57% - 1.58%   0.77% - 0.89%
Stock price N/A   $2.40   $2.23 - $2.90   $2.40
Forfeiture rate N/A   0.0%   0.0%   0.0%

 

20
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2014

(unaudited)

 

8. STOCK OPTION PLAN (Continued)

 

A summary of the status of the options issued under the Plan at June 30, 2014, and information with respect to the changes in options outstanding is as follows:  

 

       Options Outstanding 
   Shares
Available for
Grant
   Outstanding
Stock Options
   Weighted-
Average
Exercise Price
   Aggregate
Intrinsic
Value
 
                 
Balance at January 1, 2014   5,396,832    5,758,463   $2.66   $- 
Shares authorized for issuance   -    -    -    - 
Options granted under the Plan   (2,186,957)   2,186,957   $2.83    - 
Options exercised   -    -    -    - 
Options forfeited   8,959    (8,959)  $24.00    - 
Balance at June 30, 2014   3,218,834    7,936,461   $2.68   $- 
                     
Exercisable at June 30, 2014        1,355,051   $3.37   $- 

 

The following table summarizes information about stock options outstanding at June 30, 2014:

 

    Outstanding   Exercisable 
Exercise Price   Shares   Weighted-
Average
Remaining
Contractual
Life (Years)
   Weighted-
Average
Exercise
Price
   Shares   Weighted-
Average
Exercise Price
 
                      
$2.23    223,445    9.65   $2.23    -   $2.23
$2.40    5,594,152    9.08   $2.40    1,154,067   $2.40 
$2.90    1,963,512    9.57   $2.90    45,632   $2.90 
$8.00    117,969    3.57   $8.00    117,969   $8.00 
$19.38    37,383    3.78   $19.38    37,383   $19.38 
                            
Total     7,936,461    9.11   $2.68    1,355,051   $3.37 

 

Stock-based compensation costs under the Plan for the three and six month periods ended June 30, 2014 and 2013 and for the cumulative period from August 1, 2005 (inception) through June 30, 2014 are as follows:

 

                   Period from 
                   August 1, 2005 
   Three months ended June 30,   Six months ended June 30,   (inception) to 
   2014   2013   2014   2013   June 30, 2014 
                     
Research and development  $300,259   $106,416   $547,586   $324,682   $3,106,937 
General and administrative   952,714    128,855    1,870,443    374,616    4,439,083 
                          
Total  $1,252,973   $235,271   $2,418,029   $699,298   $7,546,020 

 

21
 

 

ARNO THERAPEUTICS, INC.

(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2014

(unaudited)

 

8. STOCK OPTION PLAN (Continued)

 

The fair value of options vested under the Plan was approximately $955,740 and $156,999 for the three months ended June 30, 2014 and 2013, respectively, approximately $1,916,729 and $544,804 for the six months ended June 30, 2014 and 2013, respectively and approximately $6,569,872 for the period from August 1, 2005 (inception) through June 30, 2014.

 

At June 30, 2014, total unrecognized estimated compensation cost related to stock options granted prior to that date was approximately $11,858,796 which is expected to be recognized over a weighted-average vesting period of 2.7 years. This unrecognized estimated employee compensation cost does not include any estimate for forfeitures of performance-based stock options.

 

Common stock, stock options or other equity instruments issued to non-employees (including consultants and all members of the Company’s Scientific Advisory Board) as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of stock options is determined using the Black-Scholes option-pricing model and is expensed as the underlying options vest. The fair value of any options issued to non-employees is recorded as expense over the applicable service periods.

 

9. RELATED PARTIES

 

On June 1, 2009, the Company entered into a services agreement with Two River Consulting, LLC (“TRC”) to provide various clinical development, operational, managerial, accounting and financial, and administrative services to the Company for a period of one year. David M. Tanen, a director 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 six month periods ended June 30, 2013, TRC billed the Company $67,974 and $144,126, respectively. For the period from inception to December 31, 2013, TRC billed the Company a total of $2,052,571. 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. For the period from August 1, 2005 (inception) through June 30, 2014 services and reimbursed expenses totaled $2,482,958. As of March 31, 2014, the Company had a payable to TRC of $3,814, which was paid in full during the second quarter of 2014. There is no outstanding payable to TRC as of June 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 July 17, 2014, the Board of Directors of the Company appointed Alexander Zukiwski, M.D., as interim Chief Executive Officer, in addition to his current position as Chief Medical Officer. On the same date, the Board also appointed Lawrence Kenyon as Chief Operating Officer, in addition to his current position as Chief Financial Officer. Dr. Zukiwski replaced Glenn R. Mattes, whose employment with the Company terminated on July 18, 2014.

 

On July 25, 2014, the Company and Mr. Mattes entered into a separation agreement, pursuant to which they mutually agreed that Mr. Mattes’ employment with the Company, as well as the Employment Agreement between the Company and Mr. Mattes dated April 25, 2011, terminated on July 18, 2014. Mr. Mattes also resigned as a director of the Company effective as of such date. In accordance with the terms of the separation agreement, the Company agreed to (i) continue to pay to Mr. Mattes his current annualized base salary for a period of 13 months following the separation date, which amounts to an aggregate of $426,508.33; (ii) extended the termination date of all vested stock options held by Mr. Mattes as of the separation date until July 18, 2017; and (iii) allow such stock options to be exercised on a cashless (net) exercise basis. Accordingly, as of the separation date, Mr. Mattes holds stock options to purchase 432,896 shares of the Company’s common stock, all of which are exercisable at $2.40 per share. The separation agreement also provided for a release by Mr. Mattes of all claims.

 

22
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We are a development stage company focused on developing innovative products for the treatment of cancer. Arno currently has 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. Our lead compound, onapristone, began enrolling patients in two Phase I clinical trials in 2014.

 

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 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 (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, which may 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. We completed initial pre-clinical toxicology studies that enabled the submission of an Investigational Medicinal Product Dossier, or IMPD, the foreign equivalent of an investigational new drug application, or IND, in the second quarter of 2013 to support a pharmacokinetic/food effect study, which we completed in the fourth quarter of 2013.  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 are also investigating onapristone as a potential treatment for patients with prostate cancer and enrolled the first patient in a 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, 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.

 

23
 

 

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 months ended June 30, 2014 and 2013 were approximately $1.7 million and $0.7 million, respectively. The increase of approximately $1.0 million for the first three months of 2014 over the same period in 2013 is primarily the result of increased compensation expense in 2014, of which approximately $0.8 million is due to increased non-cash stock compensation expense and $0.1 million due to increased headcount.

 

 G&A expenses for each of the six months ended June 30, 2014 and 2013 were approximately $3.4 million and $1.5 million, respectively. The increase of approximately $1.9 million for the first six months of 2014 over the same period in 2013 is primarily the result of increased compensation expense in 2014, of which approximately $1.5 million is due to increased non-cash stock compensation expense and $0.2 million due to increased headcount.

 

Research and Development Expenses. R&D expenses for the three months ended June 30, 2014 and 2013 were approximately $4.1 million and $2.7 million, respectively. The increase of approximately $1.4 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/or began enrolling patients in our two new clinical trials and related activities. Total direct onapristone development costs for the quarter ended June 30, 2014 were approximately $3.2 million compared to approximately $1.9 million for the quarter ended June 30, 2013. This increase of approximately $1.3 million over the same period of 2013 is primarily due to an increase of approximately $0.6 million for clinical trial costs incurred for starting and running the two new clinical trials, an increase of approximately $0.5 million for work related to development of the onapristone companion diagnostic test, and an increase of approximately $0.3 million for manufacturing costs. 

 

R&D expenses for the six months ended June 30, 2014 and 2013 were approximately $8.5 million and $5.7 million, respectively. The increase of approximately $2.8 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/or began enrolling patients in our two new clinical trials and related activities. Total direct onapristone development costs for the six months ended June 30, 2014 were approximately $6.8 million compared to approximately $3.8 million for the quarter ended June 30, 2013. This increase of approximately $3.0 million over the same period of 2013 is primarily due to an increase of approximately $1.5 million for clinical trial costs incurred for starting and running the two new clinical trials, an increase of approximately $0.8 million for work related to development of the onapristone companion diagnostic test, an increase of $0.3 million for manufacturing development expenses and approximately $0.3 million in higher costs for increased regulatory consulting for onapristone.

 

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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 six months ended June 30, 2014 and 2013, as well as the cumulative amounts since we began development of each product candidate through June 30, 2014. The table also summarizes unallocated costs, which consist of personnel, facilities and other costs not directly allocable to development programs:

 

           Cumulative 
    Three months ended June 30,      Six months ended June 30,   amounts during 
   2014   2013   2014   2013   development 
                     
Onapristone  $3,204,880   $1,910,914   $6,824,950   $3,814,704   $21,221,813 
AR-42   (50,129)   38,231    (24,406)   256,860    5,357,436 
AR-12   191,970    201,683    192,164    403,657    10,680,873 
AR-67   9,489    13,627    11,630    24,660    8,143,842 
Unallocated R&D   727,188    577,301    1,513,776    1,234,906    13,435,727 
Total  $4,083,398   $2,741,756   $8,518,114   $5,734,787   $58,839,691 

 

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 $14.9 million, $0.1 million and $0.2 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 June 30, 2014 and 2013 was $13,344 and $2,932 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 six months ended June 30, 2014 and 2013 was $24,860 and $6,992 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 June 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 six months ended June 30, 2014 and 2013 was approximately $0 and $4.0 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 June 30, 2014 was approximately $9.2 million compared to other expense of approximately $6.0 million for the three months ended June 30, 2013. The other income/expense recorded for each of these periods was primarily due to decreases and increases in our stock price, resulting in non-cash adjustments to the warrant liability during the three months ended June 30, 2014 and 2013.

 

Other income for the six months ended June 30, 2014 was approximately $15.0 million compared to other expense of approximately $1.0 million for the three months ended June 30, 2013. The other income/expense recorded for each of these periods was primarily due to decreases and increases in our stock price, resulting in non-cash adjustments to the warrant liability during the six months ended June 30, 2014 and 2013.

 

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Liquidity and Capital Resources

 

The following table summarizes our liquidity and capital resources as of June 30, 2014 and December 31, 2013 and our net changes in cash and cash equivalents for the six months ended June 30, 2014 and 2013 (the amounts stated are expressed in thousands):

 

   June 30,   December 31, 
Liquidity and capital resources  2014   2013 
         
Cash and cash equivalents  $15,845   $26,774 
Working capital (deficit)   13,429    22,959 
Stockholders' (deficit) equity   (7,417)   (12,883)

 

   Six Months Ended June 30, 
Cash flow data  2014   2013 
         
Cash used in:          
Operating activities  $(10,910)  $(6,389)
Investing activities   (20)   - 
Financing activities   -    - 
Net decrease in cash and cash equivalents  $(10,930)  $(6,389)

   

Our total cash resources as of June 30, 2014 were approximately $15.8 million compared to approximately $26.8 million as of December 31, 2013. As of June 30, 2014, we had approximately $23.4 million in liabilities (of which approximately $20.9 million represented non-cash derivative liabilities), and approximately $13.4 million of net working capital. We incurred a net profit of approximately $3.0 million and had negative cash flow from operating activities of $10.9 million for the six months ended June 30, 2014. Since August 1, 2005 (inception) through June 30, 2014, we have incurred an aggregate net loss of approximately $86.5 million, while negative cash flow from operating activities has amounted to $63.3 million. As we continue to develop our product candidates, we expect to continue 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 June 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.

 

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Based on our current development plans, we believe our existing cash resources are sufficient to fund our operations into the first 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.

 

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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.

 

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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.

 

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Off -Balance Sheet Arrangements

 

There were no off-balance sheet arrangements as of June 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.

 

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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.

 

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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.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not involved in any pending legal proceedings.

 

Item 1A. Risk Factors.

 

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 June 30, 2014, we had approximately $15.8 million in cash and cash resources, and net working capital of approximately $13.4 million. During the six months ended June 30, 2014, we had negative cash flow from operating activities of $10.9 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 first 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 2013 Annual Report. 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.

 

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Item 6. Exhibits.

 

Exhibit No.   Exhibit Description
     
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 June 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) Condensed Statements of Operations for the three and six months ended June 30, 2014 and June 30, 2013, and for the period from August 1, 2005 (inception) through June 30, 2014, (iii) Condensed Statement of Stockholders’ (Deficit) Equity for the period from August 1, 2005 (inception) through June 30, 2014, (iv) Condensed Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013, and for the period from August 1, 2005 (inception) through June 30, 2014, and (v) Notes to Condensed Financial Statements.*
     
+   Portions of this exhibit have been omitted pursuant to a request for confidential treatment made pursuant to Rule 24b-2 of the Exchange Act.
  Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.
*   Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

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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: August 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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INDEX TO EXHIBITS FILED WITH THIS REPORT

 

Exhibit No.   Exhibit Description
     
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 June 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) Condensed Statements of Operations for the three and six months ended June 30, 2014 and June 30, 2013, and for the period from August 1, 2005 (inception) through June 30, 2014, (iii) Condensed Statement of Stockholders’ (Deficit) Equity for the period from August 1, 2005 (inception) through June 30, 2014, (iv) Condensed Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013, and for the period from August 1, 2005 (inception) through June 30, 2014, and (v) Notes to Condensed Financial Statements.*
     
+   Portions of this exhibit have been omitted pursuant to a request for confidential treatment made pursuant to Rule 24b-2 of the Exchange Act.
*   Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

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