NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)
1. DESCRIPTION OF BUSINESS
Arno Therapeutics, Inc. (“Arno”
or the “Company”) is developing innovative drug candidates intended to treat patients with cancer and other life threatening
diseases. The Company was incorporated in Delaware in March 2000, at which time its name was Laurier International, Inc. (“Laurier”).
Pursuant to an Agreement and Plan of Merger dated March 6, 2008 (as amended, the “Merger Agreement”), by and among
the Company, Arno Therapeutics, Inc., a Delaware corporation formed on August 1, 2005 (“Old Arno”), and Laurier Acquisition,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Laurier Acquisition”), on June 3, 2008, Laurier
Acquisition merged with and into Old Arno, with Old Arno remaining as the surviving corporation and a wholly-owned subsidiary of
Laurier. Immediately following this merger, Old Arno merged with and into Laurier and Laurier’s name was changed to Arno
Therapeutics, Inc. These two merger transactions are hereinafter collectively referred to as the “Merger.” Immediately
following the Merger, the former stockholders of Old Arno collectively held 95% of the outstanding common stock of Laurier, assuming
the issuance of all shares issuable upon the exercise of outstanding options and warrants, and all of the officers and directors
of Old Arno in office immediately prior to the Merger were appointed as the officers and directors of Laurier immediately following
the Merger. Further, Laurier was a non-operating shell company prior to the Merger. The merger of a private operating company into
a non-operating public shell corporation with nominal net assets is considered to be a capital transaction in substance, rather
than a business combination, for accounting purposes. Accordingly, the Company treated this transaction as a capital transaction
without recording goodwill or adjusting any of its other assets or liabilities. All costs incurred in connection with the Merger
have been expensed. Upon completion of the Merger, the Company adopted Old Arno’s business plan.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company has not yet generated any revenue
from the sale of products and, through September 30, 2016, its efforts have been principally devoted to developing its licensed
technologies and raising capital. The Company has experienced negative cash flows from operating activities since its inception
and has an accumulated deficit of approximately $103.0 million at September 30, 2016. The Company expects to incur substantial
and increasing losses and to have negative net cash flows from operating activities as it enhances its technology portfolio and
engages in further research and development activities, particularly from conducting clinical trials, manufacturing activities
and pre-clinical studies.
The accompanying unaudited Condensed Financial
Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q adopted under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete
financial statements. In the opinion of Arno’s management, the accompanying Condensed Financial Statements contain all adjustments
(consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations
and cash flows of the Company at the dates and for the periods indicated. The interim results for the periods ended September 30,
2016 are not necessarily indicative of results for the full 2016 fiscal year or any other future interim periods.
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, 2015, 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 in the fair value of derivative liabilities. Actual results
could differ from those estimates.
Research and Development
Research and development costs are charged
to expense as incurred. Research and development includes employee costs, fees associated with operational consultants, contract
clinical research organizations, contract manufacturing organizations, clinical site fees, contract laboratory research organizations,
contract central testing laboratories, licensing activities, and allocated office, insurance, depreciation, and facilities expenses.
The Company accrues for costs incurred as the services are being provided by monitoring the status of the study 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 8) in accordance with the guidance on Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classify the warrant
instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is
subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized as a component
of other income or expense. The fair value of warrants issued by the Company, in connection with private placements of securities,
has been estimated using a Monte Carlo simulation model and, in doing so, the Company’s management utilized a third-party
valuation report. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock
price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes
standard error.
Recent Accounting Pronouncements
In January 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update No. 2016-01, “Financial Instruments” (“ASU
2016-01”). Equity investments not accounted for under the equity method of accounting will be measured at fair value, with
changes in fair value recognized in current earnings. ASU 2016-01 becomes effective for fiscal years beginning after December 15,
2017. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The
Company does not believe the adoption of this standard will have a material impact on its financial statements, results of operations
or related financial statement disclosures.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Leasees will need to recognize virtually
all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. ASU 2016-02 becomes effective
for the Company on January 1, 2019, and early adoption is permitted upon issuance. The Company is evaluating the potential impact
of adopting this standard on its financial statements.
In March 2016, the FASB issued two updates
to Derivatives and Hedging (Topic 815). Accounting Standards Update No. 2016-05, “Effect of Derivative Contract Novations
on Existing Hedge Accounting Relationships” (“ASU 2016-05”). ASU 2016-05 clarifies that a change in the counterparty
to a derivative instrument that has been designated as a hedging instrument does not, on its own, require dedesignation of that
hedge accounting relationship provided that all other hedge accounting criteria continue to be met. Accounting Standards Update
No. 2016-06, “Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”). ASU 2016-06 clarifies
that an entity is required to assess the embedded call or put option solely in accordance with a specific four-step decision sequence
and are not also required to assess whether the contingency for exercising the option is indexed to interest rate or credit risk.
ASU 2016-05 and ASU 2016-06 will take effect for public companies in fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. The Company does not believe the requirements of these updates will have a material
effect in the presentation of its financial statements.
In March 2016, the FASB issued an update
to Compensation- Stock Compensation (Topic 718). Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based
Payment Accounting” (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects
of accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity
or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. ASU 2016-09 is effective for reporting periods beginning after December
31, 2016. Early adoption is permitted. The Company is evaluating the potential impact of adopting this standard on its financial
statements.
In August 2016, the FASB issued an update
to Statement of Cash Flows (Topic 230). Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance in the presentation and classification of eight
specific cash flow issues in the statement of cash flows. ASU 2016-15 will take effect for public companies in fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating
the potential impact of adopting this standard on its financial statements.
3. LIQUIDITY AND CAPITAL RESOURCES
Cash resources as of September 30,
2016 were approximately $2.1 million, compared to approximately $0.1 million as of December 31, 2015. Based on resources at
September 30, 2016 and the current plan of expenditure for continuing the development of the Company’s current product,
the Company believes that its existing capital resources, including the $3.0 million of proceeds received, or that will be
received, from our August 2016 Purchase Agreement, are only sufficient to fund its operations into January 2017. The Company
is therefore in immediate need of additional capital to fund its continuing operations beyond such period. Further, the
Company will need substantial additional capital in order to complete the development and obtain regulatory approval of
its product candidates, if ever. The Company depends on its ability to raise additional funds through various potential
sources, such as equity and debt financing, or from a transaction in which it would license rights to its product
candidates to another pharmaceutical company. The Company will continue to fund operations from cash on hand and through
sources of capital similar to those previously described. The Company cannot assure that it will be able to secure such
additional financing, or if available, that it will be sufficient to meet its needs.
The long-term success of the Company depends
on its ability to develop new products to the point of regulatory approval and subsequent revenue generation and, accordingly,
to raise enough capital to finance these developmental efforts. Management plans to raise additional capital either by selling
shares of its stock or other securities, issuing additional indebtedness or by licensing the rights to one or more of its product
candidates to finance the continued operating and capital requirements of the Company. Amounts raised will be used to further develop
the Company’s product candidates, acquire rights to additional product candidates and for other working capital purposes.
While the Company will extend its best efforts to raise additional capital to fund all operations into January, 2017 and beyond,
management can provide no assurances that the Company will be successful in raising sufficient funds. If the Company is not successful,
it may be required to discontinue its operations.
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. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The Company’s financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The
financial statements do not include any adjustments that might result from the in ability of the Company to continue as a going
concern.
4. BASIC AND DILUTED INCOME/(LOSS) PER SHARE
Basic net loss per share is calculated by
dividing the loss available to common shareholders by weighted-average number of shares of common stock outstanding during the
period. Diluted net loss per share is calculated similarly to basic loss per share except that the denominator is 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.
As of September 30, 2016 and 2015, potentially
dilutive securities include:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
7,598,439
|
|
|
|
4,455,231
|
|
Options to purchase common stock
|
|
|
4,154,304
|
|
|
|
-
|
|
Total potentially dilutive securities
|
|
|
11,752,743
|
|
|
|
4,455,231
|
|
For all periods presented, potentially dilutive
securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive. In addition
to the potentially dilutive securities, the aggregate number of common equivalent shares (related to options and warrants) that
have been excluded from the computations of diluted loss per common share at September 30, 2016 and 2015 were 56,585,279 and 30,707,113,
respectively, as their exercise prices are greater than the fair market price per common share as of September 30, 2016 and 2015,
respectively.
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY
License Agreements
Onapristone License Agreement
The Company’s rights to onapristone
are governed by a license agreement with Invivis Pharmaceuticals, Inc. (“Invivis”), dated February 13, 2012. Under
this agreement, the Company holds an exclusive, royalty-bearing license for the rights to commercialize onapristone for all therapeutic
uses. The license agreement provides the Company with worldwide rights to develop and commercialize onapristone with the exception
of the commercialization rights in France; provided that the Company has an option to acquire French commercial rights from Invivis
upon notice to Invivis together with additional consideration.
The onapristone license agreement provides
the Company with exclusive, worldwide rights to a United States provisional patent application that relates to assays for predictive
biomarkers for anti-progestin efficacy. The Company intends to expand its patent portfolio by filing additional patent applications
covering the use of onapristone, the manufacture of onapristone and/or a companion diagnostic product. If the pending patent application
issues, the issued patent would be scheduled to expire in 2031.
The Company made a one-time cash payment
of $500,000 to Invivis upon execution of the license agreement on February 13, 2012. Additionally, Invivis will receive performance-based
cash payments of up to an aggregate of $15.1 million upon successful completion of clinical and regulatory milestones relating
to onapristone, which milestones include the marketing approval of onapristone in multiple indications in the United States or
the European Union as well as Japan. The first milestone was due upon the dosing of the first patient in a pharmacokinetic study
and was achieved during August 2013 and the Company made a $150,000 payment to Invivis during October 2013. The Company made its
next milestone payment of $100,000 to Invivis upon the dosing of the first subject in the first Company-sponsored Phase I clinical
trial of onapristone in January 2014. A milestone payment of $350,000 for the enrollment of the first patient in a Phase II clinical
trial sponsored by Arno was paid in July 2015. In addition, the Company will pay Invivis low single digit sales royalties based
on net sales of onapristone by the Company or any of its sublicensees. Pursuant to a separate services agreement which expired
in April 2014, Invivis provided the Company with certain clinical development support services, which includes the assignment of
up to two full-time employees to perform such services, in exchange for a monthly cash payment of approximately $70,833. Effective
April 1, 2014, the Company renewed the services agreement for a period of one year for a monthly cash payment of $50,000 and certain
other performance based milestones. The services agreement was not renewed upon its expiration on April 1, 2015.
Under the license agreement with Invivis,
the Company also agreed to indemnify and hold Invivis and its affiliates harmless from any and all claims arising out of or in
connection with the production, manufacture, sale, use, lease, consumption or advertisement of onapristone, provided, however,
that the Company shall have no obligation to indemnify Invivis for claims that (a) any patent rights infringe third party intellectual
property, (b) arise out of the gross negligence or willful misconduct of Invivis, or (c) result from a breach of any representation,
warranty confidentiality obligation of Invivis under the license agreement. The license agreement will terminate upon the later
of (i) the last to expire valid claim contained in the patent rights, and (ii) February 13, 2032. In general, Invivis may terminate
the license agreement at any time upon a material breach by the Company to the extent the Company fails to cure any such breach
within 90 days after receiving notice of such breach or in the event the Company files for bankruptcy. The Company may terminate
the agreement for any reason upon 90 days’ prior written notice.
University of Minnesota License
In February 2014, we entered into an Exclusive
Patent License Agreement with the Regents of the University of Minnesota, or “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
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. 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 UM on net sales of “Licensed Products” (as defined in the agreement) at
a rate in the low-single digits, which royalty obligation terminates on a licensed product-by-licensed product and country-by-country
basis upon the first date when there is no longer a valid claim under a licensed patent or patent application covering such licensed
product in the country where the licensed product is made or sold.
The term of the license agreement continues
until the last date on which there is any active licensed patent or pending patent application. UM may terminate the agreement
earlier upon a breach by us of one or more of our obligations that remains uncured for a period specified in the agreement. UM
may also terminate the agreement if we voluntarily file for bankruptcy or similar proceeding, or if a petition for an involuntary
bankruptcy proceeding is filed and is not released for 60 days. The agreement may be immediately terminated upon notice to us if
we commence or maintain a proceeding in which we assert that the licensed patents are invalid or unenforceable. We may terminate
the agreement at any time and for any reason upon 90 days’ written notice.
The license agreement further provides that
we will indemnify and hold UM and its affiliates harmless from any and all suits, actions, claims, liabilities, demands, damages,
losses or expenses relating to our exercise of its rights under the agreement, including our right to commercialize the licensed
technology. UM is required to indemnify us with respect to claims relating to or resulting from its breach of the agreement.
AR-12 and AR-42 License Agreements
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.
Under our license agreement for AR-12, we
have exclusive, worldwide rights to seven issued U.S. patent and three pending U.S. patent applications that relate to AR-12, AR-12
analogs, and particular uses of AR-12 according to our business plan. On July 9, 2015, the Company and The Ohio State Innovation
Foundation (formerly, The Ohio State Research Foundation) (“Ohio State”) entered into an amendment, dated effective
as of May 15, 2015 (the “Amendment”), to the parties’ License Agreement dated January 3, 2008 (the “AR-12
License”), pursuant to which the Company was granted an exclusive license to certain patents and other technology relating
to its AR-12 product candidate. The purpose of the Amendment was to clarify the scope of AR-12 analogs covered by the license grant
in the original AR-12 License. In addition, the Amendment provides the Company with a first option to an exclusive license to patents
and other technology relating to compounds related to AR-12 held by Ohio State. The issued patents include composition of matter
claims. The issued patents are 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 2034. In 2014, we filed a provisional patent application directed to methods
using AR-12 that, if issued, would expire in 2035. In addition, Arno has exclusive rights to a pending US and international patent
application directed to AR-12 formulations which, if issued, would expire in 2034.
Under our license agreement for AR-42, we
have exclusive, worldwide rights to one issued and two pending U.S. patent applications that relate to AR-42 and particular uses
of AR-42 according to our business plan. If one of the pending patent applications issues, the issued patent or patents would be
scheduled to expire in 2024. If the other pending patent application issues, it would be scheduled to expire in 2034.
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.
AR-67 License Agreement
During the nine months ended September
30, 2016, the Company sold to a third party for approximately $500,000 the Company’s research data related to AR-67, a
product candidate the development of which was halted by the Company and the license to which was terminated in 2012. The
proceeds from the sale have been recorded as a component of other income in the condensed statement of operations.
6. CONVERTIBLE NOTES PAYABLE
On October 21, 2015, the Company issued
a series of 6% convertible promissory notes (the “6% Notes”) in the aggregate principal amount of $2,100,000 with an
original maturity date of October 21, 2016. The 6% Notes provided for automatic conversion into shares of the Company’s equity
securities upon the closing of a “qualified financing,” defined as one in which the Company received cumulative gross
proceeds of at least $3,500,000 (including the $2,100,000 of proceeds from the sale of the 6% Notes) through the issuance of shares
of its equity securities, either alone or as part of units with other equity or equity-linked securities of the Company, at a conversion
price equal to the price paid by investor for such equity securities in the qualified financing. The Company incurred $12,528 of
issuance costs related to the 6% Notes.
On January 12, 2016, in
connection with the Company’s entry into the January 2016 Purchase Agreement (See Note 8) the $2,100,000 principal
balance and accrued interest of $28,652 under the 6% Notes was converted into 6,081,858 shares of the Company’s common
stock at a per share price of $0.35 per share. In addition the remaining unamortized issuance costs of $10,091 was
expensed.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines fair value as the amount
at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties,
that is, other than in a forced or liquidation sale. The fair value estimates presented in the table below are based on information
available to the Company as of September 30, 2016.
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
liabilities measured at fair value on a recurring basis as of September 30, 2016:
|
|
Fair Value September 30, 2016
|
|
|
Quoted Market Prices in Active Markets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level
2)
|
|
|
Significant Other Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability - 2012 Series A
|
|
$
|
2,079,948
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,079,948
|
|
Warrant liability - 2012 placement agent
|
|
|
3,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,689
|
|
Warrant liability - 2013 Series D
|
|
|
4,454,068
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,454,068
|
|
Warrant liability - 2013 placement agent
|
|
|
3,939
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,939
|
|
Total
|
|
$
|
6,541,644
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,541,644
|
|
The following table presents the Company’s
fair value hierarchy for these liabilities measured at fair value on a recurring basis as of December 31, 2015:
|
|
Fair Value December 31, 2015
|
|
|
Quoted Market Prices in Active Markets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level
2)
|
|
|
Significant Other Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability - 2012 Series A
|
|
$
|
1,753,969
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,753,969
|
|
Warrant liability - 2012 placement agent
|
|
|
7,661
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,661
|
|
Warrant liability - 2013 Series D
|
|
|
2,985,512
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,985,512
|
|
Warrant liability - 2013 placement agent
|
|
|
3,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,545
|
|
Total
|
|
$
|
4,750,687
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,750,687
|
|
The following table provides a summary of
changes in fair value of the Company’s liabilities, as well as the portion of losses included in income attributable to unrealized
depreciation that relate to those liabilities held at September 30, 2016:
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
Warrant
|
|
|
2013
|
|
|
2013
|
|
|
Placement
|
|
|
2012
|
|
|
2012
|
|
|
Placement
|
|
|
2010
|
|
|
|
Liability
|
|
|
Series E
|
|
|
Series D
|
|
|
Agent
|
|
|
Series B
|
|
|
Series A
|
|
|
Agent
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
6,671,524
|
|
|
$
|
25,737
|
|
|
$
|
3,011,249
|
|
|
$
|
18,907
|
|
|
$
|
12,381
|
|
|
$
|
3,507,938
|
|
|
$
|
67,246
|
|
|
$
|
28,066
|
|
Total gains or losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation/(depreciation)
|
|
|
(1,920,837
|
)
|
|
|
(25,737
|
)
|
|
|
(25,737
|
)
|
|
|
(15,362
|
)
|
|
|
(12,381
|
)
|
|
|
(1,753,969
|
)
|
|
|
(59,585
|
)
|
|
|
(28,066
|
)
|
Balance at December 31, 2015
|
|
$
|
4,750,687
|
|
|
$
|
-
|
|
|
$
|
2,985,512
|
|
|
$
|
3,545
|
|
|
$
|
-
|
|
|
$
|
1,753,969
|
|
|
$
|
7,661
|
|
|
$
|
-
|
|
Total gains or losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation/(depreciation)
|
|
|
1,790,957
|
|
|
|
|
|
|
|
1,468,556
|
|
|
|
394
|
|
|
|
|
|
|
|
325,979
|
|
|
|
(3,972
|
)
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
6,541,644
|
|
|
$
|
-
|
|
|
$
|
4,454,068
|
|
|
$
|
3,939
|
|
|
$
|
-
|
|
|
$
|
2,079,948
|
|
|
$
|
3,689
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value per Warrant
|
|
$
|
0.132
|
|
|
$
|
-
|
|
|
$
|
0.157
|
|
|
$
|
0.060
|
|
|
$
|
-
|
|
|
$
|
0.099
|
|
|
$
|
0.013
|
|
|
$
|
-
|
|
8. STOCKHOLDERS’ EQUITY
Common Stock
As of September 30, 2016, the Company had
47,849,036 shares of common stock issued and outstanding and approximately 68,338,022 shares of common stock reserved for issuance
upon the exercise of outstanding options and warrants.
On January 12, 2016, the Company entered
into a Stock Purchase Agreement (the “January 2016 Purchase Agreement”) with certain purchasers identified therein
(the “Purchasers”) pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, an aggregate
of 21,153,997 shares of the Company’s common stock at a purchase price of $0.35 per share for an aggregate gross proceeds
of approximately $7.4 million, including $2,128,652 from the automatic conversion of the outstanding principal and accrued and
unpaid interest under the 6% Notes. An aggregate of 6,081,858 shares were sold under the January 2016 Purchase Agreement pursuant
to the conversion of the 6% Notes sold pursuant to the January 2016 Purchase Agreement.
On August 15, 2016, the
Company entered into a Securities Purchase Agreement (the “August 2016 Purchase Agreement”) with certain
purchasers pursuant to which it agreed to issue and sell in a private placement 8,501,421 units of its securities at a price
of $0.35 per unit, with each unit consisting of one share of common stock and a five-year Series F Common Stock Purchase
Warrant to purchase one-half share (rounded to the nearest whole share) of common stock at an exercise price of $0.4375 per
share (the” Series F Warrants”). On August 15 the Company closed on the sale of 6,286,423 units for proceeds
of approximately $2.2 million and on October 4, 2016 the Company closed on the sale of 285,714 units for an additional
$100,000 in proceeds. In connection with the October closing the Company received $150,000 of the proceeds prior to September
30, 2016 and has recorded the proceeds as a stock subscription as of September 30, 2016. The closing on the sale of the
remaining 1,929,284 units, which will result in additional gross proceeds to us of approximately $675,250, is subject to
the satisfaction of customary closing conditions, including the effectiveness of a registration statement under the
Securities Act covering the resale of the shares and warrant shares sold pursuant to the purchase agreement. The Company
filed a registration statement covering such shares on October 12, 2016 and it was declared effective by the Securities and
Exchange Commission on November 3, 2016. On November 4, 2016, the Company closed on 1,214,999 units, which resulted in
additional gross proceeds to the Company of approximately $425,250. There are 714,285 units ($250,000 in proceeds) subject to
the August 2016 Purchase Agreement that remain to be closed upon.
Warrants
In accordance with the 2010 sale and issuance
of Series A preferred stock, the Company issued two-and-one-half-year “Class A” warrants to purchase an aggregate of
152,740 shares of Series A Preferred Stock at an initial exercise price of $8.00 per share (the “2010 Class A Warrants”)
and five-year Class B warrants to purchase an aggregate of 801,885 shares of Series A Preferred Stock at an initial exercise price
of $9.20 per share (the “2010 Class B Warrants,” and together with the 2010 Class A Warrants, the “2010 Warrants”).
Upon the automatic conversion of the Series A Preferred Stock in January 2011, the 2010 Warrants automatically converted to the
right to purchase an equal number of shares of common stock. The terms of the warrants contain an anti-dilutive price adjustment
provision, such that, in the event the Company issues common shares at a price below the current exercise price of the 2010 Warrants,
the exercise price will be decreased pursuant to a customary “weighted-average” formula. In accordance with this provision
and as a result of the issuances made pursuant to the 2012 Purchase Agreement and 2013 Purchase Agreement, the exercise price of
the 2010 Class B warrants has been adjusted to $3.55 per share. Because of this anti-dilution provision and the inherent uncertainty
as to the probability of future common share issuances, the Black-Scholes option pricing model the Company uses for valuing stock
options could not be used. Management used a Monte Carlo simulation model and, in doing so, utilized a third-party valuation
report to determine the warrant liability to be approximately $0.0 million at December 31, 2015. The Monte Carlo simulation is
a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable
estimate of the range of the Company’s future expected stock prices and minimizes standard error. This valuation is revised
on a quarterly basis until the warrants are exercised or they expire, with the changes in fair value recorded in other income (expense)
on the statement of operations. The 2010 Class A warrants, representing the right to purchase an aggregate of 152,740 shares of
common stock, expired unexercised during the year ended December 31, 2013, and the Class B warrants, representing the right to
purchase an aggregate of 801,885 shares of common stock, expired unexercised during September 2015.
Pursuant to the 2012 Purchase
Agreement for the sale and issuance of 8% Senior Convertible Debentures, the Company issued five-year Series A Common Stock
Purchase Warrants (The “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 Common Stock Purchase Warrants (The
“Series B Warrants” and together with the Series A Warrant, the “2012 Warrants”) to purchase an
aggregate of approximately 6,190,500 shares of common stock at an initial exercise price of $2.40 per share. The terms of the
2012 Warrants contain a “full-ratchet” anti-dilutive price adjustment provision. In accordance with such
full-ratchet anti-dilution provision, in the event that the Company sells or issues additional shares of common stock,
including securities convertible or exchangeable for common stock (subject to customary exceptions), at a per share price
less than the applicable 2012 Warrant exercise price, such warrant exercise price will be reduced to an amount equal to the
issuance price of such subsequently issued shares; after such time as the Company has raised at least $12 million in
additional equity financing, the 2012 Warrants are subject to further anti-dilution protection based on a weighted-average
formula. Further, the anti-dilution provisions of the 2012 Warrants provide that, in addition to a reduction in the
applicable exercise price, the number of shares purchasable thereunder is increased such that the aggregate exercise price of
the warrants (exercise price per share multiplied by total number of shares underlying the warrants) remained unchanged. In
accordance with the terms of this anti-dilution provision and as a result of the Company’s issuances under the 2013
Purchase Agreement, the exercise price of the Series A Warrants was reduced to $2.40 per share and the aggregate number of
shares underlying such warrants was increased to 10,317,464 shares. Further in accordance with the terms of this
anti-dilution provision and as a result of the Company’s issuances under the 2016 Purchase Agreement, the exercise
price of the Series A Warrants was reduced to $1.36 per share and the aggregate number of shares underlying such warrants was
increased to 18,207,273 shares. In August, 2016 further in accordance with the terms of this anti-dilution provision and as a
result of the Company’s issuances under the 2016 Securities Agreement, the exercise price of the Series A Warrants was
reduced to $1.18 per share and the aggregate number of shares underlying such warrants was increased to 21,009,562 shares.
The 2012 Warrants also contain a provision that may require the Company to repurchase such warrants from their holders in
connection with a sale of the Company or similar transactions. As a result of such anti-dilution and repurchase provisions,
the Company is required to record the fair value of the 2012 Warrants as a liability on the accompanying balance sheet.
Because of this anti-dilution provision and the inherent uncertainty as to the probability of future common share issuances,
the Black-Scholes option pricing model the Company uses for valuing stock options could not be used. Management
used a Monte Carlo simulation model and, in doing so, utilized a third-party valuation report to determine the warrant
liability to be approximately $2.1 million and $1.8 million at September 30, 2016 and December 31, 2015, respectively. The
Debentures were converted to common stock in 2013. At the time of the conversion of the Debentures, the expiration date of
the Series B Warrants was extended to October 31, 2014, and was thereafter further extended to January 31, 2015. The
Series B warrants, representing the right to purchase an aggregate of approximately 6,190,500 shares of common stock,
expired unexercised on January 31, 2015.
In connection with the sale of the Debentures
and 2012 Warrants, the Company engaged Maxim Group LLC, or Maxim, to serve as placement agent. In consideration for its services,
the Company paid Maxim a placement fee of $1,035,000. In addition, the Company issued to an affiliate of Maxim 7,500 shares of
common stock and five-year warrants to purchase an additional 283,750 shares of common stock at an initial exercise price of $2.64
per share. The warrants issued to Maxim are in substantially the same form as the 2012 Warrants issued to the investors, except
that they do not include certain anti-dilution provisions contained in the investors’ 2012 Warrants. However, the placement
warrants do contain a provision that could require the Company to repurchase the warrants from the holder in connection with a
sale of the Company or similar transaction. As a result of such repurchase provision, the Company is required to record the fair
value of such warrants as a liability on the accompanying balance sheet. Management used a Monte Carlo simulation model and, in
doing so, utilized a third-party valuation report to determine the warrant liability to be approximately $0.0 million at September
30, 2016 and December 31, 2015, respectively.
Under the terms of the 2013
Purchase Agreement for the issuance and sale of common stock, each Purchaser received Series D Common Stock Purchase Warrant
(a “Series D Warrant”) and a Series E Common Stock Warrant (a “Series E Warrant” and together with
the Series D Warrant, the “2013 Warrants”)) and had the option to elect to receive a Series C Common Stock
Purchase Warrant (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 were initially exercisable until October 31, 2014, which exercise date was subsequently extended by the Company to
January 31, 2015. The initial exercise price of the Series E Warrants was $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. In accordance with the terms of
this anti-dilution provision and as a result of the Company’s issuances under the 2016 Purchase Agreement, the
exercise price of the Series D warrants was reduced from $4.00 to $2.14 per share and the aggregate number of shares
underlying such warrants was increased from 12,868,585 to 24,053,398 shares. Further in accordance with the terms of this
anti-dilution provision and as a result of the Company’s issuances under the August 2016 Purchase Agreement,
the exercise price of the Series D Warrants was reduced to $1.81 per share and the aggregate number of shares underlying
such warrants was increased to 28,369,815 shares. The 2013 Warrants also contain a provision that may require the Company
to repurchase such warrants from their holders in connection with a sale of the Company or similar transactions. As a result
of such anti-dilution and repurchase provisions, the Company is required to record the fair value of the 2013 Warrants as
a liability on the accompanying balance sheet. Because of this anti-dilution provision and the inherent uncertainty as to
the probability of future common share issuances, the Black-Scholes option pricing model the Company uses for valuing
stock options could not be used. Management used a Monte Carlo simulation model and, in doing so, utilized a
third-party valuation report to determine the warrant liability for the Series D Warrants to be approximately $4.5 million
and $3.0 million at September 30, 2016 and December 31, 2015, respectively. The Series E Warrants, representing the
right to purchase an aggregate of 12,868,585 shares of common stock, expired unexercised on January 31, 2015. The 2013
Warrants are required to be exercised for cash, provided that if during the term of the Warrants there is not an effective
registration statement under the Securities Act covering the resale of the shares issuable upon exercise of the Warrants,
then the Warrants may be exercised on a cashless (net exercise) basis.
Pursuant to the terms of the August
2016 Purchase Agreement for the issuance and sale of common stock, the Company issued Series F Warrants to purchase an
aggregate of approximately 3,145,208 shares of common stock. The Series F Warrants have a five-year term and are exercisable
at an initial exercise price of $0.4375 per share, subject to adjustment for stock splits, combinations, recapitalization
events. The Series F 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 Series F Warrants, then the warrants may be exercised on a cashless (net exercise) basis.
Below is a table that
summarizes all outstanding warrants to purchase shares of the Company’s common stock as of September 30, 2016:
Description
|
|
Grant
Date
|
|
Warrants
Issued
|
|
|
Exercise
Price
|
|
|
Weighted
Average
Exercise Price
|
|
|
Expiration
Date
|
|
Exercised
|
|
|
Warrants
Outstanding
|
|
2012 Series A
|
|
11/26/2012
|
|
|
17,966,139
|
|
|
$
|
1.1786
|
|
|
$
|
1.1786
|
|
|
11/26/2017
|
|
|
-
|
|
|
|
17,966,139
|
|
2012 Placement
|
|
11/26/2012
|
|
|
261,250
|
|
|
$
|
2.6400
|
|
|
$
|
2.6400
|
|
|
11/26/2017
|
|
|
-
|
|
|
|
261,250
|
|
2012 Series A
|
|
12/18/2012
|
|
|
3,043,423
|
|
|
$
|
1.1786
|
|
|
$
|
1.1786
|
|
|
12/18/2017
|
|
|
-
|
|
|
|
3,043,423
|
|
2012 Placement
|
|
12/18/2012
|
|
|
22,500
|
|
|
$
|
2.6400
|
|
|
$
|
2.6400
|
|
|
12/18/2017
|
|
|
-
|
|
|
|
22,500
|
|
2013 Series C
|
|
10/29/2013
|
|
|
4,455,231
|
|
|
$
|
0.0100
|
|
|
$
|
0.0100
|
|
|
10/29/2018
|
|
|
-
|
|
|
|
4,455,231
|
|
2013 Series D
|
|
10/29/2013
|
|
|
28,369,815
|
|
|
$
|
1.8144
|
|
|
$
|
1.8144
|
|
|
10/29/2018
|
|
|
-
|
|
|
|
28,369,815
|
|
2013 Placement
|
|
10/29/2013
|
|
|
65,650
|
|
|
$
|
2.6400
|
|
|
$
|
2.6400
|
|
|
10/29/2018
|
|
|
-
|
|
|
|
65,650
|
|
2016 Series F
|
|
08/15/2016
|
|
|
3,143,208
|
|
|
$
|
0.4375
|
|
|
$
|
0.4375
|
|
|
08/15/2021
|
|
|
-
|
|
|
|
3,143,208
|
|
|
|
|
|
|
57,327,216
|
|
|
|
|
|
|
$
|
1.37
|
|
|
|
|
|
-
|
|
|
|
57,327,216
|
|
9. STOCK BASED COMPENSATION
The Company’s 2005 Stock Option Plan
(the “2005 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 2005 Plan. On April 25, 2011, the Company’s Board of Directors
(the “Board”) approved an amendment to the 2005 Plan to increase the number of shares of common stock issuable under
the 2005 Plan to 875,000 shares. On January 14, 2013, the Board approved an amendment to the 2005 Plan to increase the number of
shares of common stock issuable under the 2005 Plan to 945,276 shares. On October 7, 2013, the Board adopted an amendment to the
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 2005 Plan, incentives may be granted to officers, employees, directors, consultants, and advisors. Incentives under the
2005 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 2005 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 2005 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.
The 2005 Plan expired on March 31, 2016
with 7,018,549 options outstanding which will continue to vest. No further awards will be made pursuant to this plan.
On March 14, 2016, the Board of the Company
adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan replaces the Company’s
2005 Plan. Incentives under the 2016 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 stock to be awarded or optioned under the 2016 Plan will consist of authorized but unissued or reacquired shares of
common stock. The maximum aggregate number of shares of common stock reserved and available for awards under the 2016 Plan is 9,000,000
shares; provided, that all shares of stock reserved and available under the 2016 Plan will constitute the maximum aggregate number
of shares of stock that may be issued through incentive stock options.
Any employee, director, or consultant may
participate in the 2016 Plan; provided, however, that only employees are eligible to receive incentive stock options. Additionally,
the Company may grant certain performance-based awards to “covered employees” in compliance with Section 162(m) of
the Internal Revenue Code. These covered employees include our executive officers. No person may be granted options, stock appreciation
rights, restricted stock awards, restricted stock units or performance awards under the 2016 Plan for more than 4,000,000 shares
of common stock in any calendar year.
The term of stock options granted under
the 2016 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. Incentive stock options may not be granted
after March 13, 2026.
As of September 30, 2016, there are 5,007,743
shares available for future grants and awards under the 2016 Plan, which covers stock options, warrants and restricted stock awards.
Stock-based compensation costs under
the Company’s equity incentive plans for the three and nine month periods ended September 30, 2016 and 2015 are as
follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
220,960
|
|
|
$
|
275,429
|
|
|
$
|
703,324
|
|
|
$
|
830,180
|
|
General and administrative
|
|
|
804,487
|
|
|
|
658,900
|
|
|
|
2,243,488
|
|
|
|
2,027,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,025,447
|
|
|
$
|
934,329
|
|
|
$
|
2,946,812
|
|
|
$
|
2,857,289
|
|
The Company grants stock options to employees
and members of the Board of Directors with the exercise prices equal to the closing price of the underlying shares of the Company’s
common stock on the date that the options are granted. Options granted have a term of 10 years from the grant date. Options granted
to employees generally vest over a three- year period and options granted to members of the Board of Directors vest in equal monthly
installments over a one-year period from the date of grant. Options to members of the Board of Directors are granted on an annual
basis and represent compensation for services performed on the Board of Directors. Compensation cost for stock options is charged
against operations on a straight-line basis between the grant date for the option and each vesting date. The Company estimates
the fair value of the stock options on the grant date by applying the Black-Scholes option pricing valuation model. The application
of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation
cost.
In addition during the nine months
ended September 30, 2016 the Company granted stock options to members of senior management that contain certain conditions to
the exercisability of the shares subject thereto (“Contingent Options”) with the exercise prices equal to the
closing price of the underlying shares of the Company’s common stock on the date that the options are granted. The
Contingent Options granted have a term of 10 years from the grant date. The Contingent Options are exercisable only to the
extent that the Company’s outstanding Series A Warrants and Series D Warrants are exercised prior to their expiration.
Compensation cost for the Contingent Options is charged against operations over the implicit, explicit or derived requisite
service period unless the market condition is satisfied at an earlier date, in which case any unrecognized compensation cost
would be recognized immediately upon satisfaction of the market condition. If the requisite service is not rendered, all
previously recognized compensation cost would be reversed. If the requisite service is rendered, the recognized compensation
is not reversed even if the market condition is never satisfied. The Company utilized a Monte Carlo simulation model for the
valuation of market options. The application of this valuation model involves assumptions that are highly subjective,
judgmental and sensitive in the determination of compensation cost.
The Company issued the following stock options
during the three and nine month periods ended September 30, 2016 and 2015, respectively:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
|
|
2,459,799
|
|
|
|
-
|
|
Contingent Options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,621,106
|
|
|
|
-
|
|
Total granted
|
|
|
-
|
|
|
|
-
|
|
|
|
4,080,905
|
|
|
|
-
|
|
The Company estimated the fair value of
the stock options granted using the Black-Scholes option-pricing model. The Company estimated the fair value of the Market Options
granted using the Monte Carlo simulation model. The following key assumptions were used for both option grants for the nine months
ended September 30, 2016 as no options were granted in the three months ended September 30, 2016 and the three and nine months
ended September 30, 2015:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
N/A
|
|
|
|
N/A
|
|
|
82% - 85%
|
|
|
N/A
|
|
Expected term
|
|
|
N/A
|
|
|
|
N/A
|
|
|
6 years
|
|
|
N/A
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
|
0.0%
|
|
|
N/A
|
|
Risk- free interest rate
|
|
|
N/A
|
|
|
|
N/A
|
|
|
1.14% - 1.55%
|
|
|
N/A
|
|
Stock price
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$0.30 - $0.37
|
|
|
N/A
|
|
Forfeiture rate
|
|
|
N/A
|
|
|
|
N/A
|
|
|
0.0%
|
|
|
N/A
|
|
A summary of the status of the options
issued under the Company’s equity incentive plans at September 30, 2016, and information with respect to the
changes in options outstanding, is as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
|
7,027,658
|
|
|
$
|
2.57
|
|
|
$
|
7,824
|
|
Granted
|
|
|
4,080,905
|
|
|
|
0.37
|
|
|
|
414,296
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(97,757
|
)
|
|
|
2.23
|
|
|
|
-
|
|
Options outstanding at September 30, 2016
|
|
|
11,010,806
|
|
|
$
|
1.76
|
|
|
$
|
422,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at September 30, 2016
|
|
|
11,010,806
|
|
|
$
|
1.76
|
|
|
$
|
422,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
6,658,434
|
|
|
$
|
2.53
|
|
|
$
|
30,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for grant under the 2016 Plan
|
|
|
5,007,743
|
|
|
|
|
|
|
|
|
|
The following table summarizes information
about stock options outstanding at September 30, 2016:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.30
|
|
|
|
88,648
|
|
|
|
9.28
|
|
|
$
|
0.30
|
|
|
|
19,699
|
|
|
$
|
0.30
|
|
$
|
0.36
|
|
|
|
48,399
|
|
|
|
9.09
|
|
|
$
|
0.36
|
|
|
|
13,444
|
|
|
$
|
0.36
|
|
$
|
0.37
|
|
|
|
4,017,257
|
|
|
|
9.52
|
|
|
$
|
0.37
|
|
|
|
258,496
|
|
|
$
|
0.37
|
|
$
|
0.85
|
|
|
|
136,785
|
|
|
|
8.09
|
|
|
$
|
0.85
|
|
|
|
79,791
|
|
|
$
|
0.85
|
|
$
|
1.30
|
|
|
|
100,000
|
|
|
|
8.02
|
|
|
$
|
1.30
|
|
|
|
59,375
|
|
|
$
|
1.30
|
|
$
|
2.40
|
|
|
|
5,097,075
|
|
|
|
6.46
|
|
|
$
|
2.40
|
|
|
|
4,852,574
|
|
|
$
|
2.40
|
|
$
|
2.90
|
|
|
|
1,420,259
|
|
|
|
7.32
|
|
|
$
|
2.90
|
|
|
|
1,272,672
|
|
|
$
|
2.90
|
|
$
|
8.00
|
|
|
|
65,000
|
|
|
|
3.82
|
|
|
$
|
8.00
|
|
|
|
65,000
|
|
|
$
|
8.00
|
|
$
|
19.38
|
|
|
|
37,383
|
|
|
|
1.53
|
|
|
$
|
19.38
|
|
|
|
37,383
|
|
|
$
|
19.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
11,010,806
|
|
|
|
7.72
|
|
|
$
|
1.76
|
|
|
|
6,658,434
|
|
|
$
|
2.53
|
|
The grant date fair value of options
vested under the Company’s equity incentive plans was approximately $952,576 and $935,446 for the three months ended
September 30, 2016 and 2015, and $2,802,664 and $3,590,708 for the nine months ended September 30, 2016 and 2015,
respectively.
At September 30, 2016, total unrecognized
estimated compensation cost related to stock options granted prior to that date was approximately $1,784,552 which is expected
to be recognized over a weighted-average vesting period of 2.5 years. This unrecognized estimated employee compensation cost does
not include any estimate for forfeitures of performance-based stock options.
Common stock, stock options or other
equity instruments issued to non-employees (including consultants and all members of the Company’s Scientific Advisory Board)
as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments
issued (unless the fair value of the consideration received can be more reliably measured). The fair value of stock options is
determined using the Black-Scholes option-pricing model and is expensed as the underlying options vest. The fair value of any options
issued to non-employees is recorded as expense over the applicable service periods.
10. SUBSEQUENT EVENTS
As described above under “Note
8, Stockholders’ Equity - Common Stock,” on October 4, 2016, the Company closed on the sale of an additional
285,714 shares of common stock and Series F Warrants to purchase 142,857 shares of common stock pursuant to the August 2016
Purchase Agreement, resulting in gross proceeds of $100,000. The closing on the sale of the remaining 1,929,284 units, which
will result in additional gross proceeds to us of approximately $675,250, is subject to the satisfaction of customary closing
conditions, including the effectiveness of a registration statement under the Securities Act covering the resale of the
shares and warrant shares sold pursuant to the purchase agreement.
The registration statement
covering such shares and warrant shares was declared effective on November 3, 2016 by the Securities and Exchange Commission.
The Company closed on the sale of 1,214,999 units on November 4, 2016, which resulted in additional gross proceeds to us
of approximately $425,250. There are 714,285 units ($250,000 proceeds) subject to the August 2016 Purchase Agreement that
remain to be closed upon.