EXHIBIT 99.2
(a development stage company)
TO MARCH 31, 2008
ARNO THERAPEUTICS, INC.
(a development stage company)
FINANCIAL STATEMENTS
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
CONTENTS
| FINANCIAL STATEMENTS | | |
| | | |
| INDEPENDENT ACCOUNTANT'S REVIEW REPORT | | 1 |
| | | |
| BALANCE SHEET | | 2 |
| | | |
| STATEMENTS OF OPERATIONS | | 3 |
| | | |
| STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY | | 4 |
| | | |
| STATEMENTS OF CASH FLOWS | | 5 |
| | | |
| NOTES TO FINANCIAL STATEMENTS | | 6 |
To the Board of Directors and Stockholders
Arno Therapeutics, Inc.
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
We have reviewed the accompanying balance sheet of Arno Therapeutics, Inc. (a development stage company) (the “Company”) as of March 31, 2008 and the related statements of operations, changes in stockholders' equity and cash flows for the three months ended March 31, 2008 and 2007 and the period from August 1, 2005 (inception) to March 31, 2008, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of the Company.
A review consists principally of inquiries of the Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in its development stage, has not generated any revenues, has a significant working capital deficiency, and has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Hays & Company LLP
May 20, 2008
New York, New York
ARNO THERAPEUTICS, INC.
(a development stage company)
BALANCE SHEET
MARCH 31, 2008
ASSETS | | | |
Current assets | | | |
| Cash and cash equivalents | | $ | 692,518 | |
| Prepaid expenses | | | 63,342 | |
| | | | | |
| | | | 755,860 | |
| | | | | |
| Deferred fees, net of accumulated amortization of $42,041 | | | 182,959 | |
| Property and equipment, net of accumulated depreciation of $4,048 | | | 49,745 | |
| Deposits | | | 12,165 | |
| | | | | |
| | | $ | 1,000,729 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Current liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 2,076,410 | |
| Note payable - related party | | | 1,080,000 | |
| Due to related party | | | 131,844 | |
| | | | | |
| | | | 3,288,254 | |
| | | | | |
| Convertible notes and accrued interest payable | | | 4,238,930 | |
| | | | | |
| Total liabilities | | | 7,527,184 | |
Commitments and contingencies | | | | |
Stockholders' equity | | | | |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued or outstanding | | | - | |
| Common stock, $0.001 par value; 25,000,000 shares authorized, 5,000,000 issued and outstanding | | | 5,000 | |
| Additional paid-in capital | | | 897,718 | |
| Deficit accumulated during the development stage | | | (7,429,173 | ) |
| | | | | |
| | | | (6,526,455 | ) |
| | | | | |
| | | $ | 1,000,729 | |
ARNO THERAPEUTICS, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
| | | | | | | Period from | |
| | | | | | | August 1, 2005 | |
| | | | | | | (inception) | |
| | | Three months ended March 31, | | through | |
| | | 2008 | | 2007 | | March 31, 2008 | |
Operating expenses | | | | | | | |
| Research and development | | $ | 3,187,182 | | $ | 210,797 | | $ | 6,452,279 | |
| General and administrative | | | 432,264 | | | 58,027 | | | 797,673 | |
| | | | | | | | | | | |
Loss from operations | | | (3,619,446 | ) | | (268,824 | ) | | (7,249,952 | ) |
| | | | | | | | | | | |
| Interest income | | | 10,788 | | | 11,550 | | | 134,750 | |
| Interest expense | | | (89,925 | ) | | (35,341 | ) | | (313,971 | ) |
| | | | | | | | | | | |
Net loss | | $ | (3,698,583 | ) | $ | (292,615 | ) | $ | (7,429,173 | ) |
ARNO THERAPEUTICS, INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
| | | | | | | | | Deficit | | | |
| | | | | | | | | accumulated | | | |
| | | | | | | | | during the | | | |
| | | Common stock | | Additional | | development | | | |
| | | Shares | | Amount | | paid-in capital | | stage | | Total | |
| Issuance of common stock to founders at $0.001 per share | | | 5,000,000 | | $ | 5,000 | | $ | - | | $ | - | | $ | 5,000 | |
| | | | | | | | | | | | | | | | | |
| Issuance of stock options for services | | | - | | | - | | | 98,000 | | | - | | | 98,000 | |
| | | | | | | | | | | | | | | | | |
| Net loss, period from August 1, 2005 (inception) through December 31, 2007 | | | - | | | - | | | - | | | (3,730,590 | ) | | (3,730,590 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 5,000,000 | | | 5,000 | | | 98,000 | | | (3,730,590 | ) | | (3,627,590 | ) |
| | | | | | | | | | | | | | | | | |
| Issuance of stock options for services | | | - | | | - | | | 319,318 | | | - | | | 319,318 | |
| | | | | | | | | | | | | | | | | |
| Issuance of warrants for services | | | - | | | - | | | 480,400 | | | - | | | 480,400 | |
| | | | | | | | | | | | | | | | | |
| Net loss, for the three months ended March 31, 2008 | | | - | | | - | | | - | | | (3,698,583 | ) | | (3,698,583 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, March 31, 2008 | | | 5,000,000 | | $ | 5,000 | | $ | 897,718 | | $ | (7,429,173 | ) | $ | (6,526,455 | ) |
ARNO THERAPEUTICS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
| | | | | | Period from | |
| | | | | | | August 1, 2005 | |
| | | | | | | (inception) | |
| | | Three months ended March 31, | | through | |
| | | 2008 | | 2007 | | March 31, 2008 | |
Cash flows from operating activities | | | | | | | |
| Net loss | | $ | (3,698,583 | ) | $ | (292,615 | ) | $ | (7,429,173 | ) |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | | | |
| Depreciation and amortization | | | 32,981 | | | 2,083 | | | 46,089 | |
| Stock based compensation | | | 799,718 | | | - | | | 897,718 | |
| Write-off of intangible assets | | | - | | | - | | | 85,125 | |
| | | | | | | | | | | |
Changes in operating assets and liabilities | | | | | | | | | | |
| Increase in deposits | | | - | | | - | | | (12,165 | ) |
| Decrease (increase) in prepaid expenses | | | 10,749 | | | 5,482 | | | (63,342 | ) |
| Increase (decrease) in accounts payable and accrued expenses | | | 844,757 | | | (16,224 | ) | | 2,076,410 | |
| Increase in accrued interest - convertible notes | | | 59,342 | | | 33,258 | | | 271,930 | |
| Increase in due to related party | | | 31,261 | | | 47,613 | | | 31,844 | |
| | | | | | | | | | | |
Net cash used in operating activities | | | (1,919,775 | ) | | (220,403 | ) | | (4,095,564 | ) |
| | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | |
| Purchase of property and equipment | | | (13,950 | ) | | - | | | (53,793 | ) |
| Cash paid for intangible assets | | | - | | | (14,993 | ) | | (85,125 | ) |
| Proceeds from related party advance | | | - | | | - | | | 525,000 | |
| Repayment of related party advance | | | - | | | (350,000 | ) | | (525,000 | ) |
| | | | | | | | | | | |
Net cash used in investing activities | | | (13,950 | ) | | (364,993 | ) | | (138,918 | ) |
| | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | |
| Deferred fees paid | | | (20,000 | ) | | (25,000 | ) | | (45,000 | ) |
| Proceeds from issuance of common stock | | | - | | | - | | | 5,000 | |
| Proceeds from issuance of note payable - related party | | | 1,000,000 | | | - | | | 1,000,000 | |
| Proceeds from issuance of convertible notes payable | | | - | | | 3,867,000 | | | 3,967,000 | |
| | | | | | | | | | | |
Net cash provided by financing activities | | | 980,000 | | | 3,842,000 | | | 4,927,000 | |
| | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (953,725 | ) | | 3,256,604 | | | 692,518 | |
| | | | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 1,646,243 | | | 18,201 | | | - | |
| | | | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 692,518 | | $ | 3,274,805 | | $ | 692,518 | |
| | | | | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | | | |
| Interest paid | | $ | - | | $ | - | | $ | - | |
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
| 1 | Organization and business activities |
The Company
Arno Therapeutics, Inc. (the “Company”), a Delaware corporation, was incorporated on August 1, 2005. The Company is a biotechnology company that is initially focusing its efforts on developing, testing and commercializing its lead compound, AR-67, as a novel therapeutic for the treatment of cancer. Additionally, as discussed in Note 3, the Company has begun development of two newly licensed compounds, AR-42 and AR-12.
The Company’s primary activities since incorporation have been organizational; including recruiting personnel, establishing office facilities, acquiring a license to develop each of the Company's technologies, performing business and financial planning, conducting research and development activities and raising capital and have not generated any revenues. Accordingly, the Company is considered to be in the development stage.
Going concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a significant working capital deficiency and has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans with regard to this uncertainty are discussed below.
On March 5, 2008, the Company entered into an Agreement and Plan of Merger with Laurier International, Inc., a Delaware corporation (“Laurier”) and its wholly-owned subsidiary, Laurier Acquisition, Inc., also a Delaware corporation, pursuant to which Laurier Acquisition, Inc. shall be merged with and into the Company (the “Merger”), the separate corporate existence of Laurier Acquisition, Inc. shall cease and the Company shall continue as the surviving corporation and shall become a wholly-owned subsidiary of Laurier. Laurier is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and is publicly traded on the OTC Bulletin Board. Laurier does not operate any business.
As a condition to the closing of the Merger, the Company must obtain gross proceeds from an equity-financing equal to at least $12,500,000 (the “Financing”). Upon the closing of the Financing, the outstanding balance of the Notes (as defined in Note 5) will automatically convert into shares of the Company’s common stock. The Company expects to use the proceeds from the Financing to satisfy its current outstanding obligations, including obligations under the Notes, the Promissory Note (as defined in Note 6) and to provide sufficient funds in order to continue its business plan over the next year or more. Management can provide no assurances that the Company will be able to raise sufficient funds in order to complete the Merger or satisfy its current outstanding obligations. The accompanying financial statements do not include any adjustments that might result from this uncertainty.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
At the effective time of the Merger, each of the Company’s then issued and outstanding shares of common stock, including shares purchased in the Financing, will be exchanged for shares of Laurier common stock, $0.0001 par value per share, so that, after giving effect to the Merger, the holders of the Company’s common stock on a fully-diluted basis, will hold approximately 95% of the issued and outstanding shares of Laurier common stock and the holders of Laurier common stock immediately prior to the Merger shall hold approximately 5% of the outstanding shares of Laurier common stock on a fully-diluted basis. All outstanding warrants, options and other rights to purchase or acquire shares of the Company’s common stock outstanding immediately prior to the Merger shall convert into the right to purchase that number of shares of Laurier common stock at the same exchange ratio used in connection with the exchange of shares of the Company's common stock for shares of common stock of Laurier in the Merger at adjusted exercise prices.
Upon completion of the Merger, Laurier will adopt and continue implementing the Company’s business plan. Further, upon completion of the Merger, the current officers and directors of Laurier will resign and the current officers and directors of the Company will be appointed officers and directors of Laurier. For accounting purposes, the Merger will be accounted for as an acquisition of Laurier and recapitalization of the Company with the Company as the accounting acquirer (legal acquiree) and Laurier as the accounting acquiree (legal acquirer). Also at the effective date of the Merger, the Company will pay to Fountainhead Capital Partners Limited (“Fountainhead”) a consulting fee of $500,000 for their work in connection with the Merger. Fountainhead holds approximately 82.4% of Laurier’s issued and outstanding common stock.
As a result of the Merger, the Company expects to incur increased operating costs primarily related to public company regulatory compliance.
| 2 | Significant accounting policies |
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting periods. Accordingly, actual results could differ from those estimates.
Cash and cash equivalents
For purposes of the statements of cash flows, cash equivalents include time deposits, money market accounts, and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash in bank deposit accounts, which, at times, exceeds federally insured limits. The Company has not experienced any losses on these accounts.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
Property and equipment
Property and equipment, which consists principally of office furniture, computer and related equipment, are stated at cost. Maintenance and repairs are charged to expense as incurred. Additions, improvements and replacements are capitalized.
Depreciation of property and equipment, including leasehold improvements, is provided for by the straight-line method over the estimated useful lives of the related assets.
Impairment of long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value.
Research and development costs
Research and development costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development arrangements, the milestone payment obligations are expensed when the milestone results are achieved. Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development expense.
Income taxes
In accordance with Statement of Financial Accounting Standards (“SFAS”), No. 109, Accounting for Income Taxes, deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these assets and liabilities are expected to be recovered or settled. The Company provides a valuation allowance when it appears more likely than not that some or all of the net deferred tax assets will not be realized.
Share based payments
The Company accounts for its share based payments in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment, (“SFAS 123R”). SFAS 123R requires the recognition of stock-based compensation expense in the financial statements. 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 vesting conditions generally include the attainment of goals related to the Company’s financial and development performance.
Deferred fees
Fees associated with obtaining long and short-term debt financing have been deferred and are being amortized to interest expense over the expected term of the related debt. Fees directly related with the Financing are capitalized and will be charged to stockholders’ equity upon completion of the Financing.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
Pitt license agreement
In October 2006, the Company entered into an exclusive, worldwide, royalty bearing license agreement (the “Pitt License Agreement”) with the University of Pittsburgh to acquire the rights to develop and commercialize AR-67 and its analogs, believed to have use in the treatment of, but not limited to, cancer.
During 2006, a one-time fee of $350,000 was paid to the licensor and was charged to research and development expense. Pursuant to the terms of the Pitt License Agreement, the Company is obligated to make additional milestone payments based on the occurrence of certain events. No such milestone payments are required as of March 31, 2008. The total amount of all potential future clinical, regulatory and commercial milestone payments as of March 31, 2008 are $4,000,000, of which $1,500,000 is payable following the acceptance by the United States Food and Drug Administration ("FDA") of the first New Drug Application (“NDA”) for AR-67 and $2,500,000 upon FDA approval of the first NDA for AR-67.
Under the Pitt License Agreement, the Company is also obligated to pay the licensor annual maintenance fees and royalty payments based on sales of licensed products, as defined.
AR-12 license agreement
On January 3, 2008, the Company entered into an exclusive, worldwide, royalty bearing license agreement (the “AR-12 License Agreement") with the Ohio State University Research Foundation (“OSU”), which agreement includes the right to grant sublicenses, for the rights to intellectual property and know-how relating to AR-12, a small molecule with cancer-fighting properties, for all therapeutic uses.
Pursuant to the AR-12 License Agreement, a one-time license fee of $250,000 was paid to OSU during February 2008 and charged to research and development expense. In addition, the Company is obligated to make additional milestone payments based on the occurrence of certain events. The total amount of all potential future milestone payments is $5,100,000, of which, $4,000,000 is payable following receipt of regulatory approval of AR-12 in the United States, the European Union or Japan. The Company is also obligated to make a milestone payment in the amount of $1,000,000 upon the first commercial sale of the licensed technology in a second field of use as an anti-infective agent.
Under the AR-12 License Agreement, the Company is also obligated to pay OSU royalty payments based on sales of the licensed technology, as defined.
AR-42 license agreement
On January 9, 2008, the Company entered into an exclusive, worldwide, royalty bearing license agreement (the “AR-42 License Agreement") with OSU, which agreement includes the right to grant sublicenses, for the rights to intellectual property and know-how relating to AR-42, a small molecule considered to have powerful cancer-fighting properties, for all therapeutic uses.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
Pursuant to the AR-42 License Agreement, a one-time license fee of $200,000 was paid to OSU during February 2008 and charged to research and development expense. In addition, the Company is obligated to make additional milestone payments based on the occurrence of certain events. The total amount of all potential future milestone payments is $5,100,000, of which, $4,000,000 is payable following receipt of regulatory approval of AR-42 in the United States, the European Union or Japan.
Under the AR-42 License Agreement, the Company is also obligated to pay OSU royalty payments based on sales of the licensed technology, as defined.
As consideration for the performance of consulting and due diligence efforts related to the AR-12 and AR-42 licensing agreements, the Company will pay $200,000 and has granted fully vested warrants to purchase 150,000 shares of its common stock to certain consultants and related parties. The exercise price of the warrants will be equal to the price per share of common stock sold in the Financing. The warrants were valued at $480,400 using the Black-Scholes option-pricing model and the following assumptions: exercise price $4.83, a 3.27% risk-free interest rate, 5-year contractual term, dividend rate of 0%, and 80.8% expected volatility. Of the total warrants granted, 120,000 with an aggregate value of $384,320 were granted to employees of Two River Group Holdings, LLC (“Two River”), a related party as discussed in Note 9. The remaining warrants were granted to outside consultants.
In August 2005, the Company issued 5,000,000 shares of common stock to its founders for $5,000 or $0.001 per share.
| 5 | Convertible notes payable |
During February 2007, the Company completed a private placement offering of 6% convertible promissory notes (the “Notes”) in the aggregate principal amount of $3,967,000, which matures on February 9, 2009.
The Notes are unsecured obligations convertible into the Company’s common stock. Interest on the Notes accrues at 6% per year and is payable in full on maturity. The Notes mandatorily convert upon the closing of the Company's next equity financing (“Subsequent Financing”) in which the Company sells newly-issued shares of its equity securities or securities convertible into equity securities, of one or more series (the “Equity Securities”) for cash proceeds of $5,000,000 or more. At conversion, the outstanding principal and accrued but unpaid interest shall automatically convert into validly issued, fully paid and non-assessable Equity Securities of the same kind issued in the Subsequent Financing at a conversion price equal to 90% of the per share or unit purchase price of the Subsequent Financing.
In addition, upon conversion, the Company shall issue warrants entitling the holder to purchase, for a period of five years from the effective date of the conversion, a number of shares of common stock of the Company computed by dividing 10% of the principal amount of the Notes plus any unpaid accrued interest by either (a) the price per share paid by investors in the Subsequent Financing or (b) if a Subsequent Financing does not occur on or before the maturity date, the price per share paid by the most recent investor in the common stock of the Company.
At March 31, 2008, $271,930 in interest has been accrued on the Notes.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
| 6 | Note payable - related party |
During March 2008, the Company issued an unsecured promissory note to an existing holder of a portion of the Notes for an aggregate amount of $1,000,000 (the “Promissory Note”). The full 8% premium is due upon early prepayment or at maturity on July 3, 2008. Any amount of the Promissory Note that is unpaid on the maturity date will bear interest at 18% per year.
The Company also paid a 2% financing fee to the holder of the Promissory Note, which has been deferred and is being amortized to interest expense over the expected term of the Promissory Note.
At March 31, 2008, $23,256 of interest has been accrued on the Promissory Note.
| 7 | Stock based compensation |
In 2005, the Company established a stock option plan (the “Plan”) under which 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 number of shares of common stock, which may be issued under the Plan, shall not exceed 1,500,000. During the period from August 1, 2005 (inception) through March 31, 2008, the Company granted a total of 535,000 stock options to employees and advisors with exercise prices ranging from $0.25 per share to $4.83 per share.
The stock-based compensation expense in connection with stock option grants amounted to $417,318 for the period from August 1, 2005 (inception) through March 31, 2008 of which $96,700 is included in research and development costs and $320,618 is included in general and administrative expense.
On January 31, 2008, the Company granted stock options to a new employee, to purchase 40,000 shares of its common stock, subject to certain vesting requirements at an exercise price equal to the price per share of common stock sold in the next equity financing. The options were valued at $138,100 using the Black-Scholes option-pricing model and the following assumptions: exercise price $4.83, a 2.83% risk-free interest rate, 4-year contractual term, dividend rate of 0%, and 82.7% expected volatility.
On March 31, 2008, the Company granted stock options to two newly appointed members of its Board of Directors, to purchase an aggregate of 150,000 shares of its common stock, subject to certain vesting requirements at an exercise price equal to the price per share of common stock sold in the Financing. These options were valued at $540,700 using the Black-Scholes option-pricing model and the following assumptions: exercise price $4.83, a 2.47% risk-free interest rate, 5-year contractual term, dividend rate of 0%, and 89.4% expected volatility.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
The fair value of each stock option granted has been determined using the Black-Scholes Option Pricing model. The material factors incorporated in the Black-Scholes Option Pricing model in estimating the value of the options are reflected in the following table:
| Exercise price | | $0.25 - $4.83 |
| | | |
| Risk-free interest rate | | 2.47% - 4.85% |
| | | |
| Volatility | | 62.67% - 89.40% |
| | | |
| Estimated life in years | | 4-6 years |
| | | |
| Dividends paid | | None |
A summary of option activity under the Plan since inception is as follows:
| Options | | Shares | | Weighted-Average Exercise Price | |
2006 | | | | | |
| Options granted | | | 75,000 | | $ | 0.25 | |
| Options exercised | | | - | | $ | - | |
2007 | | | | | | | |
| Options granted | | | 270,000 | | $ | 2.00 | |
| Options exercised | | | - | | $ | - | |
2008 | | | | | | | |
| Options granted | | | 190,000 | | $ | 4.83 | |
| Options exercised | | | - | | $ | - | |
| Outstanding at March 31, 2008 | | | 535,000 | | | 2.76 | |
| Exercisable at March 31, 2008 | | | 150,000 | | $ | 2.54 | |
As of March 31, 2008, the aggregate fair value of stock options outstanding was $1,031,700, with a weighted-average remaining term of approximately eight years. The aggregate fair value of stock options exercisable at that same date was $280,050, with a weighted-average remaining term of approximately seven years. As of March 31, 2008, the Company has 965,000 shares available for future stock option grants.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
As of March 31, 2008, total compensation expense not yet recognized related to stock option grants amounted to $614,382, which will be recognized over the next 4 years.
On October 1, 2007, the Company established a defined contribution 401(k) plan (the “401(k) Plan”) for the benefit of its employees. Substantially all of the employees of the Company are eligible to participate in the 401(k) Plan that permits employees to make voluntary contributions up to the dollar limit allowed under the Internal Revenue Code. The 401(k) Plan also provides for matching contributions by the Company of up to a combined total of 3% of eligible compensation for each eligible employee, as defined. The Company has recorded $4,163 of matching contributions for the period from August 1, 2005 (inception) through March 31, 2008.
From time-to-time, Two River Group Holdings, LLC, (“Two River”), an entity that is partially controlled by several of the Company’s directors and founders, pays for some of the Company’s expenses. The Company reimburses Two River for these expenses and no interest is charged on the outstanding balance. For the three months ended March 31, 2008, reimbursable expenses amounted to $31,261, with a total balance due of $31,844 at March 31, 2008.
During 2006 and 2007, Two River advanced a total of $525,000 to the Company on a short-term basis in order for it to execute the Pitt License Agreement and make the initial license fee payment. The Company repaid this amount to Two River, without interest, out of proceeds from the Notes.
The Company utilized the services of Riverbank Capital Securities, Inc. (“Riverbank"), a company owned by several of the Company's directors and founders, for investment banking and other investment advisory services in connection with the Company's private placement of the Notes. Riverbank charged the Company a $25,000 non-accountable expense allowance and no brokerage fees or commissions in connection with the private placement.
In connection with the Financing as discussed in Note 1, the Company is obligated to pay Riverbank a $100,000 non-accountable expense allowance. At March 31, 2008 the Company has accrued for this fee and included it in due to related parties on the accompanying balance sheet
The financial condition and result of operations of the Company, as reported, are not necessarily indicative of the results that would have been reported had the Company operated completely independently.
At March 31, 2008, the Company had no federal income tax expense or benefit but did have federal tax net operating loss carry-forwards of approximately $6,101,000. The federal net operating loss carry-forwards will begin to expire in 2026, unless previously utilized. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss carry-forwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. No assessment has been made as to whether such a change in ownership has occurred. The Company incurred approximately $4,559 of statutory state tax expense for the three months ended March 31, 2008.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
Significant components of the Company’s net deferred tax assets at March 31, 2008 are shown below. A valuation allowance of $2,965,000 has been established to offset the net deferred tax assets at March 31, 2008, as realization of such assets is uncertain.
| Noncurrent net operating loss carryforwards | | $ | 2,624,000 | |
| Noncurrent R&D credit | | | 281,000 | |
| Other noncurrent | | | 60,000 | |
| Total noncurrent | | | 2,965,000 | |
| Other current | | | - | |
| Total deferred tax assets | | | 2,965,000 | |
| Deferred tax asset valuation allowance | | | (2,965,000 | ) |
| Net deferred taxes | | $ | - | |
During 2007, the Company entered into an operating lease for office space located in Fairfield, New Jersey. The Company is obligated under non-cancelable operating leases for the office space and related office equipment expiring at various dates through 2010. The aggregate remaining minimum future payments under these leases at March 31, 2008 are as follows:
Year ending December 31, | | | |
| 2008 | | $ | 39,750 | |
| 2009 | | | 55,000 | |
| 2010 | | | 52,000 | |
| | | $ | 146,750 | |
The Company has entered into various contracts with third parties in connection with the development of the licensed technology described in Note 3. The aggregate minimum commitment under these contracts as of March 31, 2008 is $1,909,499.
The Company has also entered into various agreements with third party consultants, which expire at various dates, through 2009 for which the Company is obligated to pay for services based upon hourly rates or completion of services, as defined.
As of March 31, 2008, the Company has an employment agreement with one key executive expiring in June 2009. The agreement provides for a base salary of $350,000 plus additional incentive compensation, as defined in the employment agreement.
ARNO THERAPEUTICS, INC.
(a development stage company)
PERIOD FROM AUGUST 1, 2005 (INCEPTION)
TO MARCH 31, 2008
Future minimum commitments remaining under the employment agreement as of March 31, 2008 are as follows:
Year ending December 31, | | | |
| 2008 | | | 355,000 | |
| 2009 | | | 183,333 | |
| | | $ | 538,333 | |
In the normal course of business, the Company enters into contracts that contain a variety of indemnification obligations to its employees, licensors, suppliers and service providers. Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities. The Company’s maximum exposure under these arrangements is unknown as of March 31, 2008. The Company does not anticipate recognizing any significant losses relating to these arrangements.
