slno-10q_20200930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 001-36593

 

SOLENO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

77-0523891

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

203 Redwood Shores Parkway, Suite 500

Redwood City, California

(Address of principal executive offices)

94065

(Zip Code)

(650) 213-8444

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

SLNO

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 6, 2020, there were 79,615,692 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 


SOLENO THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

Page

PART I—FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations (unaudited)

4

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

5

Condensed Consolidated Statements of Cash Flows (unaudited)

6

Notes to Condensed Consolidated Financial Statements (unaudited)

7

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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

22

Item 4. Controls and Procedures

22

PART II—OTHER INFORMATION

23

Item 1. Legal Proceedings

23

Item 1A. Risk Factors

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3. Defaults Upon Senior Securities

52

Item 4. Mine Safety Disclosures

52

Item 5. Other Information

53

Item 6. Exhibits

53

EXHIBIT INDEX

54

SIGNATURES

55

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Soleno Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,137

 

 

$

20,733

 

Prepaid expenses and other current assets

 

 

348

 

 

 

411

 

Total current assets

 

 

56,485

 

 

 

21,144

 

Long-term assets

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

20

 

 

 

22

 

Operating lease right-of-use assets

 

 

195

 

 

 

398

 

Finance lease right-of-use assets

 

 

17

 

 

 

24

 

Intangible assets, net

 

 

15,067

 

 

 

16,525

 

Other long-term assets

 

 

 

 

 

59

 

Total assets

 

$

71,784

 

 

$

38,172

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,213

 

 

$

1,995

 

Accrued compensation

 

 

756

 

 

 

283

 

Accrued clinical trial site costs

 

 

3,399

 

 

 

1,999

 

Operating lease liabilities

 

 

220

 

 

 

305

 

Other current liabilities

 

 

408

 

 

 

382

 

Total current liabilities

 

 

7,996

 

 

 

4,964

 

Long-term liabilities

 

 

 

 

 

 

 

 

2017 PIPE Warrant liability

 

 

4,777

 

 

 

10,822

 

2018 PIPE Warrant liability

 

 

867

 

 

 

1,354

 

Contingent liability for Essentialis purchase price

 

 

10,138

 

 

 

5,938

 

Other long-term liabilities

 

 

 

 

 

147

 

Total liabilities

 

 

23,778

 

 

 

23,225

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized,

   79,593,621 and 44,658,054 shares issued and outstanding at

   September 30, 2020 and December 31, 2019, respectively.

 

 

80

 

 

 

45

 

Additional paid-in-capital

 

 

227,519

 

 

 

172,708

 

Accumulated deficit

 

 

(179,593

)

 

 

(157,806

)

Total stockholders’ equity

 

 

48,006

 

 

 

14,947

 

Total liabilities and stockholders’ equity

 

$

71,784

 

 

$

38,172

 

 

See accompanying notes to condensed consolidated financial statements

3


 

 

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(In thousands except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,827

 

 

$

4,490

 

 

$

17,625

 

 

$

10,995

 

General and administrative

 

 

2,256

 

 

 

1,615

 

 

 

6,507

 

 

 

5,322

 

Change in fair value of contingent consideration

 

 

774

 

 

 

28

 

 

 

4,200

 

 

 

417

 

Total operating expenses

 

 

7,857

 

 

 

6,133

 

 

 

28,332

 

 

 

16,734

 

Operating loss

 

 

(7,857

)

 

 

(6,133

)

 

 

(28,332

)

 

 

(16,734

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrants liabilities

 

 

(689

)

 

 

7,116

 

 

 

6,532

 

 

 

930

 

Loss from minority interest investment

 

 

 

 

 

(123

)

 

 

 

 

 

(478

)

Interest income

 

 

1

 

 

 

29

 

 

 

13

 

 

 

133

 

Total other income (expense)

 

 

(688

)

 

 

7,022

 

 

 

6,545

 

 

 

585

 

Net income (loss)

 

$

(8,545

)

 

$

889

 

 

$

(21,787

)

 

$

(16,149

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.11

)

 

$

0.03

 

 

$

(0.38

)

 

$

(0.51

)

Diluted

 

$

(0.11

)

 

$

(0.19

)

 

$

(0.38

)

 

$

(0.53

)

Weighted-average common shares outstanding used in per-share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

79,583,254

 

 

 

31,793,292

 

 

 

56,916,137

 

 

 

31,775,590

 

Diluted

 

 

79,583,254

 

 

 

32,443,647

 

 

 

56,916,137

 

 

 

32,235,528

 

 

See accompanying notes to condensed consolidated financial statements

4


 

 Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2020 and 2019

(unaudited)

(In thousands except share data)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2020

 

 

44,658,054

 

 

$

45

 

 

$

172,708

 

 

$

(157,806

)

 

$

14,947

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

392

 

 

 

 

 

 

 

392

 

Issuance of common stock under equity incentive plan

 

 

28,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,858

)

 

 

(5,858

)

Balances at March 31, 2020

 

 

44,686,811

 

 

 

45

 

 

 

173,100

 

 

 

(163,664

)

 

 

9,481

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

341

 

 

 

 

 

 

 

341

 

Issuance of common stock under equity incentive plan

 

 

24,979

 

 

 

 

 

 

17

 

 

 

 

 

 

 

17

 

Sale of common stock in public offering, net of costs of $3,778

 

 

34,848,484

 

 

 

35

 

 

 

53,687

 

 

 

 

 

 

 

53,722

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,384

)

 

 

(7,384

)

Balances at June 30, 2020

 

 

79,560,274

 

 

 

80

 

 

 

227,145

 

 

 

(171,048

)

 

 

56,177

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

374

 

 

 

 

 

 

 

374

 

Issuance of common stock under equity incentive plan

 

 

33,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,545

)

 

 

(8,545

)

Balances at September 30, 2020

 

 

79,593,621

 

 

$

80

 

 

$

227,519

 

 

$

(179,593

)

 

$

48,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2019

 

 

31,755,169

 

 

$

32

 

 

$

157,413

 

 

$

(127,032

)

 

$

30,413

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

248

 

 

 

 

 

 

 

248

 

Issuance of common stock under equity incentive plan

 

 

21,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,030

)

 

 

(7,030

)

Balances at March 31, 2019

 

 

31,776,584

 

 

 

32

 

 

 

157,661

 

 

 

(134,062

)

 

 

23,631

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

220

 

 

 

 

 

 

 

220

 

Issuance of common stock under equity incentive plan

 

 

16,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,008

)

 

 

(10,008

)

Balances at June 30, 2019

 

 

31,793,292

 

 

 

32

 

 

 

157,881

 

 

 

(144,070

)

 

 

13,843

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

153

 

 

 

 

 

 

 

153

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

889

 

 

 

889

 

Balances at September 30, 2019

 

 

31,793,292

 

 

$

32

 

 

$

158,034

 

 

$

(143,181

)

 

$

14,885

 

 

See accompanying notes to condensed consolidated financial statements

5


 

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(21,787

)

 

$

(16,149

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,466

 

 

 

1,468

 

Noncash lease expense

 

 

210

 

 

 

322

 

Stock-based compensation expense

 

 

1,107

 

 

 

621

 

Change in fair value of stock warrants

 

 

(6,532

)

 

 

(930

)

Change in fair value of contingent consideration

 

 

4,200

 

 

 

417

 

Operating loss on minority interest investment

 

 

 

 

 

478

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses, other current assets and other assets

 

 

122

 

 

 

154

 

Due from related party

 

 

 

 

 

55

 

Accounts payable

 

 

1,215

 

 

 

801

 

Accrued compensation

 

 

473

 

 

 

4

 

Accrued clinical trial site costs

 

 

1,400

 

 

 

711

 

Operating lease liabilities

 

 

(224

)

 

 

(318

)

Other liabilities

 

 

(7

)

 

 

67

 

Net cash used in operating activities

 

 

(18,357

)

 

 

(12,299

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3

)

 

 

(16

)

Security deposit on sublease

 

 

 

 

 

(59

)

Proceeds from sale of minority interest investment in former subsidiary

 

 

 

 

 

500

 

Net cash provided by (used in) investing activities

 

 

(3

)

 

 

425

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net of costs

 

 

53,760

 

 

 

 

Proceeds from stock option exercises

 

 

17

 

 

 

 

Principal paid on finance lease liabilities

 

 

(13

)

 

 

 

Net cash provided by financing activities

 

 

53,764

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

35,404

 

 

 

(11,874

)

Cash and cash equivalents, beginning of period

 

 

20,733

 

 

 

23,099

 

Cash and cash equivalents, end of period

 

$

56,137

 

 

$

11,225

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing information

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

3

 

 

$

 

Purchases of property and equipment with capital lease obligation

 

$

 

 

$

28

 

Financing costs in accounts payable and accrued liabilities

 

$

38

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 


6


 

Soleno Therapeutics, Inc.

September 30, 2020

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. Overview

Soleno Therapeutics, Inc. (the Company or Soleno) was incorporated in the State of Delaware on August 25, 1999, and is located in Redwood City, California. The Company initially established its operations as Capnia, a diversified healthcare company that developed and commercialized innovative diagnostics, devices and therapeutics addressing unmet medical needs.  During 2017, Soleno received stockholder approval to amend its Amended and Restated Certificate of Incorporation to change its name from “Capnia, Inc.” to “Soleno Therapeutics, Inc.” and merged with Essentialis, Inc. After the merger, the Company’s primary focus has been the development and commercialization of novel therapeutics for the treatment of rare diseases and the Company divested itself of its prior business efforts.

The Company’s lead candidate is Diazoxide Choline Controlled Release tablets, or DCCR, once-daily oral tablets for the treatment of Prader-Willi Syndrome, or PWS. DCCR has orphan designation for the treatment of PWS in the United Statesas well as in the European Union.

DCCR has been evaluated in a Phase III clinical development program (C601 or DESTINY PWS) with top line results announced in June 2020. Although the trial did not meet its primary endpoint of change from baseline in hyperphagia, significant improvements were observed in two of three key secondary endpoints and the Company is evaluating the data from the C601 and C602 studies to determine next steps. DESTINY PWS was a 3-month randomized, double-blind placebo-controlled study, which completed enrollment in January 2020, with 127 patients at 29 sites in the U.S. and U.K. Patients who complete treatment in DESTINY PWS are eligible to receive DCCR for up to 36 months in C602, an open-label extension study.

Note 2. Liquidity

The Company had a net loss of $21.8 million during the nine months ended September 30, 2020 and has an accumulated deficit of $179.6 million at September 30, 2020 resulting from having incurred losses since its inception. The Company had $56.1 million of cash and cash equivalents on hand at September 30, 2020 and used $18.4 million of cash in its operating activities during the nine months ended September 30, 2020. The Company has financed its operations principally through issuances of equity securities. On June 26, 2020, the Company sold 34,848,484 shares of common stock in an underwritten public offering at a price of $1.65 per share for net proceeds of $53.7 million. The Company expects to continue incurring losses for the foreseeable future. However, the Company expects that its current cash and cash equivalents balance are sufficient to enable the Company to meet its obligations for at least the next twelve months from the date of this filing.

Note 3. Summary of Significant Accounting Policies

There have been no material changes to the significant accounting policies during the nine months ended September 30, 2020 as compared to the significant accounting policies described in Note 3 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Below are those policies with current period updates.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2020. For further information, refer to the financial statements and footnotes included in the Company’s annual financial statements for the fiscal year ended December 31, 2019, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 4, 2020.

7


 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of expenses in the financial statements and accompanying notes. Actual results could differ from those estimates. Key estimates included in the financial statements include the valuation of deferred income tax assets, the valuation of financial instruments, stock-based compensation, value and life of acquired intangibles, and the valuation of contingent liabilities. The contingent liability represents the fair value of the contingent consideration arising from the Company’s acquisition of Essentialis in 2017. As part of the purchase price, the Company is obligated to make cash earn out payments to Essentialis stockholders up to a maximum of $30 million upon the achievement of certain commercial milestones.

Recent Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date.

Recently Adopted Accounting Standards

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The Company has adopted this ASU at the beginning of 2020. The adoption did not have a material impact on the Company’s condensed consolidated financial statements disclosures.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12: “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.  The amendments in this Update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company has not yet assessed the potential impact of adopting ASU 2019-12 on its condensed consolidated financial statements.

During the nine months ended September 30, 2020, other than ASU 2019-12, there have been no new, or existing recently issued, accounting pronouncements that are of significance, or potential significance, that impact the Company’s condensed consolidated interim financial statements.

Note 4. Fair Value of Financial Instruments

The carrying value of the Company’s cash, cash equivalents and accounts payable, approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

Level I Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level II Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level III Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.  

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

8


 

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands).

 

 

 

Fair Value Measurements at September 30, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 PIPE warrant liability

 

$

4,777

 

 

$

 

 

$

 

 

$

4,777

 

2018 PIPE warrant liability

 

 

867

 

 

 

 

 

 

 

 

 

867

 

Essentialis purchase price contingency liability

 

 

10,138

 

 

 

 

 

 

 

 

 

10,138

 

Total common stock warrant and contingent

   consideration liability

 

$

15,782

 

 

$

 

 

$

 

 

$

15,782

 

 

 

 

Fair Value Measurements at December 31, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 PIPE warrant liability

 

$

10,822

 

 

$

 

 

$

 

 

$

10,822

 

2018 PIPE warrant liability

 

 

1,354

 

 

 

 

 

 

 

 

 

1,354

 

Essentialis purchase price contingency liability

 

 

5,938

 

 

 

 

 

 

 

 

 

5,938

 

Total common stock warrant and contingent

   consideration liability

 

$

18,114

 

 

$

 

 

$

 

 

$

18,114

 

 

The Company’s estimated fair value of the 2017 PIPE Warrants and the 2018 PIPE Warrants was calculated using a Black-Scholes pricing model. The Black-Scholes pricing model requires the input of highly subjective assumptions including the expected stock price volatility, the expected term, the expected dividend yield and the risk-free interest rate. Through March 31, 2020 the Company had previously used the Monte Carlo simulation of a geometric Brownian motion model to estimate the fair value of the 2017 PIPE Warrants and the 2018 PIPE Warrant as this model allows for determining path-dependent outcomes. The difference in valuation as a result of using the Black-Scholes pricing model compared to the Monte Carlo simulation model is not significant.

 

The fair value of the Essentialis purchase price contingent liability is estimated using scenario-based methods based upon the Company’s analysis of the likelihood of obtaining specified approvals from the Federal Drug Administration as well as reaching cumulative revenue milestones. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values its Essentialis purchase price contingent liability.

There were no transfers between levels within the hierarchy during the periods presented.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 liabilities (dollars in thousands).

 

 

Series C Warrants

 

 

2017 PIPE Warrants

 

 

2018 PIPE Warrants

 

 

Purchase Price

 

 

 

Number of

Warrants

 

 

Liability

 

 

Number of

Warrants

 

 

Liability

 

 

Number of

Warrants

 

 

Liability

 

 

Contingent

Liability

 

Balance at December 31, 2019

 

 

118,083

 

 

$

 

 

 

6,024,425

 

 

$

10,822

 

 

 

513,617

 

 

$

1,354

 

 

$

5,938

 

Expiration of Series C Warrants

 

 

(118,083

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in value of 2017 PIPE Warrants

 

 

 

 

 

 

 

 

 

 

 

(6,045

)

 

 

 

 

 

 

 

 

 

Change in value of 2018 PIPE Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(487

)

 

 

 

Change in value of contingent liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,200

 

Balance at September 30, 2020

 

 

 

 

$

 

 

 

6,024,425

 

 

$

4,777

 

 

 

513,617

 

 

$

867

 

 

$

10,138

 

 

 

Note 5. Warrant Liabilities

The Company has issued the following warrant series that are considered liabilities pursuant to the guidance established by ASC 815 Derivatives and Hedging: Series C Warrants, the 2017 PIPE Warrants and the 2018 PIPE Warrants. The 2017 PIPE Warrants and the 2018 PIPE Warrants (the “Warrants”) remain outstanding at September 30, 2020.

9


 

Accounting Treatment

The Company accounts for the Warrants in accordance with the guidance in ASC 815. As indicated below, the Company may be obligated to settle Warrants in cash. The Company classified the Warrants as long-term liabilities at their fair value and will re-measure the warrants at each balance sheet date until they are exercised or expire. Any change in the fair value is recognized as other income (expense) in the Company’s condensed consolidated statements of operations.

Series C Warrants

As of September 30, 2020, the fair value of the Series C Warrants was zero as the warrants had expired. This balance is consistent with the balance as of December 31, 2019.

The Company calculated the fair value of the Series C Warrants as of December 31, 2019 using a Black-Scholes pricing model. The Black-Scholes pricing model requires the input of highly subjective assumptions including the expected stock price volatility. The Company used the following inputs.

 

 

 

December 31,

2019

 

Volatility

 

 

90

%

Contractual term (years)

 

 

0.17

 

Expected dividend yield

 

 

%

Risk-free rate

 

 

1.52

%

 

Warrants Issued as Part of the Units in the 2017 PIPE Offering

The 2017 PIPE Warrants were issued on December 15, 2017 in the 2017 PIPE Offering, pursuant to a Warrant Agreement with each of the investors in the 2017 PIPE Offering, and entitle the holder of each of the 8,141,116 units to purchase 0.74 shares of the Company’s common stock at an exercise price equal to $2.00 per share, subject to adjustment as discussed below, at any time commencing upon issuance of the 2017 PIPE Warrants and terminating on December 15, 2020.

The exercise price and number of shares of common stock issuable upon exercise of the 2017 PIPE Warrants may be adjusted in certain circumstances, including the event of a stock split, stock dividend, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price of the 2017 PIPE Warrants will not be reduced below $1.72.

In the event of a change of control of the Company, the holders of unexercised warrants may present their unexercised warrants to the Company, or its successor, to be purchased by the Company, or its successor, in an amount equal to the per share value determined by the Black Scholes methodology.

As of September 30, 2020, the fair value of the 2017 PIPE Warrants was estimated at $4.8 million. The increase in the fair value of the liability for the 2017 PIPE Warrants of $0.5 million during the three months ended September 30, 2020 and the decrease in the fair value of $6.0 million during the nine months ended September 30, 2020 were recorded as other income (expense) in the condensed consolidated statements of operations. 

The Company has calculated the fair value of the 2017 PIPE Warrants as of September 30, 2020 using a Black-Scholes pricing model, and the fair value as of December 31, 2019 using a Monte Carlo simulation of a geometric Brownian motion model. Both models require the input of highly subjective assumptions including the expected stock price volatility. The following summarizes certain key assumptions used in estimating the fair values.

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Volatility

 

 

123

%

 

 

99

%

Contractual term (years)

 

 

0.2

 

 

 

1.0

 

Expected dividend yield

 

 

%

 

 

%

Risk-free rate

 

 

0.10

%

 

 

1.60

%

 

10


 

Warrants Issued as Part of the Units in the 2018 PIPE Offering

The 2018 PIPE Warrants were issued on December 19, 2018 in the 2018 PIPE Offering, pursuant to a Warrant Agreement with each of the investors in the 2018 PIPE Offering, and entitle the holders of each of the 10,272,375 units to purchase 0.05 shares of the Company’s common stock at an exercise price equal to $2.00 per share, subject to adjustment as discussed below, at any time commencing upon issuance of the 2018 PIPE Warrants and terminating on December 21, 2023.  

The exercise price and number of shares of common stock issuable upon exercise of the 2018 PIPE Warrants may be adjusted in certain circumstances, including the event of a stock split, stock dividend, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price of the 2018 PIPE Warrants will not be reduced below $2.00.

In the event of a change of control of the Company, the holders of unexercised warrants may present their unexercised warrants to the Company, or its successor, to be purchased by the Company, or its successor, in an amount equal to the per share value determined by the Black Scholes methodology.

As of September 30, 2020, the fair value of the 2018 PIPE Warrants was estimated at $0.9 million. The $0.1 million increase in the fair value of the liability for the 2018 PIPE Warrants during the three months ended September 30, 2020 and the decrease in the fair value of $0.5 million during the nine months ended September 30, 2020 were recorded as other income (expense) in the condensed consolidated statements of operations. 

The Company has calculated the fair value of the 2018 PIPE Warrants as of September 30, 2020 using a Black-Scholes pricing model, and the fair value as of December 31, 2019 using a Monte Carlo simulation of a geometric Brownian motion model. Both models require the input of highly subjective assumptions including the expected stock price volatility. The following summarizes certain key assumptions used in estimating the fair values.

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Volatility

 

 

100

%

 

 

99

%

Contractual term (years)

 

 

3.2

 

 

 

4.0

 

Expected dividend yield

 

 

%

 

 

%

Risk-free rate

 

 

0.17

%

 

 

1.56

%

 

The Black-Scholes pricing model and the Monte Carlo simulation of a geometric Brownian motion model require the use of highly subjective assumptions to estimate the fair value of stock-based awards. These assumptions include the following estimates.

 

Volatility: The Company calculates the estimated volatility rate based on the volatilities of common stock of comparable companies in its industry together with the volatility of its own stock.

 

Expected life: The expected life of the warrants is based on the contractual term of the warrants.

 

Expected dividend yield: The Company has never declared or paid any cash dividends and does not currently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero.

 

Risk-free rate: The risk-free interest rate is based on the U.S. Treasury rate for similar periods as those of expected volatility.

 

Note 6. Commitments and Contingencies

Facility Leases

The Company’s previous operating lease for its headquarters facility office space in Redwood City, California, terminated in August 2019, along with the related subleases. One of the subleases was with Capnia, of which the Company was a joint owner until September 2019. Sublease income received from Capnia during the three and nine months ended September 30, 2019 was approximately $16,000 and $65,000, respectively.

In July 2019, the Company executed a non-cancellable lease agreement for 6,368 square feet of new space in Redwood City, California, which began in September 2019 and expires in May 2021. The lease also provides the Company with the right to use office furniture in the space and allows the purchase of this furniture at the end of the lease term for $1. The lease agreement requires monthly lease payments of approximately $29,000 beginning in November of 2019, with an increase to approximately $30,000 per month in September of 2020. The Company has accounted for the new lease as an operating lease for the office space and a finance lease for the office furniture, based on their relative standalone prices.

11


 

The components of lease expense during the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

76

 

 

$

108

 

 

$

229

 

 

$

340

 

Sublease income

 

 

 

 

 

(43

)

 

 

 

 

 

(173

)

Total operating lease cost

 

$

76

 

 

$

65

 

 

$

229

 

 

$

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

2

 

 

$

1

 

 

$

7

 

 

$

1

 

Interest on lease liabilities

 

 

 

 

 

 

 

 

1

 

 

 

 

Total finance lease cost

 

$

2

 

 

$

1

 

 

$

8

 

 

$

1

 

Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.

Note 7. CoSense Joint Venture Agreement and Discontinued Operations

In December 2017, the Company entered into a joint venture with OptAsia Healthcare Limited, or OAHL, with respect to its CoSense product by agreeing to sell shares of Capnia, its then wholly-owned subsidiary, to OAHL. CoSense was Soleno’s first Sensalyze Technology Platform product to receive 510(k) clearances from the FDA and CE Mark certification. The Company’s entry into the joint venture resulted from a comprehensive review of strategic alternatives for its legacy products and product candidates following its transition to a primarily therapeutic drug product company. The terms of the Joint Venture Agreement provided that OAHL would invest up to a total of $2.2 million in Capnia’s common shares on an incremental quarterly basis commencing in December 2017. OAHL was also responsible for funding a portion of the Capnia operations. The Joint Venture Agreement provided that Capnia would issue shares of common stock to OAHL based on a negotiated price of $1.00 per share when the cumulative investment made by OAHL equaled or exceeded $1.2 million. For financial reporting purposes, Capnia’s assets, liabilities and results of operations had historically been consolidated with those of the Company.

During October 2018, the Company and OAHL determined and agreed that the cumulative investment made by OAHL exceeded $1.2 million during the quarter ended September 30, 2018. Accordingly, on October 16, 2018, Capnia issued 1,690,322 shares of its common stock to OAHL, representing 53% of its outstanding shares. After the share issuance the Company no longer held a controlling interest in Capnia and resulted in the deconsolidation of Capnia’s financial statements from those of the Company. The remaining 47% investment in Capnia was classified as an equity method investment and was presented as a Minority interest investment in former subsidiary in the condensed consolidated balance sheet.   The Company’s share of Capnia’s net losses during the three and nine months ended September 30, 2019 are recorded in the condensed consolidated statements of operations in the line titled “Loss from minority interest investment”. During September 2019, the Company sold its remaining 47% investment in Capnia. Following the transaction, the Company has no interest remaining in Capnia and the previous joint venture agreement with OAHL has been terminated.

Note 8. Stockholders’ Equity

Equity Incentive Plans

2014 Plan

The Company has adopted the 2014 Equity Incentive Plan, or the 2014 Plan. Under the 2014 Plan the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance units or performance shares to employees, directors, advisors, and consultants. Options granted under the 2014 Plan may be incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees, including officers and directors.

12


 

The Company’s Board of Directors (the “Board”) has <