slno-10q_20220331.htm
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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 March 31, 2022 

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 May 5, 2022, there were 120,088,816 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

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

19

Item 4. Controls and Procedures

19

PART II—OTHER INFORMATION

20

Item 1. Legal Proceedings

20

Item 1A. Risk Factors

20

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

20

Item 3. Defaults Upon Senior Securities

20

Item 4. Mine Safety Disclosures

20

Item 5. Other Information

20

Item 6. Exhibits

20

EXHIBIT INDEX

21

SIGNATURES

22

 

 

 


 

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Soleno Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

March 31,

2022

 

 

December 31,

2021

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,974

 

 

$

21,304

 

Prepaid expenses and other current assets

 

 

1,004

 

 

 

1,118

 

Total current assets

 

 

29,978

 

 

 

22,422

 

Long-term assets

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

27

 

 

 

33

 

Operating lease right-of-use assets

 

 

350

 

 

 

421

 

Intangible assets, net

 

 

12,151

 

 

 

12,637

 

Other long-term assets

 

 

40

 

 

 

40

 

Total assets

 

$

42,546

 

 

$

35,553

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,411

 

 

$

3,254

 

Accrued compensation

 

 

598

 

 

 

728

 

Accrued clinical trial site costs

 

 

3,521

 

 

 

3,420

 

Operating lease liabilities

 

 

344

 

 

 

282

 

Other current liabilities

 

 

439

 

 

 

323

 

Total current liabilities

 

 

7,313

 

 

 

8,007

 

Long-term liabilities

 

 

 

 

 

 

 

 

2018 PIPE Warrant liability

 

 

4

 

 

 

31

 

Contingent liability for Essentialis purchase price

 

 

8,689

 

 

 

9,547

 

Long-term lease liabilities

 

 

79

 

 

 

175

 

Total liabilities

 

 

16,085

 

 

 

17,760

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized,

   120,088,816 and 79,864,310 shares issued and outstanding at

   March 31, 2022 and December 31, 2021, respectively.

 

 

120

 

 

 

80

 

Additional paid-in-capital

 

 

245,422

 

 

 

231,068

 

Accumulated deficit

 

 

(219,079

)

 

 

(213,355

)

Accumulated other comprehensive loss

 

 

(2

)

 

 

 

Total stockholders’ equity

 

 

26,461

 

 

 

17,793

 

Total liabilities and stockholders’ equity

 

$

42,546

 

 

$

35,553

 

 

See accompanying notes to condensed consolidated financial statements

3


 

 

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands except share and per share data)

 

 

Three Months Ended

March 31,

 

 

2022

 

 

2021

 

Operating expenses

 

 

 

 

 

 

 

Research and development

$

3,988

 

 

$

7,164

 

General and administrative

 

2,643

 

 

 

2,979

 

Change in fair value of contingent consideration

 

(858

)

 

 

(987

)

Total operating expenses

 

5,773

 

 

 

9,156

 

Operating loss

 

(5,773

)

 

 

(9,156

)

Other income

 

 

 

 

 

 

 

Change in fair value of warrants liabilities

 

27

 

 

 

201

 

Interest income

 

22

 

 

 

1

 

Total other income

 

49

 

 

 

202

 

Net loss

$

(5,724

)

 

$

(8,954

)

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2

)

 

 

 

Total comprehensive loss

$

(5,726

)

 

$

(8,954

)

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

$

(0.07

)

 

$

(0.11

)

Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share

 

80,020,677

 

 

 

79,694,781

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

4


 

 Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three Months Ended March 31, 2022 and 2021

(unaudited)

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances at January 1, 2022

 

 

79,864,310

 

 

$

80

 

 

$

231,068

 

 

$

(213,355

)

 

$

 

 

$

17,793

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

644

 

 

 

 

 

 

 

 

 

 

 

644

 

Issuance of restricted stock units under equity incentive plan

 

 

279,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax withholding payments for net share-settled equity awards

 

 

(55,251

)

 

 

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

 

 

(16

)

Sale of common stock and pre-funded warrants in public offering, net of costs of $1,034

 

 

40,000,000

 

 

 

40

 

 

 

13,726

 

 

 

 

 

 

 

 

 

 

 

13,766

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,724

)

 

 

 

 

 

 

(5,724

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Balances at March 31, 2022

 

 

120,088,816

 

 

$

120

 

 

$

245,422

 

 

$

(219,079

)

 

$

(2

)

 

$

26,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances at January 1, 2021

 

 

79,615,692

 

 

$

80

 

 

$

227,912

 

 

$

(182,445

)

 

$

 

 

$

45,547

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

1,095

 

 

 

 

 

 

 

 

 

 

 

1,095

 

Issuance of restricted stock units under equity incentive plan

 

 

167,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax withholding payments for net share-settled equity awards

 

 

(59,072

)

 

 

 

 

 

 

(120

)

 

 

 

 

 

 

 

 

 

 

(120

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,954

)

 

 

 

 

 

 

(8,954

)

Balances at March 31, 2021

 

 

79,723,680

 

 

$

80

 

 

$

228,887

 

 

$

(191,399

)

 

$

 

 

$

37,568

 

 

See accompanying notes to condensed consolidated financial statements

5


 

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,724

)

 

$

(8,954

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

492

 

 

 

489

 

Non-cash lease expense

 

 

71

 

 

 

76

 

Stock-based compensation expense

 

 

644

 

 

 

1,095

 

Change in fair value of stock warrants

 

 

(27

)

 

 

(201

)

Change in fair value of contingent consideration

 

 

(858

)

 

 

(987

)

Other non-cash reconciling items

 

 

(2

)

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses, other current assets and other assets

 

 

114

 

 

 

98

 

Accounts payable

 

 

(1,046

)

 

 

1,180

 

Accrued compensation

 

 

(130

)

 

 

(594

)

Accrued clinical trial site costs

 

 

101

 

 

 

351

 

Operating lease liabilities

 

 

(34

)

 

 

(82

)

Other liabilities

 

 

37

 

 

 

41

 

Net cash used in operating activities

 

 

(6,362

)

 

 

(7,488

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(4

)

Net cash used in investing activities

 

 

 

 

 

(4

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of common stock and pre-funded warrants, net of costs

 

 

14,048

 

 

 

 

Tax withholding payments for net share-settled equity awards

 

 

(16

)

 

 

(120

)

Principal paid on finance lease liabilities

 

 

 

 

 

(5

)

Net cash provided by (used in) financing activities

 

 

14,032

 

 

 

(125

)

Net increase (decrease) in cash and cash equivalents

 

 

7,670

 

 

 

(7,617

)

Cash and cash equivalents, beginning of period

 

 

21,304

 

 

 

49,224

 

Cash and cash equivalents, end of period

 

$

28,974

 

 

$

41,607

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

 

Unpaid costs for issuing common stock and pre-funded warrants

 

$

282

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 


6


 

 

Soleno Therapeutics, Inc.

March 31, 2022

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. Overview

Soleno Therapeutics, Inc. (the Company or Soleno) is focused on the development and commercialization of novel therapeutics for the treatment of rare diseases. Its lead candidate is Diazoxide Choline Extended Release tablets (DCCR), a once-daily oral tablet for the treatment of Prader-Willi Syndrome (PWS). DCCR has received orphan designation for the treatment of PWS in the United States (U.S.) as well as in the European Union (E.U.).

The Company incorporated in the State of Delaware on August 25, 1999, and is located in Redwood City, California. It 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, the Company merged with Essentialis, Inc (Essentialis) and subsequently received stockholder approval to amend its Amended and Restated Certificate of Incorporation to change its name from “Capnia, Inc.” to “Soleno Therapeutics, Inc.” Essentialis was a privately held clinical-stage company focused on the development of breakthrough medicines for the treatment of rare diseases where there is increased mortality and risk of cardiovascular and endocrine complications. 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 all prior business efforts.

Note 2. Going Concern and Management’s Plans

The Company had a net loss of $5.7 million during the three months ended March 31, 2022 and has an accumulated deficit of $219.1 million at March 31, 2022 resulting from having incurred losses since its inception. The Company had $29.0 million of cash and cash equivalents on hand at March 31, 2022 and used $6.4 million of cash in its operating activities during the three months ended March 31, 2022. The Company has financed its operations principally through issuances of equity securities. In March 2022, the Company completed a public offering of 40,000,000 shares of its common stock and, for certain investors, in lieu of common stock, pre-funded warrants to purchase 20,000,000 shares of common stock at an exercise price of $0.01 per share, and raised $13.8 million in net proceeds after deducting the underwriting discount and other estimated offering costs, of which $0.3 million remains to be paid as of March 31, 2022. Each share of common stock or pre-funded warrant was sold together with one immediately exercisable common warrant to purchase one share of common stock.

The accompanying condensed consolidated financial statements have been prepared under the assumption the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

The Company expects to continue incurring losses for the foreseeable future and will be required to raise additional capital to complete its clinical trials, pursue product development initiatives, obtain regulatory approval and penetrate markets for the sale of its products. Management believes that the Company will continue to have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means, but the Company’s access to such capital resources is uncertain and is not assured. If the Company is unable to secure additional capital, it may be required to curtail its clinical trials and development of new products and take additional measures to reduce expenses in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays in the Company’s efforts to complete its clinical trials and commercialize its products, which are critical to the realization of its business plan and the future operations of the Company.

Management believes that the Company does not have sufficient capital resources to sustain operations through at least the next twelve months from the date of this filing. Additionally, in view of the Company’s expectation to incur significant losses for the foreseeable future it will be required to raise additional capital resources in order to fund its operations, although the availability of, and the Company’s access to such resources is not assured. Accordingly, management believes that there is substantial doubt regarding the Company’s ability to continue operating as a going concern through at least the next twelve months from the date of this filing.

7


 

Note 3. Basis of Presentation and Summary of Significant Accounting Policies

Significant Accounting Policies

There have been no material changes to the significant accounting policies during the three months ended March 31, 2022 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, 2021.

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 months ended March 31, 2022, are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2022. 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, 2021, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2022.

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, accrued costs for services rendered in connection with third-party contractor clinical trial activities, and the valuation of contingent liabilities for the purchase price of assets obtained through acquisition.

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.

During the three months ended March 31, 2022, there have been no recently adopted accounting standards and 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 March 31, 2022

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 PIPE warrant liability

 

$

4

 

 

$

 

 

$

 

 

$

4

 

Essentialis purchase price contingency liability

 

 

8,689

 

 

 

 

 

 

 

 

 

8,689

 

Total common stock warrant and contingent

   consideration liability

 

$

8,693

 

 

$

 

 

$

 

 

$

8,693

 

 

 

 

Fair Value Measurements at December 31, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 PIPE warrant liability

 

$

31

 

 

$

 

 

$

 

 

$

31

 

Essentialis purchase price contingency liability

 

 

9,547

 

 

 

 

 

 

 

 

 

9,547

 

Total common stock warrant and contingent

   consideration liability

 

$

9,578

 

 

$

 

 

$

 

 

$

9,578

 

 

The Company’s estimated fair value of 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.

Based on the terms of the Company’s completed merger with Essentialis on March 7, 2017, the Company was obligated to make cash earnout payments of up to a maximum of $30.0 million to the former Essentialis stockholders. On December 28, 2021, in connection with the dissolution of two of the former Essentialis stockholders, the two former stockholders entered into an agreement with the Company which assigned the right, title and interest to all their future earnout payments to the Company. As a result of the assignment, as of December 31, 2021, and going forward, the maximum cash earnout payments are $21.2 million. 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 (FDA) as well as the likelihood and anticipated timing of reaching cumulative revenue milestones. The Level 3 estimates are based, in part, on subjective assumptions. In determining the likelihood of obtaining FDA approval, the analysis relied on published research relating to clinical development success rates. Based on management’s assessment, a 72% probability of achieving each milestone was determined to be reasonable as of each of March 31, 2022 and December 31, 2021. During the periods presented, the Company has not changed the manner in which it values its Essentialis purchase price contingent liability.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. 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 for the three months ended March 31, 2022 and 2021 (dollars in thousands).

 

 

 

2018 PIPE Warrants

 

 

Purchase Price

 

 

 

Number of

Warrants

 

 

Liability

 

 

Contingent

Liability

 

Balance at January 1, 2022

 

 

513,617

 

 

$

31

 

 

$

9,547

 

Change in value of 2018 PIPE Warrants

 

 

 

 

 

(27

)

 

 

 

Change in value of contingent liability

 

 

 

 

 

 

 

 

(858

)

Balance at March 31, 2022

 

 

513,617

 

 

$

4

 

 

$

8,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 PIPE Warrants

 

 

Purchase Price

 

 

 

Number of

Warrants

 

 

Liability

 

 

Contingent

Liability

 

Balance at January 1, 2021

 

 

513,617

 

 

$

539

 

 

$

10,278

 

Change in value of 2018 PIPE Warrants

 

 

 

 

 

(201

)

 

 

 

Change in value of contingent liability

 

 

 

 

 

 

 

 

(987

)

Balance at March 31, 2021

 

 

513,617

 

 

$

338

 

 

$

9,291

 

 

9


 

 

Note 5. Warrant Liabilities

The Company has issued multiple warrant series, of which the 2018 PIPE Warrants were determined to be liabilities pursuant to the guidance established by ASC 815 Derivatives and Hedging.

 

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 to purchase 513,617 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.

Since the Company may be obligated to settle the 2018 PIPE Warrants in cash, the Company classified the 2018 PIPE 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.

As of March 31, 2022, the fair value of the 2018 PIPE Warrants was estimated at approximately $4,000. The approximate $27,000 and $0.2 million decrease in the fair value of the liability for the 2018 PIPE Warrants during the three months ended March 31, 2022 and 2021, respectively, was recorded as other income in the condensed consolidated statements of operations. 

The Company has calculated the fair value of the 2018 PIPE Warrants using a Black-Scholes pricing model. The following summarizes certain key assumptions used in estimating the fair value.

 

 

 

March 31,

2022

 

 

March 31,

2021

 

Volatility

 

 

87

%

 

 

105

%

Contractual term (years)

 

 

1.7

 

 

 

2.7

 

Expected dividend yield

 

 

%

 

 

%

Risk-free rate

 

 

2.10

%

 

 

0.30

%

 

The Black-Scholes pricing model requires 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 its historical volatility over the expected life of the warrants.

 

Contractual term: The expected life of the warrants, which 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 the expected life of the warrants.

 

Note 6. Commitments and Contingencies

Facility Leases

The Company’s operating lease for its headquarters facility office space in Redwood City, California, terminated in May 2021. In April 2021, the Company executed a non-cancellable operating lease agreement for the same 6,368 square feet of space, which began in June 2021 and expires in May 2023. The lease that expired in May 2021 also provided the Company with the right to use office furniture in the space and allowed the purchase of this furniture at the end of the lease term for $1, which it did. The Company has accounted for both leases of office space as operating leases. The office furniture included in the lease that expired in May 2021 was accounted for as a finance lease based on its relative standalone price as compared to the office space.

10


 

The lease was recognized at inception with a right-of-use asset equal to $0.6 million and a liability for $0.5 million. The short-term liability was equal to $0.3 million as of both March 31, 2022 and December 31, 2021, and the long-term liability was equal to $0.1 million and $0.2 million, as of March 31, 2022 and December 31, 2021, respectively. The weighted average discount rate was 9% over a remaining term of 14 months. The discount rate was determined based on estimates of the Company’s incremental borrowing rate, as the discount rate implicit in the lease cannot be readily determined.

The following is a schedule by year of future maturities of the Company’s operating lease liabilities as of March 31, 2022 (in thousands):

 

2022 (remainder of the year)

$

 

291

 

2023

 

 

159

 

Total lease payments

 

 

450

 

Less interest

 

 

(27

)

Total

$

 

423

 

 

The components of lease expense during the three months ended March 31, 2022 and 2021 were as follows (in thousands):

 

 

Three Months Ended

March 31,

 

 

2022

 

 

2021

 

Operating lease cost:

 

 

 

 

 

 

 

Operating lease cost

$

81

 

 

$

76

 

Variable lease cost

 

 

 

 

3

 

Short-term lease cost

 

5

 

 

 

7

 

Total operating lease cost

$

86

 

 

$

86

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

Amortization of right-of-use assets

$

 

 

$

2

 

Interest on lease liabilities

 

 

 

 

 

Total finance lease cost

$

 

 

$

2

 

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. Stockholders’ Equity

 

Underwritten Public Offering

On March 31, 2022, the Company sold 40,000,000 shares of its common stock at a public offering price of $0.25, and for certain investors, in lieu of common stock, pre-funded warrants (the 2022 pre-funded warrants) to purchase 20,000,000 shares of its common stock at a public offering price of $0.24 per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.01 per share exercise price for each 2022 pre-funded warrant. The 2022 pre-funded warrants are immediately exercisable and may be exercised at any time until all of the 2022 pre-funded warrants are exercised in full. Each share of common stock or 2022 pre-funded warrant was sold together with one, immediately exercisable, common warrant (the 2022 common warrants) with a five year term to purchase one share of common stock at an exercise price of $0.30 per share. The net proceeds of the offering were $13.8 million, after deducting the underwriting discount and other estimated offering expenses, of which $0.3 million remains to

11


 

be paid as of March 31, 2022. The Company is not required under any circumstance to settle any of the 2022 pre-funded warrants or the 2022 common warrants for cash, and therefore classified both types of warrants as permanent equity.

Other Common Stock Warrants

As of March 31, 2022, the Company had 102,070 common stock warrants outstanding from the 2010/2012 convertible notes, with an exercise price of $24.35 and a term of 10 years expiring in November 2024. The Company also had 16,500 common stock warrants issued to the underwriter in the Company’s IPO, with an exercise price of $35.70 and a term of 10 years, expiring in November 2024.

Equity Incentive Plans

2014 Plan

The Company maintains the 2014 Equity Incentive Plan (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.

The Board has the authority to determine to whom stock options will be granted, the number of options, the term, and the exercise price. Options are to be granted at an exercise price not less than fair value. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise price of an option will not be less than 110% of fair value. The vesting period for service-based stock options is normally monthly over a period of 4 years from the vesting date. Performance-based grants have vesting contingent upon the achievement of certain performance criteria related to the Company’s commercialization of its therapeutics. The contractual term of an option is no longer than five years for ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. The terms and conditions governing restricted stock units is at the sole discretion of the Board. As of March 31, 2022, a total of 2,805,045 shares are available for future grant under the 2014 Plan.

Inducement Plan

The Company maintains the 2020 Inducement Equity Incentive Plan (the Inducement Plan). The Inducement Plan provides for the grant of equity-based awards, including non-statutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to the 2014 Plan.

In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company, or, to the extent permitted by Rule 5635(c)(3) of the Nasdaq Listing Rules, in connection with a merger or acquisition. As of March 31, 2022, a total of 1,285,000 shares are available for future grant under the Inducement Plan.

 Stock-based compensation expense

The Company recognizes stock-based compensation expense related to options and restricted stock units granted to employees, directors and consultants. The compensation expense is allocated on a departmental basis, based on the classification of the award holder. No income tax benefits have been recognized in the condensed consolidated statements of operations for stock-based compensation arrangements during any of the periods presented

Stock-based compensation expense was recognized in the condensed consolidated statements of operations as follows (in thousands).

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Research and development

$

160

 

 

$

189

 

General and administrative

 

484

 

 

 

906

 

Total

$

644

 

 

$

1,095

 

 

Stock Options

The Company granted options to purchase 1,627,750 and 3,168,500 shares of the Company’s common stock during the three months ended March 31, 2022 and 2021, respectively. Of the total options granted during the three months ended March 31, 2021, 708,750 were performance-based options. The fair value of each award granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions.

12


 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

 

2021

 

Expected life (years)

6.0

 

 

5.5-6.0

 

Risk-free interest rate

1.7%

 

 

0.6%-0.7%

 

Volatility

88%

 

 

99%-108%

 

Dividend rate

—  %

 

 

—  %

 

 

The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. These assumptions include the following estimates:

 

Expected life: The expected life of stock options represents the period of time that the options are expected to be outstanding. Due to the lack of historical exercise history, the expected life of the Company’s service-based stock options has been determined utilizing the “simplified method”, based on the average of the contractual term of the options and the weighted-average vesting period. The expected life for the performance-based options was determined based on consideration of the contractual term of the stock options, an estimate of the date the performance criteria would be met and expectations of employee behavior.

 

Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected life of the stock options.

 

Volatility: The estimated volatility rate is based on the volatilities of the Company’s common stock for a historical period equal to the expected life of the stock options.

 

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

The following table summarizes stock option transactions for the three months ended March 31, 2022 as issued under the 2014 Plan and the Inducement Plan:

 

 

 

Number of

Options