SEC Filing | Soleno Therapeutics Inc.

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slno-10q_20220630.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 June 30, 2022

☐	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 August 4, 2022, there were 121,518,816 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 and Comprehensive Loss (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	20
Item 4. Controls and Procedures	20
PART II—OTHER INFORMATION	21
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Mine Safety Disclosures	21
Item 5. Other Information	21
Item 6. Exhibits	21
EXHIBIT INDEX	22
SIGNATURES	23

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Soleno Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

	June 30, 2022			December 31, 2021
Assets	(Unaudited)
Current assets
Cash and cash equivalents	$	24,065		$	21,304
Prepaid expenses and other current assets		824			1,118
Total current assets		24,889			22,422
Long-term assets
Property and equipment, net		28			33
Operating lease right-of-use assets		279			421
Intangible assets, net		11,665			12,637
Other long-term assets		-			40
Total assets	$	36,861		$	35,553
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	2,406		$	3,254
Accrued compensation		932			728
Accrued clinical trial site costs		3,156			3,420
Operating lease liabilities		337			282
Other current liabilities		415			323
Total current liabilities		7,246			8,007
Long-term liabilities
2018 PIPE Warrant liability		2			31
Contingent liability for Essentialis purchase price		9,305			9,547
Long-term lease liabilities		—			175
Total liabilities		16,553			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 June 30, 2022 and December 31, 2021, respectively.		120			80
Additional paid-in-capital		245,993			231,068
Accumulated deficit		(225,804	)		(213,355	)
Accumulated other comprehensive loss		(1	)		—
Total stockholders’ equity		20,308			17,793
Total liabilities and stockholders’ equity	$	36,861		$	35,553

See accompanying notes to condensed consolidated financial statements

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Operating expenses
Research and development	$	3,696		$	5,587		$	7,684		$	12,751
General and administrative		2,467			2,464			5,110			5,443
Change in fair value of contingent consideration		616			3,034			(242	)		2,047
Total operating expenses		6,779			11,085			12,552			20,241
Operating loss		(6,779	)		(11,085	)		(12,552	)		(20,241	)
Other income
Change in fair value of warrants liabilities		2			56			29			257
Interest income		52			41			74			42
Total other income		54			97			103			299
Net loss	$	(6,725	)	$	(10,988	)	$	(12,449	)	$	(19,942	)

Other comprehensive loss
Foreign currency translation adjustment		1			—			(1	)		—
Total comprehensive loss	$	(6,724	)	$	(10,988	)	$	(12,450	)	$	(19,942	)

Net loss per common share, basic and diluted	$	(0.06	)	$	(0.14	)	$	(0.12	)	$	(0.25	)
Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share		120,088,816			79,747,506			100,165,432			79,721,290

See accompanying notes to condensed consolidated financial statements

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 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
Stock-based compensation		-			-		571			-			-			571
Net loss		-			-		-			(6,725	)		-			(6,725	)
Foreign currency translation adjustment		-			-		-			-			1			1
Balances at June 30, 2022		120,088,816		$	120	$	245,993		$	(225,804	)	$	(1	)	$	20,308



												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
Stock-based compensation		-			-		857			-			-			857
Issuance of restricted stock units under equity incentive plan		35,545			-		-			-			-			-
Net loss		-			-		-			(10,988	)		-			(10,988	)
Balances at June 30, 2021		79,759,225		$	80	$	229,744		$	(202,387	)	$	-		$	27,437

See accompanying notes to condensed consolidated financial statements

Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(12,449	)	$	(19,942	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		984			979
Non-cash lease expense		142			151
Stock-based compensation expense		1,215			1,952
Change in fair value of stock warrants		(29	)		(257	)
Change in fair value of contingent consideration		(242	)		2,047
Other non-cash reconciling items		(1	)		—
Change in operating assets and liabilities:
Prepaid expenses, other current assets and other assets		334			83
Other Assets		-			(40	)
Accounts payable		(848	)		(153	)
Accrued compensation		204			(353	)
Accrued clinical trial site costs		(264	)		138
Operating lease liabilities		(120	)		(168	)
Other liabilities		92			62
Net cash used in operating activities		(10,982	)		(15,501	)
Cash flows from investing activities:
Purchases of property and equipment		(7	)		(4	)
Net cash used in investing activities		(7	)		(4	)
Cash flows from financing activities:
Proceeds from sale of common stock and pre-funded warrants, net of costs		13,766			—
Tax withholding payments for net share-settled equity awards		(16	)		(120	)
Principal paid on finance lease liabilities		—			(3	)
Net cash provided by (used in) financing activities		13,750			(123	)
Net increase (decrease) in cash and cash equivalents		2,761			(15,628	)
Cash and cash equivalents, beginning of period		21,304			49,224
Cash and cash equivalents, end of period	$	24,065		$	33,596

Supplemental disclosure of non-cash activities
Right-of-use assets obtained in exchange for operating lease obligations	$	-		$	581
Deferred financing costs included in accounts payable	$	-		$	12

See accompanying notes to condensed consolidated financial statements.

Soleno Therapeutics, Inc.

June 30, 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 $12.4 million during the six months ended June 30, 2022 and has an accumulated deficit of $225.8 million at June 30, 2022 resulting from having incurred losses since its inception. The Company had $24.1 million of cash and cash equivalents on hand at June 30, 2022 and used $11.0 million of cash in its operating activities during the six months ended June 30, 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. 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.

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 six months ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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.

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 June 30, 2022
	Total		Level 1		Level 2		Level 3
Liabilities
2018 PIPE warrant liability	$	2	$	—	$	—	$	2
Essentialis purchase price contingency liability		9,305		—		—		9,305
Total common stock warrant and contingent consideration liability	$	9,307	$	—	$	—	$	9,307

	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 U.S. Food and 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 June 30, 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 six months ended June 30, 2022 and 2021 (dollars in thousands).

2018 PIPE Warrants

Purchase Price

Number of

Warrants

Liability

Contingent

Liability

Balance at January 1, 2022