slno-10q_20190331.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 March 31, 2019

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.)

1235 Radio Road, Suite 110,

Redwood City, California

(Address of principal executive offices)

94065

(Zip Code)

(650) 213-8444

(Registrant’s telephone number, including area code)

 

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  

 

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

Common Stock, $0.001 per value, underlying the warrants

SLNOW

NASDAQ

As of May 6, 2019, there were 31,776,584 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

20

Item  3. Quantitative and Qualitative Disclosures About Market Risk

24

Item 4. Controls and Procedures

24

PART II—OTHER INFORMATION

26

Item 1. Legal Proceedings

26

Item 1A. Risk Factors

26

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

26

Item 3. Defaults Upon Senior Securities

26

Item 4. Mine Safety Disclosures

26

Item 5. Other Information

26

Item 6. Exhibits

26

EXHIBIT INDEX

27

SIGNATURES

33

 

 

 


 

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,

2019

 

 

December 31,

2018

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,402

 

 

$

23,099

 

Prepaid expenses and other current assets

 

 

603

 

 

 

529

 

Due from related party

 

 

72

 

 

 

64

 

Minority interest investment in former subsidiary

 

 

788

 

 

 

978

 

Total current assets

 

 

20,865

 

 

 

24,670

 

Long-term assets

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

19

 

 

 

12

 

Intangible assets, net

 

 

17,983

 

 

 

18,469

 

Total assets

 

$

38,867

 

 

$

43,151

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,258

 

 

$

934

 

Accrued compensation and other current liabilities

 

 

992

 

 

 

943

 

Total current liabilities

 

 

2,250

 

 

 

1,877

 

Long-term liabilities

 

 

 

 

 

 

 

 

Series A warrant liability

 

 

73

 

 

 

49

 

2017 PIPE Warrant liability

 

 

6,274

 

 

 

4,563

 

2018 PIPE Warrant liability

 

 

784

 

 

 

600

 

Contingent liability for Essentialis purchase price

 

 

5,855

 

 

 

5,649

 

Total liabilities

 

 

15,236

 

 

 

12,738

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred Stock, $.001 par value, 10,000,000 shares authorized:

 

 

 

 

 

 

 

 

Series B convertible preferred stock, 13,780 shares designated at

   March 31, 2019 and December 31, 2018; zero shares issued and

   outstanding at March 31, 2019 and at December 31, 2018.

   Liquidation value of zero.

 

 

 

 

 

 

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

   31,776,584 and 31,755,169 shares issued and outstanding at

   March 31, 2019 and December 31, 2018, respectively.

 

 

32

 

 

 

32

 

Additional paid-in-capital

 

 

157,661

 

 

 

157,413

 

Accumulated deficit

 

 

(134,062

)

 

 

(127,032

)

Total stockholders’ equity

 

 

23,631

 

 

 

30,413

 

Total liabilities and stockholders’ equity

 

$

38,867

 

 

$

43,151

 

 

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

March 31,

 

 

 

2019

 

 

2018

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

$

2,760

 

 

$

1,180

 

General and administrative

 

 

2,012

 

 

 

1,867

 

Change in fair value of contingent consideration

 

 

206

 

 

 

428

 

Total operating expenses

 

 

4,978

 

 

 

3,475

 

Operating loss

 

 

(4,978

)

 

 

(3,475

)

Other income (expense)

 

 

 

 

 

 

 

 

Cease-use income

 

 

 

 

 

3

 

Change in fair value of warrants liabilities

 

 

(1,919

)

 

 

163

 

Loss from minority interest investment

 

 

(190

)

 

 

 

Interest income

 

 

57

 

 

 

19

 

Total other income (expense)

 

 

(2,052

)

 

 

185

 

Loss from continuing operations

 

 

(7,030

)

 

 

(3,290

)

Loss from discontinued operations

 

 

 

 

 

(514

)

Net loss

 

$

(7,030

)

 

$

(3,804

)

Loss per common share from continuing operations, basic and diluted

 

$

(0.22

)

 

$

(0.17

)

Loss per common share from discontinued operations, basic and diluted

 

 

 

 

 

(0.02

)

Net loss per common share, basic and diluted

 

$

(0.22

)

 

$

(0.19

)

Weighted-average common shares outstanding used to calculate basic and

   diluted net loss per common share

 

 

31,756,120

 

 

 

19,530,311

 

 

See accompanying notes to condensed consolidated financial statements

4


 

 Soleno Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands except share data)

 

 

 

Series B Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2017

 

 

4,571

 

 

$

 

 

 

19,238,972

 

 

$

19

 

 

$

140,495

 

 

$

(113,697

)

 

$

26,817

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200

 

 

 

 

 

 

 

200

 

Issuance of common stock on conversion of

   series B convertible preferred shares

 

 

(1,000

)

 

 

(—

)

 

 

200,000

 

 

 

1

 

 

 

 

 

 

 

 

 

 

1

 

Issuance of restricted common stock for

   bonuses

 

 

 

 

 

 

 

 

 

 

99,217

 

 

 

 

 

 

159

 

 

 

 

 

 

 

159

 

Issuance of common stock to board members

   in lieu of cash payments for quarterly

   board fees

 

 

 

 

 

 

 

 

 

 

49,519

 

 

 

 

 

 

82

 

 

 

 

 

 

 

82

 

Transaction costs for the 2017 PIPE common

   stock and warrant issuance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(203

)

 

 

 

 

 

 

(203

)

Issuance of common stock held back on

   acquisition of Essentialis

 

 

 

 

 

 

 

 

 

 

180,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,804

)

 

 

(3,804

)

Balances at March 31, 2018

 

 

3,571

 

 

$

 

 

 

19,768,375

 

 

$

20

 

 

$

140,733

 

 

$

(117,501

)

 

$

23,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

-

 

 

$

 

 

 

31,755,169

 

 

$

32

 

 

$

157,413

 

 

$

(127,032

)

 

$

30,413

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

202

 

 

 

 

 

 

 

202

 

Issuance of common stock to board members

   in lieu of cash payments for quarterly board fees

 

 

 

 

 

 

 

 

 

 

21,415

 

 

 

 

 

 

46

 

 

 

 

 

 

 

46

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,030

)

 

 

(7,030

)

Balances at March 31, 2019

 

 

 

 

$

 

 

 

31,776,584

 

 

$

32

 

 

$

157,661

 

 

$

(134,062

)

 

$

23,631

 

 

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,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,030

)

 

$

(3,804

)

Loss from discontinued operations

 

 

 

 

 

(514

)

Loss from continuing operations

 

 

(7,030

)

 

 

(3,290

)

Adjustments to reconcile net loss from continuing operations to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

489

 

 

 

492

 

Stock-based compensation expense

 

 

202

 

 

 

341

 

Board fees paid with common stock

 

 

46

 

 

 

82

 

Change in fair value of stock warrants

 

 

1,919

 

 

 

(163

)

Change in fair value of contingent consideration

 

 

206

 

 

 

428

 

Operating loss on minority interest investment

 

 

190

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(74

)

 

 

(80

)

Due from related party

 

 

(8

)

 

 

 

Accounts payable

 

 

324

 

 

 

409

 

Accrued compensation and other current liabilities

 

 

49

 

 

 

(252

)

Net cash used in continuing operating activities

 

 

(3,687

)

 

 

(2,033

)

Net cash used in discontinued operating activities

 

 

 

 

 

(487

)

Net cash used in operating activities

 

 

(3,687

)

 

 

(2,520

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(10

)

 

 

 

Net cash used in continuing investing activities

 

 

(10

)

 

 

 

Net cash used in investing activities

 

 

(10

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Cash paid for the issuance of common stock and common stock warrants

 

 

 

 

 

(112

)

Net cash used in continuing financing activities

 

 

 

 

 

(112

)

Net cash provided by discontinued financing activities

 

 

 

 

 

400

 

Net cash provided by financing activities

 

 

 

 

 

288

 

Net decrease in cash, cash equivalents and restricted cash from

   continuing operations

 

 

(3,697

)

 

 

(2,145

)

Net decrease in cash, cash equivalents and restricted cash from

   discontinued operations

 

 

 

 

 

(87

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(3,697

)

 

 

(2,232

)

Net increase in cash and cash equivalents included in current assets held for

   sale

 

 

 

 

 

(2

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

23,099

 

 

 

17,135

 

Cash, cash equivalents and restricted cash, end of period

 

$

19,402

 

 

$

14,901

 

Supplemental disclosures of non-cash investing and financing information

 

 

 

 

 

 

 

 

Accrued liability for cost of issuing common stock

 

$

 

 

$

91

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


 

Soleno Therapeutics, Inc.

March 31, 2019

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. On May 8, 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.” The Company was initially established as a diversified healthcare company that developed and commercialized innovative diagnostics, devices and therapeutics addressing unmet medical needs, which consisted of: precision metering of gas flow technology marketed as Serenz ® Allergy Relief, or Serenz; CoSense ® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which measures ETCO and aids in the detection of excessive hemolysis, a condition in which red blood cells degrade rapidly and which can lead to adverse neurological outcomes; and, products that included temperature probes, scales, surgical tables, and patient surfaces.

The Company’s previously wholly-owned subsidiary, NeoForce, Inc., or NFI, through which the Company acquired substantially all of the assets of an unrelated privately-held company, NeoForce Group, Inc., or NeoForce, also marketed innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets.

The Company acquired Essentialis, Inc., or Essentialis, through a merger, or the Merger, on March 7, 2017, pursuant to Agreement and Plan of Merger dated December 22, 2016. Essentialis’s efforts prior to the Merger were focused primarily on developing and testing product candidates that target the ATP-sensitive potassium channel, a metabolically regulated membrane protein whose modulation has the potential to impact a wide range of rare metabolic, cardiovascular, and CNS diseases. Essentialis has tested Diazoxide Choline Controlled Release Tablet, or DCCR, as a treatment for Prader-Willi Syndrome, or PWS, a complex metabolic/neurobehavioral disorder. DCCR has orphan designation for the treatment of PWS in the United States, or U.S., as well as in the European Union, or E.U. Consummation of the Merger was subject to various closing conditions, including the Company’s consummation of a financing of at least $8.0 million at, or substantially contemporaneous with, the closing of the Merger, which occurred on March 7, 2017 and the receipt of stockholder approval of the Merger at a special meeting of its stockholders, which was held on March 6, 2017.

Subsequent to the acquisition of Essentialis, the Company determined to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses. Accordingly, and pursuant to ASC 205-20-45-10, any assets and liabilities related to the discontinued activities of CoSense, NFI and Serenz have been presented separately in the balance sheet as held for sale items, and the related operations reported herein for the CoSense, NFI and Serenz activities are reported as discontinued operations in the statements of operations.

The Company determined to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses in order to focus on the development and commercialization of novel therapeutics for the treatment of rare diseases. The Company’s current research and development efforts are primarily focused on advancing its lead candidate, DCCR tablets for the treatment of PWS, into late-stage clinical development.

The Company sold its entire interest in NFI in a stock transaction that was completed on July 18, 2017, pursuant to a Stock Purchase Agreement dated July 18, 2017, or the NFI Purchase Agreement, entered into with Neoforce Holdings, Inc., a wholly-owned subsidiary of Flexicare Medical Limited, a privately-held United Kingdom company, for $720,000 and adjustments for inventory and the current cash balances held at NFI.

On December 4, 2017, Soleno, and Capnia, Inc., a Delaware corporation, or Capnia, entered into a joint venture with OptAsia Healthcare Limited, or OAHL. The purpose of the joint venture is to develop and commercialize medical monitors, including CoSense, that measure end-tidal carbon monoxide in breath to assist in the detection of excessive hemolysis in neonates, a condition in which red blood cells degrade rapidly and which can lead to adverse neurological outcomes.

The Company has previously charged to expense all previously-held assets related to its Serenz operations, and there are no remaining Serenz assets, liabilities or operations related to the Company’s previous Serenz-related business.

Note 2. Going Concern and Management’s Plans

The Company had a net loss of $7.0 million during the three months ended March 31, 2019 and has an accumulated deficit of $134.1 million at March 31, 2019 resulting from having incurred losses since its inception. The Company had $18.6 million of working capital at March 31, 2019 and used $3.7 million of cash in its operating activities during the three months ended March 31, 2019. The Company has financed its operations principally through issuances of equity securities.

7


 

On December 19, 2018, the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company sold and issued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of common stock and a warrant to purchase 0.05 shares of common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and corresponding warrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018 Resale Shares.

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 may be required to raise additional capital to complete its clinical trials, pursue product development initiatives 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 is critical to the realization of its business plan and the future operations of the Company. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should it be unable to continue as a going concern.

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 within one year from the date of filing these financial statements.

Note 3. Summary of Significant Accounting Policies

There have been no material changes to the significant accounting policies during the three months ended March 31, 2019 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, 2018. Below are those policies with current period updates.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the applicable rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The interim results are not necessarily indicative of the results for any future interim period or for the entire year.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K.

Recent Accounting Standards

Recently Adopted Accounting Standards

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, to simplify the accounting for share-based payments to nonemployees by aligning it

8


 

with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards is fixed at the grant date, which may lower the cost and reduce volatility in the income statement. This ASU was early adopted by the Company at the beginning of 2019.  Its adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must now be provided in a note or separate statement. The Company has applied this new guidance to its condensed financial statements for the first quarter of 2019.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02: “Leases (Topic 842)”. ASU 2016-02 provides new comprehensive lease accounting guidance that supersedes existing lease guidance. Upon adoption of ASU 2016-02, the Company may elect to apply the transition approach either as of the beginning of the earliest period presented in the financial statements – in which case it would restate its comparative periods, or as of the beginning of the period of adoption – in which case it would not restate its comparative periods. ASU 2016-02 requires the Company to capitalize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating lease obligations. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital leases and operating leases in existing lease guidance. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. Topic 842 includes a number of optional practical expedients that the Company may elect to apply. Expanded disclosures with additional qualitative and quantitative information will also be required. The adoption will include updates as provided under ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors and ASU 2019-01, Leases (Topic 842): Codification Improvements. Topic 842 is effective for public entities with fiscal years beginning after December 15, 2018 and for all other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected 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, Topic 842 will be effective for the Company beginning in fiscal 2020, although early adoption is permitted. The Company is currently evaluating the potential impact of adoption of this standard on its condensed consolidated financial statements and the additional transition method under ASU 2018-11, which allows the Company to recognize Topic 842’s cumulative effect within retained earnings in the period of adoption.

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected 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, this ASU 2017-11 will be effective for the Company beginning in fiscal 2020, although early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its condensed consolidated financial statements and related disclosures.

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. This ASU is effective for the Company beginning in 2020. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU

9


 

No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has not yet evaluated the impact of adoption of this ASU on its condensed consolidated financial statements disclosures.

Note 4. Fair Value of Financial Instruments

The carrying value of the Company’s cash, restricted 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 March 31, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A warrant liability

 

$

73

 

 

$

73

 

 

$

 

 

$

 

Series C warrant liability

 

 

 

 

 

 

 

 

 

 

 

 

2017 PIPE warrant liability

 

 

6,274

 

 

 

 

 

 

 

 

 

6,274

 

2018 PIPE warrant liability

 

 

784

 

 

 

 

 

 

 

 

 

784

 

Essentialis purchase price contingency liability

 

 

5,855

 

 

 

 

 

 

 

 

 

5,855

 

Total common stock warrant and contingent

   consideration liability

 

$

12,986

 

 

$

73

 

 

$

 

 

$

12,913

 

 

 

 

Fair Value Measurements at December 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A warrant liability

 

$

49

 

 

$

49

 

 

$

 

 

$

 

Series C warrant liability

 

 

 

 

 

 

 

 

 

 

 

 

2017 PIPE warrant liability

 

 

4,563

 

 

 

 

 

 

 

 

 

4,563

 

2018 PIPE warrant liability

 

 

600

 

 

 

 

 

 

 

 

 

600

 

Essentialis purchase price contingency liability

 

 

5,649

 

 

 

 

 

 

 

 

 

5,649

 

Total common stock warrant and contingent

   consideration liability

 

$

10,861

 

 

$

49

 

 

$

 

 

$

10,812

 

 

The Series A Warrant is a registered security that trades on the open market and the fair value of the Series A Warrant liability is based on the publicly quoted trading price of the warrants which is listed on and obtained from NASDAQ. Accordingly, the fair value of Series A Warrants is a Level 1 measurement. The fair value measurement of the Series C Warrants is based on significant inputs that are unobservable and thus represent Level 3 measurements. The Company’s estimated fair value of the Series C Warrant liability is calculated using the Black-Scholes valuation model, which is equivalent to fair value computed using the Binomial Lattice Option Model. Key assumptions include the volatility of the Company’s stock, the expected warrant term, expected dividend yield and risk-free interest rates. The Company’s estimated fair value of the 2017 PIPE Warrants and the 2018 PIPE Warrants was calculated using a

10


 

Monte Carlo simulation of a geometric Brownian motion model. The Monte Carlo simulation 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. 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 (see Note 10). 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 liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers 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 1 and Level 3 warrants, which are treated as liabilities (dollars in thousands).

 

 

 

Series A Warrant

 

 

Series C Warrant

 

 

2017 PIPE Warrants

 

 

2018 PIPE Warrants

 

 

Purchase Price

 

 

 

Number of

Warrants

 

 

Liability

 

 

Number of

Warrants

 

 

Liability

 

 

Number of

Warrants

 

 

Liability

 

 

Number of

Warrants

 

 

Liability

 

 

Contingent

Liability

 

Balance at December 31, 2018

 

 

485,121

 

 

$

49

 

 

 

118,083

 

 

$

 

 

 

6,024,425

 

 

$

4,563

 

 

 

513,617

 

 

$

600

 

 

$

5,649

 

Change in value of Series A Warrants

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in value of 2017 PIPE Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,711

 

 

 

 

 

 

 

 

 

 

Change in value of 2018 PIPE Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

184

 

 

 

 

Change in value of contingent liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

206

 

Balance at March 31, 2019

 

 

485,121

 

 

$

73

 

 

 

118,083

 

 

$

 

 

 

6,024,425

 

 

$

6,274

 

 

 

513,617

 

 

$

784

 

 

$

5,855

 

 

Note 5. Warrant Liabilities

The Company has issued multiple warrant series, of which the Series A Warrants, Series C Warrants, the 2017 PIPE Warrants and the 2018 PIPE Warrants (the “Warrants”) are considered liabilities pursuant to the guidance established by ASC 815 Derivatives and Hedging.

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 in the case of a Fundamental Transaction (as defined in the Warrants).

The Company classified the Warrants, with a term greater than one year, 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 A Warrants

The Company has issued 489,921 Series A Warrants to purchase shares of its common stock at an exercise price of $32.50 per share in connection with the unit offering offered in the Company’s initial public offering, or the IPO, in November 2014. The Series A Warrants are exercisable at any time prior to the expiration of the five-year term on November 12, 2019.

Upon the completion of the IPO, the Series A Warrants started trading on the NASDAQ under the symbol SLNOW. As the Series A Warrants are publicly traded, the Company uses the closing price on the measurement date to determine the fair value of the Series A Warrants. The Series A Warrants contract further provides for the payment of liquidated damages at an amount per month equal to 1% of the aggregate volume weighted average price, or VWAP, of the shares into which each Warrant is convertible in the event that the Company is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registration payment arrangement stipulated in the terms of these securities and determined that it is probable that the Company will maintain an effective registration statement and has therefore not allocated any portion of the proceeds related to the warrant financings to the registration payment arrangement. The Warrants also contain a fundamental transactions provision that permits their settlement in cash at fair value at the option of the holder upon the occurrence of a change in control. Such change in control events include tender offers or hostile takeovers, which are not within the sole control of the Company as the issuer of these warrants. Accordingly, the Warrants are considered to have a cash settlement feature that precludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would be computed using the Black Scholes Option Pricing Model, which approximates the binomial lattice model.

11


 

Since their issuance, a total of 4,800 Series A Warrants have been exercised. As of March 31, 2019, the fair value of the 485,121 outstanding Series A Warrants was approximately $73,000 and the increase of approximately $24,000 in fair value during the three months ended March 31, 2019 was recorded as other income (expense) in the condensed consolidated statements of operations.

Series C Warrants

On March 5, 2015, the Company entered into separate agreements with certain Series B Warrant holders, who agreed to exercise their Series B Warrants to purchase an aggregate of 117,902 shares of the Company’s common stock at an exercise price of $32.50 per share, resulting in the de-recognition of $6.7 million of the previously issued Series B Warrant liability and gross proceeds to the Company of $3.8 million based on the exercise price of the Series B Warrants. In connection with this exercise of the Series B Warrants, the Company issued to each investor who exercised Series B Warrants, new Series C Warrants for the number of shares of the Company’s common stock underlying the Series B Warrants that were exercised. Each Series C Warrant is exercisable at $31.25 per share and will expire on March 5, 2020. The Series C Warrants contract further provides for the payment of liquidated damages at an amount per month equal to 1% of the aggregate volume weighted average price, or VWAP, of the shares into which each Warrant is convertible in the event that the Company is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registration payment arrangement stipulated in the terms of these securities and determined that it is probable that the Company will maintain an effective registration statement and has therefore not allocated any portion of the proceeds related to the warrant financings to the registration payment arrangement. The Warrants also contain a fundamental transactions provision that permits their settlement in cash at fair value at the option of the holder upon the occurrence of a change in control. Such change in control events include tender offers or hostile takeovers, which are not within the sole control of the Company as the issuer of these warrants. Accordingly, the Warrants are considered to have a cash settlement feature that precludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would be computed using the Black Scholes Option Pricing Model, which approximates the binomial lattice model.

In April 2015, the Company issued a tender offer to the remaining holders of Series B Warrants to induce the holders to cash exercise the outstanding Series B Warrants in exchange for new Series C Warrants with an exercise price of $31.25 per share that expire on March 5, 2020. The tender offer was extended to Series B Warrant holders under a registration statement filed with the SEC on Form S-4, which was declared effective on June 25, 2015 and expired on July 24, 2015. During July 2015, certain Series B Warrant holders tendered their Series B Warrants under the tender offer, which resulted in the issuance of 181 shares of the Company’s common stock, the issuance of 181 Series C Warrants and proceeds to the Company of approximately $6,000.

The Series C Warrants are exercisable into 118,083 shares of the Company’s common stock. As of March 31, 2019, the fair value of the Series C Warrants was determined to be zero, consistent with the balance as of December 31, 2018.

The Company has calculated the fair value of the Series C Warrants 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.

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Volatility

 

 

90

%

 

 

90

%

Contractual term (years)

 

 

0.92

 

 

 

1.17

 

Expected dividend yield

 

 

%

 

 

%

Risk-free rate

 

 

2.41

%

 

 

2.60

%

 

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 to purchase one share 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 at the earlier of December 15, 2020 or 30 days following positive Phase III results for the DCCR tablet in PWS.

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.

12


 

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 March 31, 2019, the fair value of the 2017 PIPE Warrants was estimated at $6.3 million. The increase in the fair value of the liability for the 2017 PIPE Warrants of approximately $1.7 million during the three months ended March 31, 2019 was recorded as other income (expense) in the condensed consolidated statements of operations. 

The Company has calculated the fair value of the 2017 PIPE Warrants using a Monte Carlo simulation of a geometric Brownian motion model. The Monte Carlo simulation pricing model requires the input of highly subjective assumptions including the expected stock price volatility. The following summarizes certain key assumptions used in estimating the fair values.

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Volatility

 

 

86

%

 

 

75

%

Contractual term (years)

 

 

1.7

 

 

 

2.0

 

Expected dividend yield

 

 

%

 

 

%

Risk-free rate

 

 

2.40

%

 

 

2.51

%

 

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 March 31, 2019, the fair value of the 2018 PIPE Warrants was estimated at approximately $784,000. The approximate $184,000 increase in the fair value of the liability for the 2018 PIPE Warrants during the three months ended March 31, 2019 was recorded as other income (expense) in the condensed consolidated statements of operations. 

The Company has calculated the fair value of the 2018 PIPE Warrants using a Monte Carlo simulation of a geometric Brownian motion model. The Monte Carlo simulation pricing model requires the input of highly subjective assumptions including the expected stock price volatility. The following summarizes certain key assumptions used in estimating the fair values.

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Volatility

 

 

86

%

 

 

75

%

Contractual term (years)

 

 

4.7

 

 

 

5.0

 

Expected dividend yield

 

 

%

 

 

%

Risk-free rate

 

 

2.23

%

 

 

2.51

%

 

The Monte Carlo simulation of a geometric Brownian motion 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 on the volatilities of common stock of comparable companies in its industry.

 

Contractual term: The expected life of the warrants, which is based on the contractual term of the warrants.

13


 

 

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

On July 1, 2015, the Company executed a new four-year non-cancelable operating lease agreement for 8,171 square feet of office space for its headquarters facility. The lease agreement provides for monthly lease payments of $23,300 beginning in September of 2015, with increases in the following three years. An additional 5,265 square feet of office space became part of the new lease agreement on March 1, 2016, and in December 2017 the Company subleased this additional space to a third party through the end of the lease term.

Rent expense was approximately $54,000 and $85,000 during the three months ended March 31, 2019 and 2018, respectively, net of sublease income of approximately $65,000 and $98,000, respectively. 

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.

14


 

Note 7. CoSense Joint Venture Agreement and Discontinued Operations

In December 2017, the Company entered into a joint venture with OAHL with respect to its CoSense product by agreeing to sell shares of Capnia, its 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. CoSense measures CO, which can be elevated due to endogenous causes such as excessive breakdown of red blood cells, or hemolysis, or exogenous causes such as CO poisoning and smoke inhalation. The first target market for CoSense is for the use of ETCO measurements to aid in detection of hemolysis in neonates, a disorder in which CO and bilirubin are produced in excess as byproducts of the breakdown of red blood cells. The Company’s entry into the joint venture results 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 provide that OAHL will invest up to a total of $2.2 million in Capnia’s common shares on an incremental quarterly basis commencing in December 2017. Going forward, OAHL will be responsible for funding a portion of the Capnia operations. The Joint Venture Agreement provided that Capnia would issue shares of common shares 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 with those of the Company and a $2.0 million gain was recognized in the fourth quarter of 2018 as a result of the deconsolidation. Of this amount, $1.2 million related to the remeasurement of the Company's retained interest in the joint venture to fair value which was measured based on the negotiated price of $1.00 per share for Soleno’s remaining ownership of 1,480,000 shares less a 23% discount for lack of control over Capnia. The total gain was included in other income from continuing operations on the Company's consolidated statements of operations. The remaining 47% investment in Capnia is classified as an equity method investment and presented as a Minority interest investment in former subsidiary in the condensed consolidated balance sheet.  The balance of Minority interest investment in former subsidiary decreased by approximately $190,000 during the three months ended March 31, 2019 as a result of the Company recording its share of Capnia’s net losses during the period, which is included in the line titled loss from minority interest investment in the Company’s condensed consolidated statements of operations.

There were no assets or liabilities held for sale as of March 31, 2019 or December 31, 2018 after the deconsolidation of Capnia in October 2018, and no discontinued operations during the three months ended March 31, 2019. The components of the Statements of Operations presented as Discontinued Operations during the three months ended March 31, 2018 follow (in thousands).

 

 

 

 

 

 

Product revenue

 

$

51

 

Cost of product revenue

 

 

51

 

Gross profit (loss)

 

 

 

Expenses

 

 

 

 

Research and development

 

 

401

 

Sales and marketing

 

 

11

 

General and administrative

 

 

102

 

Total expenses

 

 

514

 

Net loss from discontinued operations

 

$

(514

)

 

Stock-based compensation expense of approximately $19,000 was classified in discontinued operations for the three months ended March 31, 2018.  There were no discontinued operations during the three months ended March 31, 2019.

Note 8. Stockholders’ Equity

Equity Incentive Plans

The Company has adopted the 1999 Incentive Stock Plan, the 2010 Equity Incentive Plan, and the 2014 Equity Incentive Plan, or the 2014 Plan, and together, the Plans. The 1999 Incentive Stock Plan expired in 2009, and the 2010 Equity Incentive Plan has been closed to new issuances. 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.

15


 

The Board of Directors 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 is normally monthly over a period of 4 years from the vesting date. 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, 2019, a total of 925,749 shares are available for future grant under the 2014 Plan.

The Company recognized stock-based compensation expense related to options and restricted stock units granted to employees, directors and consultants for the three months ended March 31, 2019 and 2018 of approximately $202,000 and $359,000, respectively, of which approximately $19,000 was recorded in discontinued operations in the first quarter of 2018. The compensation expense is allocated on a departmental basis, based on the classification of the option holder. No income tax benefits have been recognized in the statements of operations for stock-based compensation arrangements during any of the periods presented.  

Stock compensation expense was allocated between departments in continuing operations as follows (in thousands).

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

53

 

 

$

105

 

General and administrative

 

 

149

 

 

 

235

 

Total

 

$

202

 

 

$

340

 

 

Stock Options

The Company granted options to purchase 464,000 and 616,500 of the Company’s common stock during the three months ended March 31, 2019 and 2018, respectively. 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.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Expected life (years)

 

6.0-6.1

 

 

6.0

 

Risk-free interest rate

 

2.6%