UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2015
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to.Commission File No.:001-36593
Soleno Therapeutics, Inc.
(formerly known as Capnia, 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 | 94065 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:(650) 213-8444
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class: | Name of Each Exchange on which Registered: | |
Common Stock, par value $0.001 per share Series A warrants to purchase Common Stock | The NASDAQ Capital Market The NASDAQ Capital Market |
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” inRule 12b-2 of the Exchange Act (Check one):
| 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 inRule 12b-2 of the Act). Yes
The aggregate market value of voting stock held bynon-affiliates of the registrant on June 30, 2015,2017, based on the closing price of $2.81$2.51 for shares of the registrant’s common stock as reported by the NASDAQ Capital Market, was approximately $9.7$6.8 million. Shares of Common Stock beneficially held by each executive officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates.
As of March 15, 201621, 2018 there were 15,404,691 19,486,729shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 20162018 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2015.2017. Except with respect to information specifically incorporated by reference in thisForm 10-K, the Proxy Statement is not deemed to be filed as part of thisForm 10-K.
(formerly known as Capnia, Inc. Annual Report on Form10-K For INDEX Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation Item 7A Item 8 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A Item 9B Item 10 Item 11 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13 Certain Relationships and Related Transactions, and Director Independence Item 14 Item 15Thethe Year Ended December 31, 2015PART I PART I 2 Item 1 17 Item 1A 57 Item 1B 57 Item 2 57 Item 3 Item 4PART II57 PART II 58 60 61 78 79 116 116 Item 9B PART III 117 PART III 118 118 118 118 PART IV 118 PART IV 118 125
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form10-K. This Annual Report onForm 10-K contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, particularly in Part I, Item 1: “Business,” Part I, Item 1A: “Risk Factors” and Part 2, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” “plan” or “continue,” and similar expressions or variations. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to: any projections of financial information; any statements about historical results that may suggest trends for our business; any statements of the plans, strategies, and objectives of management for future operations; any statements of expectation or belief regarding future events, technology developments, our products, product sales, the regulatory regime for our products, expenses, liquidity, cash flow, market growth rates or enforceability of our intellectual property rights and related litigation expenses; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Accordingly, we caution you not to place undue reliance on these statements. Particular uncertainties that could affect future results include: our ability to achieve or maintain profitability; our ability to obtain substantial additional capital that may be necessary to expand our business; our ability to maintain internal control over financial reporting; our dependence on, and need to attract and retain, key management and other personnel; our ability to obtain, protect and enforce our intellectual property rights; potential advantages that our competitors and potential competitors may have in securing funding or developing products; business interruptions such as earthquakes and other natural disasters; our ability to comply with laws and regulations; potential product liability claims; and our ability to use our net operating loss carryforwards to offset future taxable income. For a discussion of some of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on risk factors that appear in Part I, Item 1A: “Risk Factors” of this Annual Report on Form10-K and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission, or SEC. The forward-looking statements in this Annual Report onForm 10-K represent our views as of the date of this Annual Report onForm 10-K. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report onForm 10-K.
Company Overview
On March 7, 2017, we completed our merger, or the Merger, with Essentialis, Inc., a Delaware corporation, or Essentialis in accordance with the Merger Agreement by and between Soleno Therapeutics and Essentialis dated December 22, 2016, or the Merger Agreement. After the Merger, our primary focus is transitioning to the development and commercialization of novel therapeutics for the treatment of rare diseases. Essentialis was a privately held, clinical stage biotechnology 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. Prior to the Merger, Essentialis’s efforts were focused primarily on developing and testing product candidates that target theATP-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.
Our current research and development efforts are primarily focused on advancing our lead candidate, DCCR tablets for the treatment of PWS, into late-stage clinical development, with a diversified healthcaresecondary emphasis on our joint venture with OptAsia Healthcare Limited, a Hong Kong company that developslimited by shares, or OAHL, for the development and commercializes innovative diagnostics, devices and therapeutics addressing unmet medical needs. Our first commercial product,commercialization of Capnia’s Sensalyze technology, which includes the CoSense End-Tidal Carbon Monoxide (ETCO) Monitor, aidsmonitor that assists in the detection of excessive hemolysis a condition in which red blood cells degrade rapidly. When present in neonates, with jaundice, hemolysis is a dangerous condition which can lead to adverse neurological outcomes.and other related products. CoSense is 510(k) cleared for sale in the U.S. and received CE Mark certification for sale in the E.U. We continue to separately evaluate alternatives for our Serenz portfolio.
Diazoxide Choline Controlled-Release Tablets
DCCR tablets consist of the active ingredient diazoxide choline, the choline salt of diazoxide, which is a benzothiadiazine. Once solubilized from the formulation, diazoxide choline is rapidly hydrolyzed to diazoxide prior to absorption. Diazoxide acts by stimulating ion flux throughATP-sensitive K+ channels (KATP). The KATP channel links the cellular energy status to the membrane potential. Diazoxide appears to act on signs and symptoms of PWS in a variety of ways. Agonizing the KATP channel in the hypothalamus has the potential to address hyperphagia, which is an abnormally increased appetite for food. Agonizing the channel in GABAergic neurons improves GABA signaling and may reduce aggressive behaviors.
In the U.S., diazoxide was first approved in 1973 as an intravenous formulation for the emergency treatment of malignant hypertension. In 1976, immediate-release oral formulations, including Proglycem® Oral Suspension and Capsules, or Proglycem, were approved and there has been nearly 40 years of use of the2-3 times a day orally-administered drug in the approved indications. In addition to the short-term use (<3 months) in the approved indications for Proglycem, there are also extensive data on chronic use in children with congenital hyperinsulinism, or CI, and in adults with insulinoma. Insulinoma patients tend to be older, with 50% of them over 70 years old. The average duration of use of Proglycem in CI and insulinoma patients is 5 years and 7 years, respectively.
DCCR tablets were formulated with the goals of improving the safety and bioavailability of orally-administered diazoxide and reducing the frequency of daily dosing required by current diazoxide formulations. Diazoxide choline is formulated into a controlled-release tablet that lowers peak plasma concentration compared to diazoxide oral suspension and slows release of diazoxide from DCCR, making it suitable foronce-a-day dosing. The control of release and absorption of diazoxide achieved using DCCR results in very level and consistent intraday circulating drug levels, and consistent levels of diazoxide in tissues that are the site of action
of the drug (the hypothalamus). In circulation, diazoxide is extensively protein bound. Only unbound diazoxide is active. The consistent absorption of diazoxide may also result in some level of disequilibrium in protein binding, potentiating the therapeutic response to treatment. The controlled rate of absorption, level intraday circulating drug levels and the disequilibrium in protein binding likely results in the potential for improved therapeutic response to treatment. Avoiding significant swings in circulating drug levels also has the potential to reduce adverse events which are often associated with transiently high circulating drug levels that often follow rapid absorption from immediate release product formulations.
Prader Willi Syndrome
PWS is a rare, complex neurobehavioral/metabolic disorder, which is due to the absence of normally active paternally expressed genes from the chromosome15q11-q13 region. PWS is an imprinted condition with70-75% of the cases due to a de novo deletion in the paternally inherited chromosome 1511-q13 region,20-30% from maternal uniparental disomy 15, or UPD, where the affected individual inherited 2 copies of chromosome from their mother and no copy from their father, and the remaining2-5% from either microdeletions or epimutations of the imprinting center (i.e., imprinting defects; IDs). The committee on genetics of the American Academy of Pediatrics states PWS affects both genders equally and occurs in people from all geographic regions; its estimated incidence is 1 in 15,000 to 1 in 25,000 live births. The mortality rate among PWS patients is 3% a year across all ages and 7% in those over 30 years of age. The mean age of death reported from a40-year mortality study in the U.S. was 29.5 ± 15 years (range: 2 months - 67 years).
In addition to hyperphagia, typical behavioral disturbances associated with PWS include skin picking, difficulty with change in routine, obsessive and compulsive behaviors and mood fluctuations. The majority of older adolescent and adult PWS patients display some degree of aggressive or threatening behaviors including being verbally aggressive, seeking to intimidate others, being physically aggressive including attacking others and destroying property, throwing temper tantrums and directing rage or anger at others.
Other complications in PWS patients include greater risk for autistic symptomatology, psychosis, sleep disorders, distress, food stealing, withdrawal, sulking, nail-biting, hoarding and overeating, and more pronounced attention-deficit hyperactivity disorder symptoms, insistence on sameness, and their association with maladaptive conduct problems. The reported rates of psychotic symptoms, between 6% and 28%, are higher than those for individuals with other intellectual disabilities. Individuals with PWS showage-related increases in internalizing problems such as anxiety, sadness and a feeling of low self-esteem. Males are at greater risk for aggressive behavior, depression and dependent personality disorder and overall severity of psychopathology than females. Cognitively, most individuals with PWS function in the mild mental retardation range with a mean IQ in the 60s to low 70s. The combination of food-related preoccupations and numerous maladaptive behaviors makes it difficult for individuals with PWS to perform to their IQ potential.
Unmet Medical Needs in PWS
The target indication for DCCR is the treatment of PWS. Currently, the only approved treatment related to PWS is growth hormone, which only addresses the short stature and limits the accumulation of visceral fat, reduces hypotonia, may reduce cognitive impairment, but has no effect on hyperphagia. A global patient survey conducted by the Foundation for Prader-Willi Research (n=779), found that 96.5% of respondents rated reducing hunger and 91.2% rated improving behavior around food as very important or most important symptom to be relieved by a new treatment. Physical function and body composition symptoms for which a high percentage of respondents indicated were very important or most important included: 92.9% indicated improving metabolic health (reduces fat / increases muscle) and 81.3% indicated the related symptom of improving activity and stamina. The behavioral and cognitive symptoms rated by respondents as very or most important were: 85.2% indicated reduction of obsessive/compulsive behavior, 84.6% indicated improvements to intellect/development, and 83.2% indicated reduction of temper outburst severity and frequency. See the Foundation for Prader-Willi Research: Prader-Willi Syndrome “Patient Voices” Online Survey and Results.
Therefore, there is a clear unmet need in the treatment of PWS to reduce hyperphagia and improve behaviors around food, and to reduce other behavioral and cognitive impacts of this complex disease. In addition, improving metabolic health is also an important unmet need.
Clinical Trial of DCCR for PWS
A Phase II clinical trial has been conducted to evaluate the safety and preliminary efficacy if DCCR in the treatment of PWS subjects. This study, PC025, was a single-center, randomized withdrawal study and enrolled 13 overweight and obese subjects with genetically-confirmed PWS who were between the ages of 11 and 21. The first phase of the study was open label during which subjects were initiated on a DCCR dose that was escalated every 14 days at the discretion of the investigator. Any subject who showed an increase in resting energy expenditure and/or a reduction in hyperphagia from baseline at certain study visits would be designated a responder, whereas all others would be designatednon-responders. This10-week open-label treatment phase was followed by randomized double-blind, placebo-controlled, withdrawal phase. Responders were randomized in a 1:1 ratio either to continue on active treatment at the dose they were treated with, or to the placebo equivalent of that dose for an additional 4 weeks. Of the 13 subjects who enrolled, 11 were designated as responders; the remaining two subjects had discontinued prematurely.
Key efficacy results included a statistically significant reduction in hyperphagia from baseline to the end of the open-label treatment phase. In addition, greater improvement in hyperphagia from baseline was observed in those subjects with moderate to severe hyperphagia who received DCCR doses of 4.2 mg/kg (the planned population and target dose for the Phase III study). There was a significant improvement in the number of subjects reporting one or more aggressive and destructive behaviors. During the open-label treatment phase, a mean decrease in body fat mass and increases in lean body mass and lean body mass / fat mass ratio were seen. These changes were associated with a statistically significant reduction in waist circumference, consistent with the loss of visceral fat. Statistically significant reductions from baseline in LDL cholesterol andnon-HDL cholesterol were observed. The change in triglycerides, while marked, did not reach statistical significance.
Safety of DCCR in the Treatment of PWS
Many of the adverse events were common medical complications of PWS including ear and respiratory infections, hypersomnia, peripheral edema, skin picking and constipation. The most common adverse events that occurred during the study included peripheral edema, hyperglycemia, impaired glucose tolerance, upper respiratory tract infections, ear infection, headache, somnolence, constipation, and bruises.
Regulatory Status of DCCR for the Treatment of PWS
DCCR is being developed in the U.S. under a current IND, and is designated as an Orphan Product. We announced the successful completion of a scientific advice meeting with FDA on July 5, 2017. The FDA expressed support for change in hyperphagia score (without a change in weight) compared to placebo as the primary endpoint for the study. In addition, based on the data provided in the meeting briefing information, the dosing paradigm proposed by the Company for the study was accepted. The FDA proposed, and Soleno agreed, that the duration of the randomized, double-blind, placebo-controlled study should be shorter (3-4 months) and that DCCR safety information could be obtained in a long-term, safety extension study. On September 8, 2015,25, 2017 we through our wholly owned subsidiary NeoForce, Inc., or NFI, acquired substantially allannounced the receipt of advice from the Committee for Medicinal Products for Human Use (CHMP) of the assets of NeoForce Group, Inc., or NeoForce. As a result of this acquisition, we also develop and market innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets. NFI’s primary product is the NeoPip T-piece resuscitator and related consumable, which delivers consistent pre-set inspiratory pressure and positive end-expiratory pressures. Other products include temperature probes, scales, surgical tables and patient surfaces.
the lung. This is referred toEMA recommending DCCR for designation as the end-tidal component of the breath, and the measurement we perform with CoSense is referred to as end-tidal carbon monoxide, or ETCO. This measurement is typically reported after being corrected for ambient CO levels, and is referred to as ETCOc. Throughout this document, ETCO refers to ETCOc levels. The American Academy of Pediatrics, or AAP, guidelines published in the journal Pediatrics in 2004 recommend ETCO measurement be performed to assess the presence of hemolysis in neonates requiring phototherapy, neonates unresponsive to phototherapy or readmitted for phototherapy and neonates with bilirubin levels approaching transfusion levels. Because CO is a direct byproduct of hemolysis, ETCO can measure the rate of bilirubin production from hemolysis. However, until the availability of CoSense, no device was commercially available for accurately measuring the ETCO levels associated with the rate of hemolysis in clinical practice in neonates. As a result, we believe that CoSense is the only device on the market that enables physicians to practice in accordance with the AAP guidelines when evaluating jaundiced neonates for potential treatment. Physicians are free to practice in accordance with their own judgment; however, we believe that the current AAP guidelines will be a significant factor in the adoption of CoSense.
Market opportunity
An estimated 300,000 to 400,000 individuals worldwide have PWS. An overall prevalence ranging from 1:15,000 to 1:25,000 has been reported regardless of geography or ethnicity. The numbers of identified PWS patients is growing at a rate that is higher than the rate of general population because of improved rates of diagnosis. We anticipate that DCCR could be the first effective treatment for hyperphagia in PWS to reach the market both in the U.S. and Europe and would therefore be likely to be used in a large proportion of patients.
Sales and Marketing
Newly diagnosed PWS patients tend to be treated by a multi-disciplinary team led by a pediatric endocrinologist. Many patients receive care at larger clinics devoted to PWS in university-associated hospitals or at children’s hospitals. This concentration of care allows us to consider marketing DCCR without a partner by assembling a small, dedicated salesforce to target the limited number of major PWS treatment centers in the U.S. In contrast to the situation in the U.S., we are characterized by recurring bouts of excruciating painlikely to need to identify a marketing partner for DCCR in one sideEurope, Japan, and the rest of the head.
Pricing
We have not conducted a formal pricing analysis of DCCR in PWS. We anticipate that pricing at launch may be influenced by the product label negotiated with the FDA, pharmacoeconomic data developed to support pricing and the potential for greater sales under negotiated government contracts.
Competition
Currently, the only approved products for PWS are Genotropin® (somatropin), and Omnitrope® (somatropin) which are approved only for growth failure due to PWS. There are no approved products to addressPWS-associated hyperphagia and behaviors, or for any other abnormalities associated with the disease. However, to our nasal, non-inhaled CO
Essentialis Acquisition
On December 22, 2016, the Company entered into the Merger Agreement with Essentialis. Consummation of the merger was subject to various closing conditions, including the Company’s consummation of a financing of at least $8 million at, or substantially contemporaneous with, the FDAclosing of the Merger and started enrolling TN subjectsthe receipt of stockholder approval of the Merger at a special meeting of stockholders.
On March 6, 2017, the Company held a special shareholder meeting and received approval for issuance of the merger shares under the Merger Agreement with Essentialis, issuance of the shares of common stock for the $8 million of concurrent financing and issuance of the shares of common Stock for the $2 million investment by Aspire Capital.
On March 7, 2017, the Company completed the merger with Essentialis and issued 3,783,388 shares of common stock to shareholders of Essentialis. The Company held back 182,676 shares of common stock as partial recourse to satisfy indemnification claims, and such shares will be issued to Essentialis stockholders on the1-year anniversary of the closing of the merger. The Company is also obligated to issue an additional 913,389 shares of common stock to Essentialis stockholders upon the achievement of a development milestone. Assuming
that we issue all of the shares of our common stock held back and the development milestone is achieved, we would issue a total of 4,879,453 shares of common stock to Essentialis stockholders. Additionally, upon the achievement of certain commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of the Merger Agreement, we are obligated to make cash earnout payments of up to a pilot clinical trialmaximum of $30 million to Essentialis stockholders. The merger consideration described above will be reduced by any such shares of common stock issuable, or cash earnout payments payable, to Essentialis’ management carve-out plan participants and other service providers of Essentialis, in 2016.
On May 8, 2017, we received stockholder approval to amend the Amended and Restated Certificate of Incorporation of the Company, to change the name of the Company to Soleno Therapeutics, Inc.
Joint Venture for CoSense
In December 2017, we entered into a joint venture with OAHL with respect to our CoSense product by selling shares of Capnia, our previously wholly owned subsidiary, to OAHL. CoSense was our first Sensalyze Technology Platform product to receive 510(k) clearance from the FDA and CE Mark certification. CoSense measures ETCO,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. OurUnder the terms of the joint venture agreement, OAHL will invest up to $2.2 million in tranches to purchase shares of our Capnia subsidiary and as a result of this investment, Capnia will no longer be a wholly-owned subsidiary of us. Going forward, OAHL will be responsible for funding the operations of Capnia. In addition, OAHL has the option to buy our remaining interest in Capnia as set forth in the joint venture agreement. As of December 31, 2017, OAHL had acquired no shares of Capnia. 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. Hemolysis can place neonates at high riskOur entry into the joint venture is part of a comprehensive review of strategic alternatives for hyperbilirubinemiaour legacy products and resulting neurodevelopmental disability. The AAP recommends the use of ETCO monitoring to evaluate neonates for hemolysis, but, other than CoSense, there is no device currently on the market for physicians to effectively monitor ETCO in clinical practice.
Manufacturing
Pharmaceuticals
Our manufacturing strategy is to contract with third parties to manufacture our clinical and commercial API and drug product supplies.
The formulation and processes used to manufacture our products are proprietary, being covered by multiple issued U.S. Departmentpatents and counterparts in other regions of Healththe world, and Human Services, neonatal jaundice is the single largest cause for hospital readmission of neonates in the U.S. This results in inefficient care and can also be highly stressful and disruptive for the parents and neonate.
Our third-party manufacturers and peripheral smear,corporate partners are all invasive blood testsindependent entities who are subject to their own operational and are less useful in neonates due to physiologic changes resulting from childbirth. For example, hematocrit levels and reticulocyte counts may be elevated in neonates unrelated to pathological conditions and may therefore confound the diagnosis of hemolysis,financial risks over which typically involves low hematocrit and high reticulocyte counts. The Coombs test, a blood test that detects antibodies that can cause hemolysis, is used extensively as a measure of hemolysis; however, it often requires a painful heel stick to draw a blood sample, and other conditions besides hemolysis may trigger a false positivewe have no control. If we or false negative Coombs test. In spiteany of these limitations, we believe that the Coombs test remains the most frequently used diagnostic for hemolysis by physicians.
Medical marketed the CO-Stat device for detection of ETCO in neonates. The Natus product was withdrawn from the market due to poor sales. We believe Natus’ CO-Stat did not achieve commercial success due to several disadvantages that we have overcome with our product, including a lack of consistent accuracy, limited ability to compensate for environmental factors such as humidity and heat, high price, and poor ease of use, including a requirement for frequent calibration.
We have manufactured the Serenz device in partnership with an OEM supplier based in Shenzhen, China and intend to manufacturehave the possibility of manufacturing future supply with this same OEM supplier.
Our joint venture with OAHL requires us to support Capnia in the EU, as well as many other international markets. NFI assembles and tests the NeoPip resuscitatorsmanufacture of CoSense monitors at itsour facility in Ivyland. Redwood City, California. We assemble components for our joint venture from a variety of original equipment manufacturer, or OEM, sources.
Regulation of Pharmaceutical Manufacturing Processes
The NeoPiP circuitmanufacturing process for pharmaceutical products is manufacturedhighly regulated and regulators may shut down manufacturing facilities that they believe do not comply with regulations. We and our third-party manufacturers are subject to current Good Manufacturing Practices, which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality standards as defined by the FDA and the EMA. Similar regulations and requirements are in Taiwan at an FDA registered ISO 13485 facility, with inventory stocked at NFI for distribution. NFI holds 4 to 6 months of inventory at any given time to assure it can meet expanded and growing demands for its solutions and to minimize transportation costs.
Intellectual Property
DCCR Patent Portfolio
Our patent portfolio surrounding our Sensalyze Technology Platform, including CoSense,DCCR consists of onefive issued U.S. patents, one allowed U.S. patent fourand 10 pending U.S. non-provisional patent applications, and eight pending U.S. provisional patent applications. Three of the non-provisional filings have corresponding Patent Cooperation Treaty, or PCT, filings and are still eligible for expansion into other geographies. It is our intent to file these, and future cases, in other major commercial geographies over time. Our issued U.S. patentpatents (no. 8,021,308) expires’s 7,572,789, 7,799,777, 9,381,202, 9,757,384, and 9,782,416) expire in August 2027. The pending patent applications, if issued, would likely expire on dates ranging from 2023 through 2034.
| • | Methods to treat various rare diseases including PWS with KATP channel agonists |
Government Regulation Federal Food, Drug,- Pharmaceuticals
Our operations and Cosmetic Act
A country’s regulatory agency, such as the FDA’s refusal toFDA in the United States, or a region’s agency, such as the EMA for the European Union, must approve pending applications, a clinical hold, warning letters, recall or seizure of products, partial or total suspension of production, withdrawal of the product from the market, injunctions, fines, civil penalties or criminal prosecution.
Nonclinical Testing
Before a drug candidate in can be tested in humans, it must be studied in laboratory experiments and in animals to generate data to support the drug candidate’s potential benefits and/or safety. Additional nonclinical testing may be marketed inrequired during the U.S. generally involves:
Investigational New Drug Exemption Application (IND)
The results of pre-clinicalinitial nonclinical tests, together with manufacturing information, analytical data and a proposed clinical trial protocol and other information, are submitted as part of an IND to the FDA. Some pre-clinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt byIf the FDA unlessdoes not identify significant issues during the FDA, withininitial30-day IND review, the 30-day time period, raises concerns or questions relating to one or more proposeddrug candidate can then be studied in human clinical trials to determine if the drug candidate is safe and places aeffective. Each clinical trial on clinical hold, including concerns that human research subjects willprotocol and/or amendment, new nonclinical data, and/or new or revised manufacturing information must be exposedsubmitted to unreasonable health risks. In such a case, the IND, sponsor and the FDA must resolve any outstanding concerns beforehas 30 days to complete its review of each submission.
Clinical Trials
These clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which are subject to considerable regulation, are as follows:
Phase I Studies. During Phase I studies, researchers test a new drug in normal volunteers who are healthy. In most cases, 20 to 80 healthy volunteers or people with the disease/condition participate in Phase 1. Phase I studies are closely monitored and gather information about how a drug interacts with the human body. Researchers adjust dosing schemes based on animal data to find out how much of a drug the body can tolerate and what its acute side effects are. As a Phase I trial continues, researchers answer research questions related to how it works in the body, the side effects associated with increased dosage, and early information about how effective it is to determine how best to administer the drug to limit risks and maximize possible benefits. This is important to the design of Phase 2 studies.
Phase II Studies. In Phase II studies, researchers administer the drug to a group of patients with the disease or condition for which the drug is being developed. Typically involving up to a few hundred patients, these studies aren’t large enough to show whether the drug will be beneficial. Instead, Phase II studies provide researchers with additional safety data. Researchers use these data to refine research questions, develop research methods, and design new Phase III research protocols.
Phase III Studies. Researchers design Phase 3 studies to demonstrate whether or not a product offers a treatment benefit to a specific population. Sometimes known as pivotal studies, these studies generally involve a larger number of participants than do Phase II studies. Phase III studies provide most of the safety data. In Phase II studies, it is possible that less common side effects might have gone undetected. Because these studies are larger and longer in duration, the results are more likely to show long-term or rare side effects.
For each clinical trial, can begin. As a result, our submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development.
Clinical trials involve the administration of an investigational drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research
subjects provide their informed consent in writing for their participation in any clinical trial. Sponsors of clinical trials generally must register and report, at theNIH-maintained website ClinicalTrials.gov, key parameters of certain clinical trials. For purposes
At any point in this process, the development of a drug candidate can be stopped for a number of reasons including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completed successfully or within any specified time period. We may choose, or FDA may require us, to delay or suspend our clinical trials at any time if it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.
FDA Approval Process
When we believe that the data from our clinical trials show an adequate level of safety and efficacy, we would intend to submit an application to market the drug for a particular use, an NDA submissionor BLA with the FDA. The FDA may hold a public hearing where an independent advisory committee of expert advisors asks additional questions and approval, human clinical trialsmakes recommendations regarding the drug candidate. This committee makes recommendations to the FDA that are typically conductednot binding but are generally followed by the FDA. If the FDA agrees that the compound has met the required level of safety and efficacy for a particular use, it will allow the drug product to be marketed in the following sequential phases, which may overlap or be combined:
The FDA may also require Phase 4non-registrational studies to explore scientific questions to further characterize safety and efficacy during commercial use of our drug. The FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures or facilities or may require extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not contain adequate evidence of the safety and benefits of the drug. In addition, even if the FDA approves a drug, it could limit the uses of the drug. The FDA can withdraw approvals if it does not believe that we are complying with regulatory standards or if problems are uncovered or occur after approval.
In addition to obtaining FDA approval for each drug, we obtain FDA approval of the manufacturing facilities for companies who manufacture our drugs for us. These facilities are subject to periodic inspections by the FDA. The FDA must also approve foreign establishments that manufacture products to be sold in the United States and these facilities are subject to periodic regulatory inspection.
Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems are identified after the product reaches the market. In addition, the FDA may require post-approval testing, including Phase 4 studies, and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on the results of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label, and, even if the FDA approves a product, it may limit the approved indications for use for the product or impose other conditions, including labeling or distribution restrictions or other risk-management mechanisms. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, the sponsor may be
required to submit and obtain FDA approval of a new or supplemental NDA, which may require the development of additional data or conduct of additionalpre-clinical studies and clinical trials.
Ongoing Regulation
Once a manufacturer becomes aware of information suggesting that any of its marketed products may have caused or contributed to a death, serious injury or serious illness or any of its products has malfunctioned and that a recurrence of a malfunction would likely cause or contribute to a death or serious injury or illness. The FDA relies on medical device reports to identifypharmaceutical product problems and utilizes these reports to determine, among other things, whether it should exercise its enforcement powers. The FDA may also require postmarket surveillance studies for specified devices.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP or QSR requirements. Changes to the manufacturing process are strictly regulated and generally require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP or QSR and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP or QSR compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market, though the FDA must provide an application holder with notice and an opportunity for a hearing in order to withdraw its approval of an application. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
The FDA strictly regulates the marketing, labeling, advertising and promotion of drug and device products that are placed on the market. While physicians may prescribe drugs and devices for off label uses, manufacturers may only promote for the approved indications and in accordance with the provisions of the approved label. Manufacturers may not promote a drug that is still under development and has not been approved by the FDA. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off label uses, and a company that is found to have improperly promoted off label uses may be subject to significant liability.
Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which the development program is designed to address the unmet medical need, may be designated as fast track and/or breakthrough candidates by the FDA and may be eligible for accelerated and priority review.
Drugs that are developed for rare diseases (i.e., in the U.S., the disease or condition has an prevalence of < 200,000 persons; in the EU, the prevalence of the condition must be not more than 5 in 10,000) can be designated as Orphan Drugs. In the U.S., orphan-designated drugs are granted up to7-year market exclusivity. In the EU, products granted orphan designation are subject to reduced fees for protocol assistance, marketing authorization applications, inspections before authorization, applications for changes to marketing authorizations, and annual fees, access to the centralized authorization procedure, and 10 years of market exclusivity.
Drugs are also subject to extensive regulation outside of the United States. In the European Union, there is a centralized approval procedure that authorizes marketing of a product in all countries of the European Union through a single application and review process. If this centralized approval procedure is not used, approval in one country of the European Union can be used to obtain approval in another country of the European Union under one of two simplified application processes: the mutual recognition procedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of the European registration procedures, separate pricing and reimbursement approvals are also required in most countries. The European Union also has requirements for approval of manufacturing facilities for all products that are approved for sale by the European regulatory authorities.
Government Regulation Medical Devices
In the U.S., any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes is regulated by the FDA as medical devices under the Federal Food, Drug, and Cosmetic Act, or FFDCA. The process for the regulatory approval of Serenz in the US has yet to commence
Additional Government Regulations
Advertising
Advertising of our neonatologycommercial products are subject to regulation by the Federal Trade Commission, or FTC, under the FTC Act. The FTC Act prohibits unfair or deceptive acts or practices in or affecting commerce. Violations of the FTC Act, such as failure to have substantiation for product claims, would subject us to a variety of enforcement actions, including compulsory process, cease and desist orders and injunctions, which can require, among other things, limits on advertising, corrective advertising, consumer redress and restitution, as well as substantial fines or other penalties. Any enforcement actions by the FTC could have a material adverse effect our business.
HIPAA and Other Privacy Laws
HIPAA, established for the first timefirst-time comprehensive protection for the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”: health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcare transactions electronically. Covered Entities and their Business Associates must have in place administrative, physical, and technical standards to guard against the misuse of individually identifiable health information. Because we are a healthcare provider and we conduct certain healthcare transactions electronically, we are presently a Covered Entity, and we must have in place the administrative, physical, and technical safeguards required by HIPAA, HITECH and their implementing regulations. Additionally, some state laws impose privacy protections more stringent than HIPAA. Most of the institutions and physicians from which we obtain biological specimens that we use in our research and validation work are Covered Entities and must obtain proper authorization from their patients for the subsequent use of those samples and associated clinical information. We may perform future activities that may implicate HIPAA, such as providing clinical laboratory testing services or entering into specific kinds of relationships with a Covered Entity or a Business Associate of a Covered Entity.
If we or our operations are found to be in violation of HIPAA, HITECH or their implementing regulations, we may be subject to penalties, including civil and criminal penalties, fines, and exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our operations. HITECH increased the civil and criminal penalties that may be imposed against Covered Entities, their Business
Associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.
Our activities must also comply with other applicable privacy laws. For example, there are also international privacy laws that impose restrictions on the access, use, and disclosure of health information. All of these laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain tissue samples and associated patient information could significantly impact our business and our future business plans.
Federal and State Billing and Fraud and Abuse Laws
Antifraud Laws/Overpayments
. As participants in federal and state healthcare programs, we are subject to numerous federal and state antifraud and abuse laws. Many of these antifraud laws are broad in scope, and neither the courts nor government agencies have extensively interpreted these laws. Prohibitions under some of these laws include:We could be subject to substantial penalties for violations of these laws, including denial of payment and refunds, suspension of payments from Medicare, Medicaid or other federal healthcare programs and exclusion from participation in the federal healthcare programs, as well as civil monetary and criminal penalties and imprisonment. One of these statutes, the False Claims Act, is a key enforcement tool used by the government to combat healthcare fraud. The False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. In addition, violations of the federal physician self-referral laws, such as the Stark laws discussed below, may also violate false claims laws. Liability under the False Claims Act can result in treble damages and imposition of penalties. For example, we could be subject to penalties of $5,500 to $11,000 per false claim, and each use of our product could potentially be part of a different claim submitted to the government. Separately, the HHS office of the Office of Inspector General, or OIG, can exclude providers found liable under the False Claims Act from participating in federally funded healthcare programs, including Medicare. The steep penalties that may be imposed on laboratories and other providers under this statute may be disproportionate to the relatively small dollar amounts of the claims made by these providers for reimbursement. In addition, even the threat of being excluded from participation in federal healthcare programs can have significant financial consequences on a provider.
Numerous federal and state agencies enforce the antifraud and abuse laws. In addition, private insurers may also bring private actions. In some circumstances, private whistleblowers are authorized to bring fraud suits on behalf of the government against providers and are entitled to receive a portion of any final recovery.
Federal and State “Self-Referral” and “Anti-Kickback” Restrictions
Self-Referral law
. We are subject to a federal “self-referral” law, commonly referred to as the “Stark” law, which provides that physicians who, personally or through a family member, have ownership interests in or compensation arrangements with a laboratory are prohibited from making a referral to that laboratory for laboratory tests reimbursable by Medicare, and also prohibits laboratories from submitting a claim for Medicare payments for laboratory tests referred by physicians who, personally or through a family member, have ownership interests in or compensation arrangements with the testing laboratory. The Stark law contains anumber of specific exceptions which, if met, permit physicians who have ownership or compensation arrangements with a testing laboratory to make referrals to that laboratory and permit the laboratory to submit claims for Medicare payments for laboratory tests performed pursuant to such referrals.
We are subject to comparable state laws, some of which apply to all payors regardless of source of payment, and do not contain identical exceptions to the Stark law. For example, we are subject to a North Carolina self-referral law that prohibits a physician investor from referring to us any patients covered by private, employer-funded or state and federal employee health plans. The North Carolina self-referral law contains few exceptions for physician investors in securities that have not been
We have several stockholders who are physicians in a position to make referrals to us. We have included within our compliance plan procedures to identify requests for testing services from physician investors and we do not bill Medicare, or any other federal program, or seek reimbursement from other third-party payors, for these tests. The self-referral laws may cause some physicians who would otherwise use our laboratory to use other laboratories for their testing.
Providers are subject to sanctions for claims submitted for each service that is furnished based on a referral prohibited under the federal self-referral laws. These sanctions include denial of payment and refunds, civil monetary payments and exclusion from participation in federal healthcare programs and civil monetary penalties, and they may also include penalties for applicable violations of the False Claims Act, which may require payment of up to three times the actual damages sustained by the government, plus civil penalties of $5,500 to $11,000 for each separate false claim. Similarly, sanctions for violations under the North Carolina self-referral laws include refunds and monetary penalties.
Anti-Kickback Statute
. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. The reach of the Anti-Kickback Statute was also broadened by theThe OIG has criticized a number of the business practices in the clinical laboratory industry as potentially implicating the Anti-Kickback Statute, including compensation arrangements intended to induce referrals between laboratories and entities from which they receive, or to which they make, referrals. In addition, the OIG has indicated that “dual charge” billing practices that are intended to induce the referral of patients reimbursed by federal healthcare programs may violate the Anti-Kickback Statute.
Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and
Medicaid programs, and do not contain identical safe harbors. For example, North Carolina has an anti-kickback statute that prohibits healthcare providers from paying any financial compensation for recommending or securing patient referrals. Penalties for violations of this statute include license suspension or revocation or other disciplinary action. Other states have similar anti-kickback prohibitions.
Both the federal Anti-Kickback Statute and the North Carolina anti-kickback law are broad in scope. The anti-kickback laws clearly prohibit payments for patient referrals. Under a broad interpretation, these laws could also prohibit a broad array of practices involving remuneration where one party is a potential source of referrals for the other.
If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our operations. To the extent that any product we make is sold in a foreign country in the future, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. To reduce the risks associated with these various laws and governmental regulations, we have implemented a compliance plan. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
U.S. Healthcare Reform
In March 2010, the PPACA was enacted, which includes measures that have or will significantly change the way healthcare is financed by both governmental and private insurers. Beginning in August 2013, the Physician Payment Sunshine Act, enacted as part of PPACA and its implementing regulations requires medical device manufacturers to track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members. Manufacturers are required to report this information to Centers for Medicare & Medicaid Services, or CMS, beginning in 2014. Various states have also implemented regulations prohibiting certain financial interactions with healthcare professionals or mandating public disclosure of such financial interactions. We may incur significant costs to comply with such laws and regulations now or in the future.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Other Corporate Transactions
Sale of NFI
On September 2, 2015, Private Transactionthe Company established NeoForce, Inc. (“NFI”), a wholly owned subsidiary of the Company and through NFI, acquired substantially all of the assets of an unrelated privately held company
NeoForce Group, Inc.(“NeoForce”). NFI markets innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets. The Company sold NFI in a stock transaction that was completed on July 18, 2017, pursuant to a Stock Purchase Agreement with Neoforce Holdings, Inc. a wholly-owned subsidiary of Flexicare Medical Limited, a privately-held United Kingdom company.
Sabby 2016 Stock Purchase
On March 5, 2015,June 29, 2016, we entered into and subsequently consummated,the 2016 Sabby Purchase Agreement with Sabby, pursuant to which we agreed to sell to Sabby, in a private transaction, or the Private Transaction, pursuantplacement, an aggregate of up to a Warrant Exercise Agreement, or the Warrant Exercise Agreement, with certain holders13,780 shares of our Series B Warrants. The Series B Warrants were originally issued in connection with our IPO, and were exercisable for up toConvertible Preferred Stock at an aggregate purchase price of 2,449,605$13,780,000, which shares are convertible into 2,756,000 shares of our Common Stock at an exercisecommon stock, based on a fixed conversion price of $6.50$5.00 per share prior to their expiration on February 12, 2016. Pursuant toan as-converted basis. Under the Warrant Exercise Agreement, certain participating holders of Series B Warrants and we agreed that such Series B Warrant holders would cash exercise their Series B Warrants in full and we would issue to the holders Series C Warrants, at an exercise price of $6.25 per share to purchase up to an aggregate of 589,510 shares of Common Stock, which represented the aggregate number of shares of Common Stock underlying the Series B Warrants to be cash exercised pursuant to the Warrant Exercise Agreement. We received gross proceeds of approximately $3.8 million from the cash exercisesterms of the Series B WarrantsConvertible Preferred Stock, in connection with the Private Transaction.
Aspire Private Transaction
On July 24, 2015,January 27, 2017, we entered into thea Common Stock Purchase Agreement (the “2017 Aspire Purchase AgreementAgreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0$17.0 million in value of shares of our Common Stock over the 24-month30-month term of the Aspire Purchase Agreement. Concurrently with entering into the Aspire Purchase Agreement, we also entered into a registration rights agreement, or the Aspire Registration Rights Agreement, with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act, registering the sale of the shares of our Common Stock that have been and may be issued to Aspire Capital under the2017 Aspire Purchase Agreement. The SEC declared our registration statement in connectionCompany issued 1,666,666 shares of common stock for an investment of $8 million from the completion of the financing with the foregoing effective on August 10, 2015.
2017 PIPE Offering
On December 11, 2017, we haveentered into the right, inUnit Purchase Agreement with certain stockholders, pursuant to which we sold and issued 8,141,116 immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of approximately $15,000,000. Each unit consisted of one share of our sole discretion, to present Aspire Capital withcommon stock and a purchase notice directing itwarrant to purchase up to 75,0000.74 shares of our Common Stock per business day, up to $10.0 million of our Common Stock in the aggregatecommon stock at a per share price equal to the lesser of: (x) the lowest salean exercise price of the our Common Stock on the purchase date; or (y) the arithmetic average$2.00 a share, for an aggregate of the three (3) lowest closing sale prices for our Common Stock during the ten (10) consecutive trading days ending on the trading day immediately preceding the purchase date.
Employees
As of December 31, 2015,2017, we had 29twelve full-time employees and 13six full-time or part-time consultants providing services to us. None of our employees is represented by a labor union or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Corporate and Available Information
Our principal corporate offices are located at 1235 Radio Road, Suite 110, Redwood City, California 94065 and our telephone number is(650) 213-8444. We were incorporated in Delaware on August 25, 1999. Our internet address is www.Capnia.com.www.soleno.life. We make available on our website, free of charge, our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish it to, the Securities Exchange and Commission. Our Securities Exchange and Commission reports can be accessed through the Investor Relations section of our internet website. The information found on our internet website is not part of this or any other report we file with or furnish to the Securities Exchange and Commission.
An investment in our securities has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below andtogether with all the of the other information in this prospectus.Annual Report onForm 10-K, including our consolidated financial statements and related notes. If any of the following risks actually occur, our business, operating results and financial condition could be harmed, and the value of our stock could go down. This means you could lose all or a part of your investment.
Risks related to our financial condition and capital requirements
We are primarily a clinical-stage company with no approved products, which makes assessment of our future viability difficult.
We are primarily a clinical-stage company, with a relatively limited operating history and with no approved therapeutic products or revenues from the sale of therapeutic products. As a result, there is limited information for investors to use when assessing our future viability as a company focused primarily on therapeutic products and our potential to successfully develop product candidates, conduct clinical trials, manufacture our products on a commercial scale, obtain regulatory approval and profitably commercialize any approved products.
We are significantly dependent upon the success of DCCR, our sole therapeutic product candidate.
We invest a significant portion of our efforts and financial resources in the development of DCCR for the treatment of PWS, a rare complex genetic neurobehavioral/metabolic disease. Our ability to generate product revenues, which may not occur for the foreseeable future, if ever, will depend heavily on the successful development, regulatory approval, and commercialization of DCCR.
Any delay or impediment in our ability to obtain regulatory approval to commercialize in any region, or, if approved, obtain coverage and adequate reimbursement from third-parties, including government payors, for DCCR, may cause us to be unable to generate the revenues necessary to continue our research and development pipeline activities, thereby adversely affecting our business and our prospects for future growth. Further, the success of DCCR will depend on a number of factors, including the following:
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize DCCR, which would materially harm our business.
We have a limited operatingcommercialization history and have incurred significant losses since our inception, and we anticipate that we will continue to incur substantial losses for the foreseeable future. We have only one product approved for sale,transitioned to be primarily a research and have generated limited commercial sales to date,development company, which, together with our limited operating history, makes it difficult to evaluate our business and assess our future viability.
We are a developer of therapeutics and diagnosticsmedical devices with a limited operatingcommercialization history. Other than CoSense, which has received 510(k) clearance from the FDA and CE Mark certification in the E.U., and the products acquired from NeoForce (collectively, our “neonatology products”), we have no other products currently approved. Evaluating our performance, viability or future success will be more difficult than if we had a longer operating history or approved products for sale on the market. We continue to incur significant research and development and general and administrative expenses related to our operations. Investment in medical device product development is highly speculative, because it entails substantial upfront capital expenditures and significant risk that any potential planned product will fail to demonstrate adequate accuracy or clinical utility. We have incurred significant operating losses in each year since our inception and expect that we will not be profitable for an indefinite period of time. As of December 31, 2015,2017, we had an accumulated deficit of $86$114.0 million.
We expect that our future financial results will depend primarily on our success in developing, launching, selling and supporting our neonatology and other products. This will require us to be successful in a range of activities, including clinical trials, manufacturing, marketing and selling our neonatology products. We are only in the preliminary stages of some of these activities. We may not succeed in these activities and may never generate revenue that is sufficient to be profitable in the future. Even if we are profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve sustained profitability would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our planned products, market our current and planned products, or continue our operations.
We currently have generated limited product revenue and may never become profitable.
To date, we have not generated significant revenues from our neonatology products, and have not generated sufficient revenues from licensing activities to achieve profitability. Our ability to generate significant revenue from product sales and achieve profitability will depend upon our ability, alone or with any future collaborators, to successfully commercialize products including our neonatology products, Serenz, or any planned products that we may develop,in-license or acquire in the future. Our ability to generate revenue from product sales from planned products also depends on a number of additional factors, including our ability to:
In addition, because of the numerous risks and uncertainties associated with product development and commercialization, including that Serenz or anyour planned products may not advance through development, or achieve the endpoints of applicable clinical trials or obtain approval, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide, or are required by the FDA or foreign regulatory authorities, to perform studies or clinical trials in addition to those that we currently anticipate. Even if we are able to complete the development and regulatory process for Serenz or any planned products, we anticipate incurring significant costs associated with commercializing these products.
Even if we are able to generate significant revenue from the sale of our neonatology products, Serenz or any plannedof our products that may be approved or commercialized, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or shut down our operations.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or below our guidance.
Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. From time to time, we may enter into collaboration agreements with other companies that include development funding and significant upfront and milestone payments or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend on development funding and the achievement of development and clinical milestones under any potential future collaboration and license agreements and sales of our products, if approved.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on aperiod-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Common Stock
We may need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which would force us to delay, reduce or suspend our research and development programs and other operations or commercialization efforts. Raising additional capital may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations, or require us to relinquish rights to our planned products and technologies.
The commercializationaccompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of our neonatology products, as well as the completion of the developmentassets and the potential commercializationsatisfaction of planned products, will require substantial funds.liabilities in the normal course of business. As of December 31, 2015,2017, we had approximately $5.5 million in cashhave incurred significant operating losses since inception and cash equivalents. Our future financing requirementscontinue to generate losses from operations and have an accumulated deficit of $114.0 million. These matters raise substantial doubt about our ability to continue as a going concern. The 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 we be unable to continue as a going concern.
Commercial results have been limited and we have not generated significant revenues. We cannot assure our stockholders that our revenues will depend on many factors, some of whichbe sufficient to fund its operations. If adequate funds are beyondnot available, we may be required to curtail our control, including the following:
At December 31, 2017, our cash balance was $17.1 million. We intend to raise additional capital, either through debt or equity financings to achieve its business plan objectives. We believe that we can be successful in obtaining additional capital; however, no assurance can be provided that we will be able to do so. There is no assurance that any funds raised will be sufficient to enable us to attain profitable operations or continue as a going concern. To the cost to manufacture CoSense instruments and consumables on a larger scale;
We do not have any material committed external source of CoSense as a result;
We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to whichour management.
From time to time we utilize the Common Stock Purchase Agreement datedmay consider strategic transactions, such as acquisitions, asset purchases and sales, andout-licensing orin-licensingof July 24, 2015,products, product candidates or the Aspire Purchase Agreement, with Aspire Capital LLC, or Aspire Capital, as a source of funding will depend on a number of factors, including the prevailing market price of our Common Stock, the volume of trading in our Common Stock and the extent to which we are able to secure funds from other sources. The number of sharestechnologies. Additional potential transactions that we may sellconsider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to Aspire Capital underincurnon-recurring or other charges, may increase our near and long-term expenditures, could not result in perceived benefits that were contemplated upon entering into the Aspire Purchase Agreement ontransaction, and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations, solvency and financial results. For example, these transactions may entail numerous operational and financial risks, including:
Accordingly, although there can be no assurance that we will undertake or successfully complete any additional transactions of the agreement is limited. Additionally,nature described above or that we will achieve an economic benefit that justifies such transactions, any additional transactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and Aspire Capitalprospects.
We may not effect anybe able to enter into strategic transactions on a timely basis or on acceptable terms, which may impact our development and commercialization plans.
We have relied, and expect to continue to rely, on strategic transactions, which includein-licensing,out-licensing, purchases and sales of sharesassets, and other ventures. The terms of our Common Stockany additional strategic transaction that we may enter into may not be favorable to us, and the contracts governing such strategic transaction may be subject to differing interpretations exposing us to potential litigation. We may also be restricted under the Aspire Purchase Agreement during the continuance of an event of defaultexisting collaboration or licensing arrangements from entering into future agreements on any trading day that the closing sale price of our Common Stock is less than $2.63 per share. Even if we arecertain terms with potential strategic partners. We may not be able to access the full $10.0 million under the Aspire Purchase Agreement,negotiate additional strategic transactions on a timely basis, on acceptable terms, or at all. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our products or bring them to market and generate product revenue. Furthermore, there is no assurance that any such transaction will be successful or that we will still need additional capital to fully implement our business, operating and development plans. In addition,derive an economic benefit as a result of the Sabby Purchase Agreement, from October 12, 2015 until ninety days after the date that all securities sold to Sabby may be freely sold without restriction (either as a result of an effective registration statement covering such shares or pursuant to Rule 144), we are not able to access any additional funds under the Aspire Purchase Agreement.
Risks related to the development and commercialization of our products
We have not commercialized any product in the past, and may not be successful in commercializing CoSense.
Commercialization of risks, any of which may prevent or limit sales of the CoSense instruments and consumables. Furthermore, commercialization of products into the medical marketplace is subject to a variety of regulations regarding the manner in which potential customers may be engaged, the manner in which products may be lawfully advertised, and the claims that can be made for the benefits of the product, among other things. Our lack of experience with product launches may expose us to a higher than usual level of risk ofnon-compliance with these regulations, with consequences that may include fines or the removal of CoSenseour approved products from the marketplace by regulatory authorities.
If we are unable to execute our sales and marketing strategy for our neonatology products, and are unable to gain acceptance in the market, we may be unable to generate sufficient revenue to sustain our business.
Although we believe that DCCR and our neonatology and other planned products represent promising commercial opportunities, our products may never gain significant acceptance in the marketplace and therefore may never generate substantial revenue or profits for us. We will need to establish a market for neonatology productsDCCR globally and build that marketthese markets through physician education, awareness programs, and other marketing efforts. Gaining acceptance in medical communities depends on a variety of factors, including clinical data published or reported in reputable contexts andword-of-mouth between physicians. The process of
We are relying, or will rely, on a third party, Bemes,parties with whom we are directly engaged with, but who we do not control, to distribute and sell CoSense and our consumable PSS.products. If Bemes isthese distributors are not committed to our products or otherwise runsrun into itstheir own financial or other difficulties, it may result in failure to achieve widespread market acceptance of our neonatologyproducts, and other products would materially harm our business, financial condition and results of operations.
If we are unable to implement our sales, marketing, distribution, training and support strategies or enter into agreements with third parties to perform these functions in markets outside of the U.S. and E.U., we will not be able to effectively commercialize DCCR and may not reach profitability.
We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of therapeutic products. To achieve commercial success for DCCR, if and when we obtain marketing approval, we will need to establish a sales and marketing organization.
In the future, we expect to build a targeted sales, marketing, training and support infrastructure to market DCCR in the U.S. and E.U. and to opportunistically establish collaborations to market, distribute and support DCCR outside of the U.S. and E.U. There are risks involved with establishing our own sales, marketing, distribution, training and support capabilities. For example, recruiting and training sales and marketing personnel is expensive and time consuming and could delay any product launch. If the commercial launch of DCCR is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales, marketing, training and support personnel.
Factors that may inhibit our efforts to commercialize DCCR on our own include:
If we are unable to establish our own sales, marketing, distribution, training and support capabilities and instead enter into arrangements with third parties to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were to market, sell and distribute DCCR ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute DCCR or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to commercialize DCCR effectively. If we do not establish sales, marketing, distribution, training and support capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing DCCR and achieving profitability, and our business would be harmed.
If physicians decide not to order our neonatology products in significant numbers, we may be unable to generate sufficient revenue to sustain our business.
To generate demand for our neonatologycurrent and other planned products, we will need to educate neonatologists, pediatricians,physicians and other health care professionals on the clinical utility, benefits and value of the tests we provide through published papers, presentations at scientific conferences, educational programs andone-on-one education sessions by members of our sales force. In addition, we will need support of hospital administrators that the clinical and economic utility of CoSenseour products justifies payment for the device and consumables at adequate pricing levels. We need to hire additional commercial, scientific, technical and other personnel to support this process.
If our neonatology or other planned products do not continue to perform as expected, our operating results, reputation and business will suffer.
Our success depends on the market’s confidence that our neonatology and other planned products can provide reliable, high-quality diagnostic results.results or treatments. We believe that our customers are likely to be particularly sensitive to any test defects and errors in
our products, and prior products made by other companies for the same diagnostic purpose have failed in the marketplace, in part as a result of poor diagnostic accuracy. As a result, the failure of our neonatologycurrent and other planned products to perform as expected would significantly impair our reputation and the clinical usefulness of such tests. Reduced sales might result, and we may also be subject to legal claims arising from any defects or errors.
If clinical studies of Serenz or any of our planned products fail to demonstrate safety and efficacyeffectiveness to the satisfaction of the FDA or similar regulatory authorities outside the U.S. or do not otherwise produce positive results, we may incur additional costs, experience delays in completing or ultimately fail in completing the development and commercialization of Serenz or our planned products.
Before obtaining regulatory approval for the sale of any planned product we must conduct extensive clinical studies to demonstrate the safety and efficacyeffectiveness of our planned products in humans. Clinical studies are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more of our clinical studies could occur at any stage of testing.
Numerous unforeseen events during, or as a result of, clinical studies could occur, which would delay or prevent our ability to receive regulatory approval or commercialize Serenz or any of our planned products, including the following:
If we or any future collaboration partnerpartners are required to conduct additional clinical trials or other testing of Serenz or any planned products beyond those that we contemplate, if those clinical studies or other testing cannot be successfully completed, if the results of these studies or tests are not positive or are only modestly positive or if there are safety concerns, we may:
Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any clinical studies will begin as planned, will need to be restructured or will be completed on schedule, or at all.
If we fail to obtain regulatory approval for DCCR in the U.S. and E.U., our business would be harmed.
We are required to obtain regulatory approval for each indication we are seeking before we can market and sell DCCR in a particular jurisdiction, for such indication. Our ability to obtain regulatory approval of DCCR depends on, among other things, successful completion of clinical trials by demonstrating efficacy with statistical significance and clinical meaning, and safety in humans. The results of our current and future clinical trials may not meet the FDA, the European Medicines Agency, or EMA, or other regulatory agencies’ requirements to approve DCCR for marketing under any specific indication, and these regulatory agencies may otherwise determine that our third parties’ manufacturing processes, validation, and/ or facilities are insufficient to support approval. As such, we may need to conduct more clinical trials than we currently anticipate and upgrade the manufacturing processes and facilities, which may require significant additional time and expense, and may delay or prevent approval. If we fail to obtain regulatory approval in a timely manner, our commercialization of DCCR would be delayed and our business would be harmed.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be predictive of future trial results, and our clinical trials may fail to adequately demonstrate acceptablethe safety and efficacy of SerenzDCCR or other potential product candidates.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. A failure of one or more of our clinical trials can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in later stages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.
We may experience delays in our clinical trials. We do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients in a timely manner or be completed on schedule, if at all. Clinical trials can be delayed, suspended or terminated for a variety of reasons, including failure to:
Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ or caregivers’ perceptions as to the potential advantages of the drug candidate being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating or any investigational new drugs or treatment of AR,under development for the indications we are investigating.
We could also encounter delays if a clinical trial is suspended or terminated by us, by a data safety monitoring board for such trial or by the FDA or similarany other regulatory authority, or if the IRBs of the institutions in which such trials are being conducted suspend or terminate the participation of their clinical investigators and sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities outsideresulting in the U.S.imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
If we experience delays in the completion of, or termination of, any clinical trial of our product candidates for any reason, the commercial prospects of our product candidates may not approve Serenzbe harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
We may be unable to obtain regulatory approval for marketingDCCR or may approve it with restrictions on the label, which couldother potential product candidates. The denial or delay of any such approval would delay commercialization and have a material adverse effect on our potential to generate revenue, our business financial condition,and our results of operations.
The research, development, testing, manufacturing, labeling, packaging, approval, promotion, advertising, storage, record keeping, marketing, distribution, post-approval monitoring and reporting, and export and import of drug products are subject to extensive regulation by the FDA, and by foreign regulatory authorities in other countries. The legislation and regulations differ from country to country. To gain approval to market our product candidates, we must provide development, manufacturing and clinical data that adequately demonstrates the safety and efficacy of the product for the intended indication. We have not yet obtained regulatory approval to
market any of our product candidates in the U.S. or any other country. Our business depends upon obtaining these regulatory approvals. The FDA can delay, limit or deny approval of our product candidates for many reasons, including:
Even if we eventually complete clinical testing and receive approval of any regulatory filing for our product candidates, the FDA may grant approval contingent on the performance of costly additional post-approval clinical trials. The FDA may also approve our product candidates for a more limited indication or a narrower patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. To the extent we seek regulatory approval in foreign countries, we may face challenges similar to those described above with regulatory authorities in applicable jurisdictions. Any delay in obtaining, or inability to obtain, applicable regulatory approval for any of our product candidates would delay or prevent commercialization of our product candidates and would materially adversely impact our business, results of operations and growth prospects.
Even if Serenz or any planned products receive regulatory approval, these products may fail to achieve the degree of market acceptance by physicians, patients, caregivers, healthcare payors and others in the medical community necessary for commercial success.
If Serenz or any planned products receive regulatory approval from the FDA or other regulatory agencies in jurisdictions in which they are not currently approved, they may nonetheless fail to gain sufficient market acceptance by physicians, hospital administrators, patients, healthcare payors and others in the medical community. The degree of market acceptance of our planned products, if approved for commercial sale, will depend on a number of factors, including the following:
For example, a number of companies offer therapies for treatment of AR patients based on a daily regimen, and physicians, patients or their families may not be willing to change their current treatment practices in favor of Serenz even if it is able to offer additional efficacy or more attractive product attributes. If Serenz or any plannedour products if approved, do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable on a sustained basis or at all.
If the market opportunity for DCCR is smaller than we believe it is, then our revenues may be adversely affected, and our business may suffer.
PWS is a rare disease, and as such, our projections of both the number of people who have this disease, as well as the subset of people with PWS who have the potential to benefit from treatment with our product candidate, are based on estimates.
Currently, most reported estimates of the prevalence of PWS are based on studies of small subsets of the population of specific geographic areas, which are then extrapolated to estimate the prevalence of the diseases in the broader world population. In addition, as new studies are performed the estimated prevalence of these diseases may change. There can be no assurance that the prevalence of PWS in the study populations, particularly in these newer studies, accurately reflects the prevalence of this disease in the broader world population. If our estimates of the prevalence of PWS, or of the number of patients who may benefit from treatment with our product candidates prove to be incorrect, the market opportunities for our product candidate may be smaller than we believe it is, our prospects for generating revenue may be adversely affected and our business may suffer.
DCCR is currently under development and we have limitedno sales and distribution personnel, and limited marketing capabilities.capabilities at the present time to commercialize DCCR, if we receive regulatory approval. If we are unable to develop a sales and marketing and distribution capability on our own or through collaborations or other marketing partners, we will not be successful in commercializing our neonatology products, Serenz, or other planned products.
There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time-consuming, and could delay any product launch. If the commercial launch of a planned product for which we recruit a sales force and establish marketing capabilities is delayed, or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
To achieve commercial success for any approved product, we must either develop a sales and marketing infrastructure or outsource these functions to third parties. We also may not be successful entering into arrangements with third parties to sell and market our planned products or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively and could damage our reputation. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our planned products.
We may attempt to form partnerships in the future with respect to Serenz or other futureour products, but we may not be able to do so, which may cause us to alter our development and commercialization plans and may cause us to terminate the Serenz program.
We may form strategic alliances, create joint ventures or collaborations, or enter into licensing agreements with third parties that we believe will more effectively provide resources to develop and commercialize our programs. For example, we currently intend to identify one or more new partners or distributors for the commercialization of Serenz. We may also attempt to find one or more strategic partners for the development or commercialization of one or more of our other future products.
We face significant competition in seeking appropriate strategic partners, and the negotiation process to secure favorable terms is time-consuming and complex. In addition, the termination of our license agreement for Serenz with our former partner, may negatively impact the perception of Serenz held by other potential partners for the program. We may not be successful in our efforts to establish such a strategic partnership for any future products and programs on terms that are acceptable to us, or at all.
Any delays in identifying suitable collaborators and entering into agreements to develop or commercialize our future products could negatively impact the development or commercialization of our future products, particularly in geographic regions like the E.U., where we do not currently have development and commercialization infrastructure. Absent a partner or collaborator, we would need to undertake development or commercialization activities at our own expense. If we elect to fund and undertake development and commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we are unable to do so, we may not be able to develop our future products or bring them to market, and our business may be materially and adversely affected.
Our products may cause serious adverse side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial desirability of an approved label or result in significant negative consequences following any marketing approval.
The risk of failure of clinical development is high. It is impossible to predict when or if this or any planned products will prove safe enough to receive regulatory approval. Undesirable side effects caused by Serenz or any of our planned products could cause us or regulatory authorities to interrupt, delay or halt clinical trials or could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular planned product, if approved.
We face competition, which may result in others discovering, developing or commercializing products before we do, or more successfully than we do.
Alternatives exist for our neonatology products and for Serenz and we will likely face competition with respect to any planned products that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty
pharmaceutical companies, medical device companies, and biotechnology companies worldwide. There are several large pharmaceutical and biotechnology companies that currently market and sell AR therapies to our target patient group. These companies may reduce prices for their competing drugs in an effort to gain or retain market share and undermine the value proposition that Serenz or our neonatology products might otherwise be able to offer to payors.payers. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Many of these competitors are attempting to develop therapeutics for our target indications.
Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified technical and management personnel, establishing clinical study sites and patient registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs.
Our patent rights may prove to be an inadequate barrier to competition.
We are the sole owner of patents and patent applications in the U.S. with claims covering the compounds underlying our primary product candidate, DCCR. Foreign counterparts of these patents and applications have been issued in the E.U., Japan, China, Canada, Australia, India and Hong Kong. However, the lifespan of any one patent is limited, and each of these patents will ultimately expire and we cannot be sure that pending applications will be granted, or that we will discover new inventions which we can successfully patent. Moreover, any of our granted patents may be held invalid by a court of competent jurisdiction, and any of these patents may also be construed narrowly by a court of competent jurisdiction in such a way that it is held to not directly cover DCCR. Furthermore, even if our patents are held to be valid and broadly interpreted, third parties may find legitimate ways to compete with DCCR by inventing around our patent. Finally, the process of obtaining new patents is lengthy and expensive, as is the process for enforcing patent rights against an alleged infringer. Any such litigation could take years, cost large sums of money and pose a significant distraction to management. Indeed, certain jurisdictions outside of the U.S. and E.U., where we hope to initially commercialize DCCR have a history of inconsistent, relatively lax or ineffective enforcement of patent rights. In such jurisdictions, even a valid patent may have limited value. Our failure to effectively prosecute our patents would have a harmful impact on our ability to commercialize DCCR in these jurisdictions.
Even if we are able to commercializemaintain our neonatologyexisting partners in commercializing our products, Serenz, or any planned products, or to obtain a partner to commercialize Serenz, the productsthey may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, thereby harming our business.
The regulations that govern marketing approvals, pricing and reimbursement for new products vary widely from country to country. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing approval is granted. In some foreign markets, pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product and negatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more planned products, even if our planned products obtain regulatory approval.
Our ability to commercialize our neonatology or any planned products successfully also will depend in part on the extent to which reimbursement for these products and related treatments becomes available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors,payers, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payorspayers have attempted to control costs by limiting
coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with products administered under the supervision of a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any planned product that we successfully develop.
In the purposes for which the product is approved by the FDA or regulatory authorities in other countries. Moreover,U.S., eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payorspayers and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices than in the U.S. Third-party payorspayers often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies.
Our inability to promptly obtain coverage and profitable payment rates from both government funded and private payorspayers for new products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition. In some foreign countries, including major markets in the E.U. and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take nine to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the sale of our neonatology products and any planned products in human clinical studies.products. The marketing, sale and use of our neonatology products and our planned products could lead to the filing of product liability claims against us if someone alleges that our tests failed to perform as designed. We may also be subject to liability for a misunderstanding of, or inappropriate reliance upon, the information we provide. If we cannot successfully defend ourselves against claims that our neonatology products or our planned products caused injuries, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
We currently hold $8.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
The loss of key members of our executive management team could adversely affect our business.
Our success in implementing our business strategy depends largely on the skills, experience and performance of key members of our executive management team and others in key management positions, including Dr. Anish Bhatnagar, our Chief Executive Officer, David D. O’Toole, our Senior Vice President, Chief Financial Officer, Anthony Wondka,Neil M. Cowen, our Senior Vice President of Research andDrug Development, Otho Boone, our Vice President and General Manager of Neonatology, and Kristen Yen, our Vice President of Clinical & Regulatory.Operations. The collective efforts of each of these persons, and others working with them as a team, are critical to us as we continue to develop our technologies, tests and research and development and sales programs. As a result of the difficulty in locating qualified new management, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we were to lose one or more of these key employees, we could experience difficulties in finding qualified successors, competing effectively, developing our technologies and implementing our business strategy. Our Chief Executive Officer, Chief Financial Officer, Vice President & General Manager of Neonatology, Vice President of Clinical & Regulatory, and Senior Vice President of Research and Developmentofficers all have employment agreements,agreements; however, the existence of an employment agreement does not guarantee retention of members of our executive management team and we may not be able to retain those individuals for the duration of or beyond the end of their respective terms. We have secured a $1,000,000 “key person” life insurance policy on our Chief Executive Officer, Dr. Anish Bhatnagar, but do not otherwise maintain “key person” life insurance on any of our employees.
In addition, we rely on collaborators, consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our collaborators, consultants and advisors are generally employed by employers other than us and may have commitments under agreements with other entities that may limit their availability to us.
Management turnover creates uncertainties and could harm our business
We have recently experienced changes in our executive leadership. Specifically, on August 29, 2017, David O’Toole, Senior Vice President and Chief Financial Officer, notified us of his decision to resign from employment effective September 11, 2017. Mr. Jonathan Wolter, a partner at FLG Partners, LLC, was retained as our interim Chief Financial Officer; however, no permanent replacement has been appointed. In addition, as part of our joint venture with OAHL, Anthony Wondka transitioned from our Senior Vice President, Research & Development to an employee of Capnia. We also expect that we may have other officers leave as we continue to transition our primary focus to our DCCR development program, and away from our legacy businesses. Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style. Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. Until we integrate new personnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our financial condition and profitability may suffer.
Further, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a key employee, the failure of a key employee to perform in his or her current position orcandidate that meets our inabilityrequirements. If we are unable to attract and retain skilled employees could result in our inability to continue to growqualified management personnel, our business or to implement our business strategy.
There is a scarcity of experienced professionals in our industry. If we are not able to retain and recruit personnel with the requisite technical skills, we may be unable to successfully execute our business strategy.
The specialized nature of our industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon our ability to attract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessary to support our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that we require and the competition for qualified personnel among life sciencebiotechnology businesses, we may not succeed in attracting or retaining the personnel we require to continue and grow our operations.
We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions or licenses of assets or acquisitions of businesses. We also may pursue strategic alliances and joint ventures that leverage our core technology and industry experience to expand our product offerings or sales and distribution resources.resources, including our joint venture with OAHL with respect to CoSense. Our company has limited experience with acquiring other companies, acquiring or licensing assets or forming strategic alliances and joint ventures. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have a material adverse effect on our financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations.
We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, license, strategic alliance or joint venture. To finance such a transaction, we may choose to issue shares of our Common Stockcommon stock as consideration, which would dilute the ownership of our stockholders. If the price of our Common Stockcommon stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
International expansion of our business will expose us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the U.S.
Our business strategy contemplates international expansion, including partnering with medical device distributors, and introducing our neonatologycurrent products and other planned products outside the U.S. Doing business internationally involves a number of risks, including:
Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, have a material adverse effect on our financial condition, results of operations and cash flows.
Intrusions into our computer systems could result in compromise of confidential information.
Any software we develop or use for any of CoSense depends, in part, on the function of software run by the microprocessors embedded in the device. This software is proprietary to us. While we have made efforts to test the software extensively, it isour products may be potentially subject to malfunction. It may bemalfunction or vulnerable to physicalbreak-ins, hackers, improper employee or contractor access, computer viruses, programming errors, or similar problems. Any of these might result in confidential medical, business or other information of other persons or of ourselves being revealed to unauthorized persons.
There are a number of state, federal and international laws protecting the privacy and security of health information and personal data.data, including on electronic medical systems. As part of the American Recovery and Reinvestment Act 2009, or ARRA, Congress amended the privacy and security provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’s protected healthcare information by healthcare providers, healthcare clearinghouses, and health insurance plans, collectively referred to as covered entities. The HIPAA amendments also impose compliance obligations and corresponding penalties fornon-compliance on individuals and entities that provide services to healthcare providers and other covered entities, collectively referred to as business associates. ARRA also made significant increases in the penalties for improper use or disclosure of an individual’s health information under HIPAA and extended enforcement authority to state attorneys general. The amendments also create notification requirements for individuals whose health information has been inappropriately accessed or disclosed: notification requirements to federal regulators and in some cases, notification to local and national media. Notification is not required under HIPAA if the health information that is improperly used or disclosed is deemed secured in accordance with encryption or other standards developed by the U.S. Department of Health and Human Services, or HHS. Most states have laws requiring notification of affected individuals and state regulators in the event of a breach of personal information, which is a broader class of information than the health information protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of the U.S. implicate local and national data protection standards, impose additional compliance requirements and generate additional risks of enforcement fornon-compliance. We may be required to expend significant capital and other resources to ensure ongoing compliance with applicable privacy and data security laws, to protect against security breaches and hackers or to alleviate problems caused by such breaches.
With respect to our joint venture, the accuracy of CoSense depends, in part, on the function of proprietary software run by the microprocessors embedded in the device, and despite our efforts to test the software extensively, it is potentially subject to malfunction, physicalbreak-ins, hackers, improper employee or contractor access, computer viruses, programming errors, or similar problems. Any of these might result in confidential medical, business or other information of other persons or of ourselves being revealed to unauthorized persons.
Risks related to the operation of our business
Any future distribution or commercialization agreements we may enter into for our neonatology products Serenz, or any other planned product, may place the development of these products outside our control, may require us to relinquish important rights, or may otherwise be on terms unfavorable to us.
We may enter into additional distribution or commercialization agreements with third parties with respect to our neonatology products, to Serenz, or with respect to planned products, for commercialization in or outside the U.S.products. Our likely collaborators for any distribution, marketing, licensing or other collaboration
arrangements include large andmid-size medical device and diagnostic companies, regional and national medical device and diagnostic companies, and distribution or group purchasing organizations. We will have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our planned products. Our ability to generate revenue from these arrangements will depend in part on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.
Collaborations involving our planned products are subject to numerous risks, which may include the following:
Any termination or disruption of collaborations could result in delays in the development of planned products, increases in our costs to develop the planned products or the termination of development of a planned product.
We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
As of December 31, 2015,2017, we had 29twelve employees and 13six full-time or part-time consultants. Over the next several years, we expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, quality assurance, engineering, product development, regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The
physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Future growth would impose significant added responsibilities on members of management, including:
Our failure to accomplish any of these tasks could prevent us from successfully growing. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Because we intend to commercialize our neonatology products outside the U.S., we will be subject to additional risks.
A variety of risks associated with international operations could materially adversely affect our business, including:
We rely on third parties to conduct certain components of our clinical studies, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such studies.
We rely on third parties, such as contract research organizations, or CROs, clinical data management organizations,investigational product packaging, labeling and distribution, laboratories, medical institutions and clinical investigators and staff, to perform various functions for our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical studies is conducted in accordance with the general investigational plan and protocols for the study. Moreover, the FDA requires us and third parties involved in the
set-up, conduct, analysis and reporting of the clinical studies to comply with regulations and with standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical studiesor GCP, to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of patients in clinical studies are protected. Our clinical investigators are also required to comply with GCPs. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical studies in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our planned products and will not be able to, or may be delayed in our efforts to, successfully commercialize our planned products.
If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.
Our manufacturing processes currently require the controlled use of potentially harmful chemicals. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could
Risks related to intellectual property
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Patent litigation is prevalent in the medical device and diagnosticour sectors. Our commercial success depends upon our ability and the ability of our distributors, contract manufacturers, and suppliers to manufacture, market, and sell our planned products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. We may become party to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology. Third parties may assert infringement claims against us based on existing or future intellectual property rights. If we are found to infringe a third-party’s intellectual property rights, we could be required to obtain a license from such third-party to continue developing and marketing our products and technology. We may also elect to enter into such a license in order to settle pending or threatened litigation. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could benon-exclusive, thereby giving our competitors access to the same technologies licensed to us and could require us to pay significant royalties and other fees.
We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our planned products or force us to cease some of our business operations, which could materially harm our business. Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information orknow-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. These and other claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our business to the infringement claims discussed above.
Even if we are successful in defending against intellectual property claims, litigation or other legal proceedings relating to such claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Common Stock.common stock. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectual property related proceedings could have a material adverse effect on our ability to compete in the marketplace.
If we fail to comply with our obligations in our intellectual property agreements, we could lose intellectual property rights that are important to our business.
We are a party to intellectual property arrangements and expect that our future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, any licensor may have the right to terminate such agreements, in which event we may not be able to develop and market any product that is covered by such agreements.
The risks described elsewhere pertaining to our intellectual property rights also apply to any intellectual property rights that we may license, and any failure by us or any future licensor to obtain, maintain, defend and enforce these rights could have a material adverse effect on our business.
Our ability to successfully commercialize our technology and products may be materially adversely affected if we are unable to obtain and maintain effective intellectual property rights for our technologies and planned products, or if the scope of the intellectual property protection is not sufficiently broad.
Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the U.S. and in other countries with respect to our proprietary technology and products.
The patent position of medical device and diagnosticpharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unresolved. In recent years patent rights have been the subject of significant litigation. As a result, the issuance, scope, validity, enforceability and commercial value of the patent rights we rely on are highly uncertain. Pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the U.S. and other countries may diminish the value of the patents we rely on or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we or were the first to file for patent protection of such inventions.
Even if the patent applications we rely on issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in anon-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and the patents we rely on may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our
technology and products. Given the amount of time required for the development, testing and regulatory review of new planned products, patents protecting such products might expire before or shortly after such products are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours or otherwise provide us with a competitive advantage.
We may become involved in legal proceedings to protect or enforce our intellectual property rights, which could be expensive, time-consuming, or unsuccessful.
Competitors may infringe or otherwise violate the patents we rely on, or our other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. In addition, in an infringement proceeding, a court may decide that a patent we are asserting is invalid or unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that the patents we are asserting do not cover the technology in question. An adverse result in any litigation proceeding could put one or more patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office, or USPTO, or any foreign patent authority may be necessary to determine the priority of inventions or other matters of inventorship with respect to patents and patent applications. We may become involved in proceedings, including oppositions, interferences, derivation proceedings inter partes reviews, patent nullification proceedings, orre-examinations, challenging our patent rights or the patent rights of others, and the outcome of any such proceedings are highly uncertain. An adverse determination in any such proceeding could reduce the scope of, or invalidate, important patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. Our business also could be harmed if a prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may also become involved in disputes with others regarding the ownership of intellectual property rights. If we are unable to resolve these disputes, we could lose valuable intellectual property rights.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical or management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our Common Stock.common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Uncertainties
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, harming our business and competitive position.
In addition to our patented technology and products, we rely upon confidential proprietary information, including trade secrets, unpatentedknow-how, technology and other proprietary information, to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in the market. We seek to protect our confidential proprietary information,
in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us. These agreements are designed to protect our proprietary information,information; however, we cannot be certain that our trade secrets and other confidential information will not be disclosed or that competitors will not otherwise gain access to our trade secrets, or that technology relevant to our business will not be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees, consultants or collaborators that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated or otherwise become known or be independently discovered by our competitors. In addition, intellectual
We may not be able to protect or enforce our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our planned products throughout the world would be prohibitively expensive to us. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the U.S. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated fornon-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents or applications will be due to be paid by us to the United States Patent and Trademark Office, or USPTO, and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents or applications. The USPTO and variousnon-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to use our technologies and this circumstance would have a material adverse effect on our business.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of our issued patents.
In March 2013, under the America Invents Act, or AIA, the U.S. moved to afirst-to-file system and made certain other changes to its patent laws. The effects of these changes are currently unclear as the USPTO must still implement various regulations, the courts have yet to address these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. Accordingly, it is not yet clear what, if any, impact the AIA will have on the operation of our business. However, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which could have a material adverse effect on our business and financial condition.
If we do not obtain a patent term extension in the U.S. under the Hatch-Waxman Act and in foreign countries under similar legislation, thereby potentially extending the term of our marketing exclusivity for our planned products, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our products, if any, one or more of the U.S. patents covering any such approved product(s) or the use thereof may be eligible for up to five years of patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be extended per FDA approved product. Patent term extension also may be available in certain foreign countries upon regulatory approval of our planned products. Nevertheless, we may not be granted patent term extension either in the U.S. or in any foreign country because of, for example, our failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority could be less than we request.
If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than requested, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.
Risks related to government regulation
The regulatory approval process is expensive, time consuming and uncertain, and may prevent us from obtaining approvals for the commercialization of Serenz or our planned products.
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of medical devicesour products are subject to extensive regulation by the FDA in the U.S. and other regulatory authorities in the U.S. and other countries, which regulations differ from country to country. We are not permitted to market our planned products in the U.S. until we received the requisite approval or clearance from the FDA. We have not submitted an application or received marketing approval for Serenz or any planned products. Obtaining PMA or 510(k) clearance for a medical deviceapprovals from the FDA can be a lengthy,
Prior to receiving approval to commercialize any of our planned products in the U.S. or abroad, we may be required to demonstrate with substantial evidence from well-controlled clinical studies, and to the satisfaction of the FDA and other regulatory authorities abroad, that such planned products are safe and effective for their intended uses. Results from preclinical studies and clinical studies can be interpreted in different ways. Even if we believe the preclinical or clinical data for our planned products are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any of our planned products to humans may produce undesirable side effects, which could interrupt, delay or cause suspension of clinical studies of our planned products and result in the FDA or other regulatory authorities denying approval of our planned products for any or all targeted indications.
Regulatory approval from the FDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical studies or perform additional preclinical studies and clinical studies. The number of preclinical studies and clinical studies that will be required for FDA approval varies depending on the planned product, the disease or condition that the planned product is designed to address and the regulations applicable to any particular planned product. The FDA can delay, limit or deny approval of a planned product for many reasons, including, but not limited to, the following:
If Serenz or any planned products fail to demonstrate safety and efficacyeffectiveness in clinical studies or do not gain regulatory approval, our business and results of operations will be materially and adversely harmed.
The research, development, conduct of clinical trials, manufacturing, labeling, approval, selling, import, export, marketing and distribution of pharmaceutical and biologic products also are subject to extensive regulation by the FDA in the U.S. and other regulatory authorities in other countries, which regulations differ from country to country.
The research, development, conduct of clinical trials, manufacturing, labeling, approval, selling, import, export, marketing and distribution of pharmaceutical and biologic products also are subject to extensive regulation by the FDA in the U.S. and other regulatory authorities in other countries, which regulations differ from country to country.
Nonclinical Testing
Before a drug candidate in can be tested in humans, it must be studied in laboratory experiments and in animals to generate data to support the drug candidate’s potential benefits and safety. Additional nonclinical testing may be required during the clinical development process such as reproductive toxicology and juvenile toxicology studies. Carcinogencity studies in 2 species are generally required for products intended for long-term use.
Investigational New Drug Exemption Application (IND)
The results of initial nonclinical tests, together with manufacturing information, analytical data and a proposed clinical trial protocol and other information, are submitted as part of an IND to the FDA. If FDA does not identify significant issues during the initial30-day IND review, the drug candidate can then be studied in human clinical trials to determine if the drug candidate is safe and effective. Each clinical trial protocol and/or amendment, new nonclinical data, and/or new or revised manufacturing information must be submitted to the IND, and the FDA has 30 days to complete its review of each submission.
Clinical Trials
These clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which are subject to considerable regulation, are as follows:
For each clinical trial, an independent IRB or independent ethics committee, covering each site proposing to conduct a clinical trial must review and approve the plan for any clinical trial and informed consent information for subjects before the trial commences at that site and it must monitor the study until completed. The FDA, the
IRB, or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk or for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical trials involve the administration of an investigational drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Sponsors of clinical trials generally must register and report, at theNIH-maintained website ClinicalTrials.gov, key parameters of certain clinical trials.
At any point in this process, the development of a drug candidate can be stopped for a number of reasons including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completed successfully or within any specified time period. We may choose, or FDA may require us, to delay or suspend our clinical trials at any time if it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.
FDA Approval Process
When we believe that the data from our clinical trials show an adequate level of safety and efficacy, we submit the application to market the drug for a particular use, normally a New Drug Application (NDA) with FDA. FDA may hold a public hearing where an independent advisory committee of expert advisors asks additional questions and makes recommendations regarding the drug candidate. This committee makes a recommendation to FDA that is not binding but is generally followed by FDA. If FDA agrees that the compound has met the required level of safety and efficacy for a particular use, it will allow the drug candidate in the United States to be marketed and sold for that use. It is not unusual, however, for FDA to reject an application because it believes that the risks of the drug candidate outweigh the purported benefit or because it does not believe that the data submitted are reliable or conclusive. The FDA may also issue a Complete Response Letter, or CRL, to indicate that the review cycle for an application is complete and that the application is not ready for approval. CRLs generally outline the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when the deficiencies have been addressed to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
FDA may also require Phase 4non-registrational studies to explore scientific questions to further characterize safety and efficacy during commercial use of our drug. FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures or facilities or may require extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not contain adequate evidence of the safety and benefits of the drug. In addition, even if FDA approves a drug, it could limit the uses of the drug. FDA can withdraw approvals if it does not believe that we are complying with regulatory standards or if problems are uncovered or occur after approval.
In addition to obtaining FDA approval for each drug, we obtain FDA approval of the manufacturing facilities for companies who manufacture our drugs for us. All of these facilities are subject to periodic inspections by FDA. FDA must also approve foreign establishments that manufacture products to be sold in the United States and these facilities are subject to periodic regulatory inspection.
Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems are identified after the product reaches the market. In addition, the FDA may require post-approval testing, including Phase 4 studies, and surveillance programs to monitor the effect of approved products
which have been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on the results of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label, and, even if the FDA approves a product, it may limit the approved indications for use for the product or impose other conditions, including labeling or distribution restrictions or other risk-management mechanisms. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, the sponsor may be required to submit and obtain FDA approval of a new or supplemental NDA, which may require the development of additional data or conduct of additionalpre-clinical studies and clinical trials.
Even if we receive regulatorymarketing approval for a planned product, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.
Once regulatorymarketing approval has been obtained, the approved product and its manufacturer are subject to continual review by the FDA ornon-U.S. regulatory authorities. Our regulatory approvalWith respect to our joint venture, the current clearance for CoSense, as well as any additional regulatory approval that we receive for Serenz or for any of our other planned products may be subject to limitations on the indicated uses for which the product may be marketed. Future approvals may contain requirements for potentially costly post-marketingfollow-up studies to monitor the safety and efficacyeffectiveness of the approved product. In addition, we are subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for our products.
In addition, we are required to comply with cGMP regulations regarding the
Once a pharmaceutical product is approved, a product will be subject to pervasive and continuing regulation by the FDA, EMA, and other health authorities, including, among other things, recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and generally require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP or QSR and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP or QSR compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market, though the FDA must provide an application holder with notice and an opportunity for a hearing in order to withdraw its approval of an application. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
The FDA strictly regulates the marketing, labeling, advertising and promotion of drug and device products that are placed on the market. While physicians may prescribe drugs and devices for off label uses, manufacturers may only promote for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off label uses, and a company that is found to have improperly promoted off label uses may be subject to significant liability.
Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which the development program is designed to address the unmet medical need, may be designated as fast track and/or breakthrough candidates by FDA and may be eligible for accelerated and priority review.
Drugs that are developed for rare diseases can be designated as Orphan Drugs. In the U.S., the disease or condition has an incidence of less than 200,000 persons and in the E.U. the prevalence of the condition must be not more than 5 in 10,000 persons. In the U.S., orphan-designated drugs are granted up to7-year market exclusivity. In the E.U., products granted orphan designation are subject to reduced fees for protocol assistance, marketing authorization applications, inspections before authorization, applications for changes to marketing authorizations, and annual fees, access to the centralized authorization procedure, and 10 years of market exclusivity.
Drugs are also subject to extensive regulation outside of the U.S. In the E.U., there is a centralized approval procedure that authorizes marketing of a product in all countries of the E.U. (which includes most major countries in the E.U.). If this centralized approval procedure is not used, approval in one country of the E.U. can be used to obtain approval in another country of the E.U. under one of two simplified application processes: the mutual recognition procedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of the E.U. registration procedures, separate pricing and reimbursement approvals are also required in most countries. The E.U. also has requirements for approval of manufacturing facilities for all products that are approved for sale by the E.U. regulatory authorities.
Failure to obtain regulatorymarketing approvals in foreign jurisdictions will prevent us from marketing our products internationally.
We intend to seek a distribution and marketing partnerpartners for our neonatologycurrent products outside the U.S. and may market planned products in international markets. We haveOur joint venture has obtained a CE Mark certification for CoSense and it isSerenz and they are therefore authorized for sale in the E.U.; however, in order to market our plannedthese products in Asia, Latin America and other foreign jurisdictions, we must obtain separate regulatory approvals.
We have had limited interactions with foreign regulatory authorities. The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Moreover, clinical studies or manufacturing processes conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA and CE Mark certification does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect
on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and even if we file we may not receive necessary approvals to commercialize our products in any market.
Healthcare reform measures could hinder or prevent our planned products’ commercial success.
In the U.S., there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, one of the most significant healthcare reform measures in decades, the Patient Protection and Affordable Care Act as amended by the Health Care and Education Affordability Reconciliation Act,of 2010, or PPACA, was enacted in 2010. The PPACA contains a number of provisions, including those governing enrollmentenrollments in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The PPACA, among other things:
While the U.S. Supreme Court upheld the constitutionality of most elements of the PPACA in June 2012, other legal challenges are still pending final adjudication in several jurisdictions. In addition, Congress has also proposed a number of legislative initiatives, including possible repeal of the PPACA. In December of 2015, Congress passed atwo-year suspension of the 2.3% medical device tax. If after two years, the suspension is not extended, at this time we believe the 2.3% tax on sales of medical devices will be pplicableapplicable to sales of our medical device products, including CoSense devices and may be applicable to CoSense consumables sold under our joint venture and also Serenz devices. We cannot assure you that after thetwo-year suspension, the reinstatement of the 2.3% medical device tax would not adversely affect our business and financial results and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, the Budget Control Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals for spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, which triggered the legislation’s automatic reduction to several government programs, including aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, former President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by the sequestration provisions of the Budget Control Act of 2011. The ATRA, among other things, also reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. In March 2013, the President signed an executive order implementing sequestration, and in April 2013, the 2% Medicare reductions went into effect. We cannot predict whether any additional legislative changes will affect our business.
There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payorspayers of healthcare services to contain or reduce costs of health care may adversely affect:
Further, changes in regulatory requirements and guidance may occur and we may need to amend clinical study protocols to reflect these changes. Amendments may require us to resubmit our clinical study protocols IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical study. In light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Governmental Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the recall and withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products or require safety surveillance or patient education. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical studies and the drug approval process. Data from clinical studies may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate or suspend clinical studies before completion or require longer or additional clinical studies that may result in substantial additional expense and a delay or failure in obtaining approval or approval for a more limited indication than originally sought.
Given the serious public health risks of high-profile adverse safety events with certain drug products, the FDA may require, as a condition of approval, costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, special packaging or labeling, expedited reporting of certain adverse events, preapproval of promotional materials and restrictions ondirect-to-consumer advertising.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.
Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors,payers, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include, without limitation:
The PPACA, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
Risks related to ownership of our securities
Our stock price may be volatile, and purchasers of our securities could incur substantial losses.
Our stock price has been and is likely to continue to be volatile. The stock market in general, and the market for biotechnology and medical device companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. In 2015,During the period from January 1, 2017, through December 31, 2017, the reported high and low prices of our Common Stockcommon stock ranged from $9.90$4.55 to $1.02.$1.32. As a result of this volatility, investors may not be able to sell their Common Stockcommon stock at or above the purchase price. The market price for our Common Stockcommon stock may be influenced by many factors, including the following:
These broad market and industry factors may seriously harm the market price of our Common Stock,common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.
Future sales of our Common Stock,common stock, or the perception that future sales may occur, may cause the market price of our Common Stockcommon stock to decline, even if our business is doing well.
Sales of substantial amounts of our Common Stockcommon stock in the public market, or the perception that these sales may occur, could materially and adversely affect the price of our Common Stockcommon stock and could impair our ability to raise capital through the sale of additional equity securities. All of our shares of Common Stockcommon stock are freely tradable, without restriction, in the public market, except for any shares sold toheld by our affiliates.
We have issued 13,780 shares of Series B Convertible Preferred Stock, of which 8,209 shares were converted into 1,641,800 shares of the Company’s Common Stock in 2017. As of December 31, 2015, approximately 14 million2017, there are 4,571 shares of Series B Convertible Preferred Stock outstanding which are convertible into 914,200 shares of Common Stock may be sold inStock. Under the public market by existing stockholders, subject to volume and other limitations imposed underterms of the federal securities laws. Sales of substantial amounts of our CommonSeries B Convertible Preferred Stock, in the public market, or the perception that such sales could occur, could adversely affect the market price of our Common Stock and could materially impair our ability to raise capital through offerings of our Common Stock.
On March 7, 2017, we issued 1,666,666 shares of common stock for an investment of $8 million from the completion of the concurrent financing and issued 416,666 shares of common stock for an investment of $2 million from Aspire Capital pursuant to the 2017 Aspire Purchase Agreement. The number ofAll the shares that we may sell to Aspire Capitalissued under the 2017 Aspire Purchase Agreement are eligible for future resale under a registration statement on FormS-1 on February 1, 2017 that was declared effective by the SEC on February 15, 2017. We terminated the 2017 Aspire Purchase Agreement on any given day and duringDecember 15, 2017 in connection with the termclosing of the agreement is limited. Additionally,2017 PIPE Offering.
On December 11, 2017, we entered into the Unit Purchase Agreement with certain stockholders, pursuant to which we sold and Aspire Capital may not effect any salesissued 8,141,116 immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of approximately $15,000,000. We refer to such offering as the 2017 PIPE Offering. Each unit consisted of one share of our common stock and a warrant to purchase 0.74 shares of our Common Stock under the Aspire Purchase Agreement during the continuance ofcommon stock at an event of default or on any trading day that the closing saleexercise price of $2.00 per share, for an aggregate of 8,141,116 Shares and corresponding warrants to purchase an aggregate of 6,024,425 Warrant Shares, together referred to as the Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registration statement with the SEC to register for resale the Resale Shares. The registration statement was declared effective in February 2018.
In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangement or otherwise. Any such issuance could result in substantial dilution to our Common Stock is less than $2.63 per share.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Common Stockcommon stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, which was enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the completion of theour initial public offering, or IPO, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.0$1.07 billion, (3) the date on which we are deemed to be a large accelerated filer, which means the market value of our Common Stockcommon stock that is held bynon-affiliates exceeds $700.0 million as of the prior June 30th, and (4) the date on which we have issued more than $1.0 billion innon-convertible debt securities during the prior three-year period. We cannot predict if investors will find our Common Stockcommon stock less attractive because we may rely on these exemptions. If some investors find our Common Stockcommon stock less attractive as a result, there may be a less active trading market for our Common Stockcommon stock and our stock price may suffer or be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
Our executive officers, directors and principal stockholders willmay continue to maintain the ability to control or significantly influence all matters submitted to stockholders for approval and under certain circumstances Vivo Ventures, Technology Partners, Forward Ventures and its affiliates may have control over key decision making.
Our executive officers, directors and principal stockholders own a majority of our outstanding Common Stock.common stock. Entities associated with Vivo Ventures, Oracle Investment Management, Birchview Fund, Jack W. Schuler, 683 Capital Partners, Forward Ventures and our Chairman, Ernest Mario,Technology Partners, as of December 31, 2015,2017, beneficially own approximately 59%77.6% of our Common Stock.common stock. As a result, the forgoingforegoing group of stockholders are able to
control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these stockholders will control the election of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.
We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management has devoted and will be required to continue to devote substantial time to new compliance initiatives.
We have incurred and will continue to incur significant legal, accounting and other expenses as a public company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the other rules and regulations of the SEC, and the rules and regulations of The NASDAQ Capital Market, or NASDAQ. The expenses of being a public company are material, and compliance with the various reporting and other requirements applicable to public companies requires considerable time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and national securities exchanges have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. These rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, these rules and regulations may make it difficult and expensive for us to obtain adequate director and officer liability insurance, and we may be required to accept reduced policy limits on coverage or incur substantial costs to maintain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified personnel to serve on our boardBoard of directors,Directors, our board committees, or as executive officers.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404, beginning with our Annual Report on Form10-K for the fiscal year ended December 31, 2014, which was filed March 13, 2015. In addition, we will be required
If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.
Our ability to use our net operating loss carry forwards and certain other tax attributes maywill be limited.
Our ability to utilize our federal net operating loss, carryforwards and federal tax credit maywill be limited under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code. The limitations apply if an “ownership change,” as defined by Section 382, occurs. Generally, an ownership change occurs if the percentage of the value of the stock that is owned by one or more direct or indirect “five percent shareholders” increases by more than 50% over their lowest ownership percentage at any time during the applicable testing period (typically three years). IfDuring the years ended December 31, 2016, we have experienced an “ownership change” at any time since, and in the year ended December 31, 2017 our formation, we may already be subject to limitations onacquisition of Essentialis resulted in an ownership change, of which both changes will limit our ability to utilize our existing and acquired net operating losses and other tax attributes to offset taxable income. In addition, future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change” and, consequently, Section 382 and 383 limitations. As a result, if we earn net taxable income, our ability to use ourpre-change net operating loss carryforwards and other tax attributes
As our warrant holders exercise their warrants into shares of our Common Stock,common stock, our stockholders will be diluted.
The exercise of some or all of our warrants results in issuance of common sharesstock that dilute the ownership interests of existing stockholders. Any sales of the Common Stockcommon stock issuable upon exercise of the warrants could adversely affect prevailing market prices of our Common Stock.
If holders of our warrants elect to exercise their warrants and sell material amounts of our Common Stockcommon stock in the market, such sales could cause the price of our Common Stockcommon stock to decline, and the potential for such downward pressure on the price of our Common Stockcommon stock may encourage short selling of our Common Stockcommon stock by holders of our warrants or other parties.
If there is significant downward pressure on the price of our Common Stock,common stock, it may encourage holders of our warrants, or other parties, to sell shares by means of short sales or otherwise. Short sales involve the sale, usually with a future delivery date, of Common Stockcommon stock the seller does not own. Covered short sales are sales made in an amount not greater than the number of shares subject to the short seller’s right to acquire Common Stock,common stock, such as upon exercise of warrants. A holder of warrants may close out any covered short position by exercising all, or a portion, of its warrants, or by purchasing shares in the open market. In determining the source of shares to close out the covered short position, a holder of warrants will likely consider, among other things, the price of Common Stockcommon stock available for purchase in the open market as compared to the exercise price of the warrants. The existence of a significant number of short sales generally causes the price of Common Stockcommon stock to decline, in part because it indicates that a number of market participants are taking a position that will be profitable only if the price of the Common Stockcommon stock declines.
Under certain circumstances we may be required to settle the value of the Series A, WarrantsSeries C and Series C2017 PIPE Warrants in cash.
If, at any time while the Series A, Warrants and Series C and 2017 PIPE Warrants, or the Warrants, are outstanding, we enter into a “Fundamental Transaction” (as defined in the Series A Warrant, and Series C and 2017 PIPE Warrant Agreements), which includes, but is not limited to, a purchase offer, tender offer or exchange offer, a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,spin-off or other scheme of arrangement), then each registered holder of outstanding Series A Warrants and Series C Warrants as at any time prior to the consummation of the Fundamental Transaction, may elect and require us to purchase the Series A and Series C Warrants held by such person immediately prior to the consummation of such Fundamental Transaction by making a cash payment in an amount equal to the Black Scholes Value of the remaining unexercised portion of such registered holder’s Series A Warrants and Series C Warrants.
We might not be able to maintain the listing of our securities on The NASDAQ Capital Market.
We have listed our Common Stockcommon stock and Series A Warrants on the NASDAQ Capital Market.NASDAQ. We might not be able to maintain the listing standards of that exchange, which includes requirements that we maintain our shareholders’ equity, total value of shares held by unaffiliated shareholders, and market capitalization above certain specified levels. On July 17, 2015, we received a notice from the NASDAQ informing us that the NASDAQ Listing Rules, or the Rules, require listed securities to maintain alevels and minimum Market Valuebid requirement of Listed Securities, or MVLS, of $35 million. Our MVLS for the 30 consecutive business days preceding July 17, 2015 no longer met this requirement and consequently, a deficiency occurred with respect to the Rules. The Rules also provided us with a compliance period of 180 calendar days, which ended on January 13, 2016, in which to regain compliance. On January 12, 2016, we received a letter from NASDAQ indicating that we had regained compliance: however, since we$1.00 per common share. We do not expect to become profitable for some time after the filing of this prospectus,and there is a risk that our shareholders’ equity could fall below the $2.5 million level required by NASDAQ. If we do not regain compliance with the NASDAQ Capital Market, whichminimum bid requirement or our shareholders’ equity falls below $2.5 million, it will cause us to
Due to the speculative nature of warrants, there is no guarantee that it will ever be profitable for holders of the warrants to exercise the warrants.
The warrants we have issued and outstanding do not confer any rights of Common Stockcommon stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of Common Stockcommon stock at a fixed price for a limited period of time. Specifically, holders of Series A Warrants may exercise their right to acquire the Common Stockcommon stock and pay an exercise price of $6.50$32.50 per share prior to the expiration of the five-year term on November 12, 2019, after which date any unexercised Series A Warrants will expire and have no further value. Holders of Series C Warrants may exercise their right to acquire Common Stockcommon stock and pay an exercise price of $6.25$31.25 per share prior to the expiration of the five-year term on March 4, 2020. Holders of the 2017 PIPE Warrants are entitled to purchase one share of our common stock at an exercise price equal to $2.00 per share prior to at the earlier of (i) December 15, 2020 or (ii) 30 days following positive Phase III results for DCCR tablet in Prader-Willi syndrome.
Following amendment of the Series D Common Stock Purchase Warrants, the holders may exercise their right to acquire Common Stockcommon stock and pay an amended exercise price of $2.46$8.75 per share prior to the expiration of the five-year term on October 15, 2020. In certain circumstances, the Series A Warrants, Series C Warrants, and Series D Warrants may be exercisable on a cashless basis. There can be no assurance that the market price of the Common Stockcommon stock will ever equal or exceed the exercise price of the warrants, and, consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our Common Stockcommon stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Common Stockcommon stock could decrease, which might cause our stock price and trading volume to decline.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our Common Stock,common stock, thereby depressing the market price of our Common Stock.common stock. In addition, these provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our boardBoard of directors.Directors. Because our boardBoard of directorsDirectors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include the following:
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Our employment agreements with our executive officers may require us to pay severance benefits to any of those persons who are terminated in connection with a change in control of us, which could harm our financial condition or results.
Certain of our executive officers are parties to employment agreements that contain change in control and severance provisions providing for aggregate cash payments of up to approximately $2.3 million for severance and other benefits and acceleration of vesting of stock options with a value of approximately $1.1 million,vesting in the event of a termination of employment in connection with a change in control of us. The accelerated vesting of options could result in dilution to our existing stockholders and harm the market price of our Common Stock.common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.
Because we do not anticipate paying any cash dividends on our Common Stockcommon stock in the foreseeable future, capital appreciation, if any, will be our stockholders’ sole source of gain.
We have never declared or paid cash dividends on our Common Stock.common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of
existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our Common Stockcommon stock will be our stockholders’ sole source of gain for the foreseeable future.
The sale of our Common Stockcommon stock to Aspire Capitalinvestors in the 2017 PIPE Offering may cause substantial dilution to our existing stockholders and the sale of Common Stockcommon stock by Aspire Capitalthese investors could cause the price of our Common Stockcommon stock to decline.
On December 11, 2017, we have or may sell to Aspire Capital underentered into the AspireUnit Purchase Agreement plus 71,891 shareswith certain stockholders, pursuant to which we sold and issued in the 2017 Pipe Offering 8,141,116 immediately separable units at a price per unit of Common Stock that were commitment shares that we issued$1.84, for aggregate gross proceeds of approximately $15,000,000. Each unit consisted of one share of our common stock and a warrant to Aspire Capital. As of December 31, 2015, we have sold 505,585purchase 0.74 shares of our Common Stockcommon stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 Shares and corresponding warrants to Aspire Capital. The shares that were issued or may be issuedpurchase an aggregate of 6,024,425 Warrant Shares, together referred to Aspire Capitalas the Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registration statement with the Aspire Purchase Agreement were registered and may be sold immediately after purchase by Aspire.SEC to register for resale the Resale Shares. The numberregistration statement was declared effective in February 2018.
The sale of shares ultimately offered for sale by Aspire Capital is dependent upon the number of shares we electour common stock to sell to Aspire CapitalSabby under the Aspire Purchase Agreement. Depending upon market liquidity at the time, sales of shares of our Common Stock under the Aspire2016 Sabby Purchase Agreement may cause substantial dilution to our existing stockholders and the tradingsale of common stock by Sabby could cause the price of our Commoncommon stock to decline.
We have also registered for sale the shares of common stock underlying the Series B Convertible Preferred Stock sold and issued, or available for sale and issuance, to decline. Aspire CapitalSabby pursuant to the 2016 Sabby Purchase Agreement. Sabby may sell all, some or none of our shares that it holds or comes to hold under the Aspire2016 Sabby Purchase Agreement. The issuance of the shares of common stock underlying the Series B Convertible Preferred Stock and the amended Series D Common Stock Purchase Warrants to Sabby may cause substantial dilution to our existing stockholders, and the sale of the underlying shares of common stock by Sabby could cause the price of our common stock to decline. The sale of a substantial number of shares of our Common Stockcommon stock by Aspire Capital,Sabby, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, except as limited by theThe 2016 Sabby Purchase Agreement we have the right to control the timing and amount of sales of our shares to Aspire Capital, and the Aspire Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us.
Not applicable.
Facilities
Our headquarters are located at 1235 Radio Road, Suite 110,principal facilities consist of office space in Redwood City, California, 94065, where we leasewhich also contains space for Capnia’s final assembly and calibration facility for CoSense. We currently occupy approximately 8,17113,436 square feet of office space under a non-cancelable operating lease that expiresterminates in in JulyAugust 2019. An additional 5,265 square feet of office space became part of the lease agreement on March 1, 2016.
We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased on commercially reasonable terms to accommodate any future growth.
On February 16, 2017, a purported stockholder class action lawsuit captioned Garfield v. Capnia, Inc., et al., Case No.C17-00284 was filed in Superior Court of the State of California, County of Contra Costa against us and certain of our officers and directors, or the Lawsuit. The Lawsuit alleged, generally, that our directors breached their fiduciary duties to our stockholders by seeking to sell control of the company through an allegedly defective process, and on unfair terms. The Lawsuit also alleged that defendants failed to disclose all material facts concerning the merger with Essentialis to stockholders. The Lawsuit sought, among other things, equitable relief that would have enjoined the consummation of the merger, compensatory and/or rescissory damages, and attorneys’ fees and costs. We are not currentlymade certain supplemental disclosures in a Current Report on Form8-K filed with the SEC on February 28, 2017 in connection with the plaintiff’s agreement to voluntarily dismiss plaintiff’s claims in the Lawsuit. The stipulation of dismissal is pending with the court.
The Company also agreed to pay $175,000 for dismissal of the lawsuit. This amount was accrued as a current liability on the balance sheet as of December 31, 2016 and recorded as an expense in general and administrative expense on the statement of operations for the year ended December 31, 2016.
We may, from time to time, be party to anylitigation and subject to claims that arise in the ordinary course of business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. We currently believe that these ordinary course matters will not have a material adverse effect on our business; however, the results of litigation orand claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other material legal proceedings.
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on NASDAQ under the symbol “CAPN”,“SLNO” and our Series A warrants are quoted on NSADAQ under the symbol “CAPNW.“SLNOW.” Our Series B warrants were not, and our Series C Warrants, and Series D Warrants and 2017 PIPE Warrants are not traded on a national securities exchange.
The following table sets forth the high and low sales prices per share of the common stock as reported on NASDAQ. Such quotations represent inter dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. Prior to
| High | Low | |||||||
2016 |
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First Quarter | $ | 9.25 | $ | 5.70 | ||||
Second Quarter | $ | 6.80 | $ | 5.45 | ||||
Third Quarter | $ | 5.90 | $ | 4.50 | ||||
Fourth Quarter | $ | 5.15 | $ | 3.65 | ||||
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2017 |
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First Quarter | $ | 4.55 | $ | 2.75 | ||||
Second Quarter | $ | 3.75 | $ | 2.35 | ||||
Third Quarter | $ | 3.75 | $ | 1.48 | ||||
Fourth Quarter | $ | 3.06 | $ | 1.32 | ||||
2018 | ||||||||
First Quarter (through March21, 2018) | $ | 2.29 | $ | 1.53 | ||||
As of March21, 2018, the datelast reported sale price of our IPO, there was no public market for our common stock. As a result, we have not set fourth quarterly information with respect to the high and low prices for our common stock for all ofon the two most recent fiscal years.
| Fiscal 2014 | High | Low | |||||
| Fourth Quarter (since November 18, 2014) | $ | 4.04 | $ | 1.49 | |||
| Fiscal 2015 | |||||||
| First Quarter 2015 | $ | 8.75 | $ | 1.18 | |||
| Second Quarter 2015 | 7.45 | 2.81 | |||||
| Third Quarter 2015 | 3.15 | 1.15 | |||||
| Fourth Quarter 2015 | 2.46 | 1.51 | |||||
As of March 1, 2016,2018, there were approximately 9082 shareholders of record for our common stock. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
Dividend Policy
We have never declared or paid cash dividends on our common stock, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Equity Securities
During the year ended December 31, 2015,2017, we issued the following unregistered securities:
On July 24, 2015,December 11, 2017, we entered into the AspireUnit Purchase Agreement with Aspire Capital Fund, LLC,certain stockholders, pursuant to which provides that, upon the termswe sold and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to anissued 8,141,116 immediately separable units at a price per unit of $1.84, for aggregate of $10.0 million in value of shares of our Common Stock over the 24-month term of the purchase agreement. During the quarter ended September 30, 2015, we issued an aggregate of 506,585 shares of Common Stock to Aspire Capital in exchange for approximately $1.4 million
2017 PIPE Offering. Each unit consisted of one share of our common stock and a warrant to purchase 0.74 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 Shares and corresponding warrants to purchase an aggregate of 6,024,425 Warrant Shares, together referred to as the Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registration statement with the SEC to register for resale the Resale Shares. The registration statement was declared effective in February 2018. |
Except as outlined above, none of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering. The Registrant believesWe believe that these transactions were exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the stock certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering. The Registrant believesWe believe that these transactions were exempt from the registration requirements of the Securities Act under Rule 701 promulgated under the Securities Act as offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. The recipients of securities in these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the stock certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.
(b) Use of Proceeds
There has been no material change in the planned use of proceeds from the transactions with Aspire and Sabby2017 PIPE Offering as described in our final prospectusesprospectus filed with the SEC pursuant to Rule 424(b) for each such transaction.
The following selected consolidated financial We derived the statements of operations data for the fiscal years ended December 31, Statement of Operations Data: Operating expenses Research and development Sales and marketing General and administrative Change in fair value of contingent consideration Total Operating expenses Operating loss Total interest and other income (expense), net Loss from continuing operations, net of income tax benefit Provision for income tax benefit Loss from continuing operations, net of provision for income tax benefit Loss from discontinued operations, net of tax effect Net loss Loss on extinguishment of convertible preferred stock Net loss applicable to common stockholders Weighted average common shares outstanding Basic and diluted Net loss per common share from continuing operations, basic and Net loss per common share from discontinued operations, basic and diluted Net loss per common share, basic and diluted Balance Sheet Data Cash and cash equivalents Working capital Total assets Total stockholders’ equityDATAdatainformation should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form10-K. The selected consolidated financial datainformation in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.20152017 and 20142016 and the balance sheetssheet data as of December 31, 20152017 and 20142016 from our audited financial statements appearing elsewhere in this filing. The data should be read in conjunction with the financial statements, related notes, and other financial information included herein. Years Ended December 31, 2017 2016 $ 3,068,742 $ 2,247,141 25,731 — 6,584,650 6,076,976 2,492,192 — 12,171,315 8,324,117 (12,171,315 ) (8,324,117 ) (1,553,002 ) 1,586,497 (13,724,317 ) (6,737,620 ) 1,650,467 — (12,073,850 ) (6,737,620 ) (3,593,575 ) (5,327,594 ) (15,667,425 ) (12,065,214 ) — 3,651,172 $ (15,667,425 ) $ (15,716,386 ) 8,977,795 3,101,496
diluted $ (1.35 ) $ (3.35 ) (0.40 ) (1.72 ) $ (1.75 ) $ (5.07 ) December 31 2017 2016 $ 17,099,507 $ 2,725,996 $ 16,261,038 $ 2,093,916 $ 39,021,665 $ 5,564,852 $ 26,534,908 $ 3,435,197
| Year Ended December 31, | |||||||
| Statement of Operations Data: | 2015 | 2014 | |||||
| Revenue | $ | 607,472 | $ | — | |||
| Cost of goods sold | $ | 352,683 | $ | — | |||
| Expenses | |||||||
| Research and development | 4,536,244 | 2,242,216 | |||||
| Sales and marketing | 1,737,470 | 252,359 | |||||
| General and administrative | 6,140,821 | 2,665,154 | |||||
| Total expenses | 12,414,535 | 5,159,729 | |||||
| Operating income (loss) | (12,159,746 | ) | (5,159,729 | ) | |||
| Interest and other income (expense) | |||||||
| Interest income | — | 1,085 | |||||
| Interest expense | — | (4,130,394 | ) | ||||
| Other income (expense), net | (3,748,800 | ) | (3,948,578 | ) | |||
| Net loss | $ | (15,908,546 | ) | $ | (13,237,616 | ) | |
| Weighted average common shares outstanding | |||||||
| Basic and diluted | 9,425,880 | 1,270,033 | |||||
| Net loss per share | |||||||
| Basic and diluted | $ | (1.69 | ) | $ | (10.42 | ) | |
| December 31 | |||||||
| Balance Sheet Data | 2015 | 2014 | |||||
| Cash and cash equivalents | $ | 5,494,523 | $ | 7,956,710 | |||
| Working capital | 3,211,565 | 7,048,533 | |||||
| Total assets | 8,201,195 | 8,395,925 | |||||
| Total stockholders’ equity (deficit) | 3,223,816 | (11,189,973 | ) | ||||
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form10-K. This Annual Report onForm 10-K contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” “plan,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of this Annual Report onForm 10-K and elsewhere in this report. The forward-looking statements in this Annual Report onForm 10-K represent our views as of the date of this Annual Report onForm 10-K. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report onForm 10-K.
Business Overview
Soleno Therapeutics, Inc. (formerly known as Capnia, Inc.) (the “Company”) was incorporated in the State of Delaware on August 25, 1999, and commercialize neonatologyis located in Redwood City, California. On May 8, 2017, the Company received stockholder approval to amend the Amended and Restate Certificate of Incorporation of the Company to change the name of the Company to Soleno Therapeutics, Inc. The Company was initially established as a diversified healthcare company that developed and commercialized innovative diagnostics, devices and diagnostics. We also have a therapeutics platform based on our proprietary technology foraddressing unmet medical needs, which consisted of: precision metering of gas flow.
The Company’s wholly-owned subsidiary NeoForce, Inc., or Bemes,
On December 22, 2016, we entered into the Merger Agreement with Essentialis, Inc. Essentialis’s efforts prior to the merger were focused primarily on developing and testing product iscandidates that target the T-piece resuscitator and related consumable, which delivers consistent pre-set inspiratory pressure and positive end-expiratory pressures. Other products include temperature probes, scales, surgical tables and surfaces.
The Company subsequently explored opportunities to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses. Accordingly, and pursuant to ASC205-20-45-10, the assets and liabilities related to the discontinued operations of CoSense, NFI and Serenz are presented separately in a pilot clinical trialthe Balance Sheet as held for sale items, and the related operations reported herein for the CoSense, NFI and Serenz businesses are reported as discontinued operations in 2016.
The Company determined to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses in order to focus ouron the development and commercialization of novel therapeutics for the treatment of rare diseases. Our current research and development efforts are primarily focused on additional diagnostic products based onadvancing our Sensalyze Technology Platform, a portfolio of proprietary methods and algorithms which enables CoSense and can be applied to detect a variety of analytes in exhaled breath, as well as other productslead candidate, DCCR tablets for the neonatology market. Our current development pipeline includes proposed diagnostic devices for asthmatreatment of PWS, into late-stage clinical development.
The Company sold NFI in children, assessment of blood carbon dioxide, or CO
On December 4, 2017, we, and our wholly-owned subsidiary, Capnia, Inc., a Delaware corporation, or Capnia, entered into a joint venture with OAHL with the purpose of developing and commercializing CoSense. See the section titled “Business—Joint Venture for CoSense” for more information.
We continue to separately evaluate alternatives for our Serenz portfolio.
No stock options were exercised during 2017 and during the year ended December 31, 2016, we received $70,000 from the exercise of stock options.
During the year ended December 31, 2015,2016, we issued an aggregateimplemented plans to reduce our operating expenses, including reducing our workforce, eliminating outside consultants, reducing legal fees and implementing a plan to allow Board members to receive common stock in lieu of 506,585 shares of Common Stock to Aspire Capital in exchange for approximately $1.4 million.
On October 12, 2015, we entered into6, 2017, the Sabby Purchase Agreement with funds managed by Sabby Management, LLC,Company effected a one-for-five (1:5) reverse stock split of its then outstanding common stock and, accordingly, all common share and per share data are retrospectively restated to purchase up to $10 million of Series A Convertible Preferred Stock, or Preferred Stock, together with related Series D Warrants to purchase shares of our Common Stock. The salegive effect of the Preferred Stock was set to take place in two separate closings. On October 15, 2015, the date of the first closing, we received proceeds of approximately $4.1 million, net of $0.4 million in estimated expenses. On January 8, 2016, the date of the second closing, we received proceeds of approximately $5 million, net of $0.5 million in estimated expenses.
As of December 31, 2015,2017, we had an accumulated deficit of $86$114.0 million, primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, potentially including sales of our neonatology products, therapeutic products, other diagnostic products, license fees, milestone payments, and research and development payments in connection with potential future strategic partnerships, we have, to date, generated revenue only from the 2013 license agreement pertaining to Serenz, and a minimal amount of$2.6 million in revenue from our neonatology products. The GSK agreement terminatedproducts and $0.2 million in June 2014, and we may not generate future licensing revenue.government grants; these activities are reported as discontinued operations in the accompanying consolidated financial statements of the Company. We may never be successful in commercializing our novel therapeutic and in divesting, selling or otherwise disposing of our existing neonatology products therapeutic products or in developing additionalrelated therapeutic products. Accordingly, we expect to incur significant losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.
Financings
Sabby 2016 Stock Purchase
On June 29, 2016, we entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to which we agreed to sell to Sabby, in a private placement, an aggregate of up to 13,780 shares of our research and development efforts to additional productsSeries B Convertible Preferred Stock at an aggregate purchase price of $13,780,000, which shares are convertible into 2,756,000 shares of our Common Stock, based on a fixed conversion price of $5.00 per share on anas-converted basis. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. In connection with the 2016 Sabby Purchase Agreement, we also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were originally purchased by Sabby under
the 2015 Sabby Purchase Agreement and which shares represent 841,081 shares of Common Stock on anas-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After the repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, the Company received approximately $5.6 million of net proceeds.
Aspire Stock Purchase
On January 27, 2017, the Company entered into a Common Stock Purchase Agreement (the “2017 Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $17.0 million in value of shares of our Sensalyze Technology Platform,Common Stock over the30-month term of the 2017 Aspire Purchase Agreement. The Company issued Aspire Capital 141,666 shares of Common Stock as commitment shares under the 2017 Aspire Purchase Agreement. The 2017 Aspire Purchase Agreement was terminated upon the closing of the 2017 PIPE Offering.
2017 PIPE Offering
On December 11, 2017, the Company entered into the Unit Purchase Agreement with purchasers of the Company’s securities pursuant to which the Company sold and issued 8,141,116 immediately separable units at a portfolioprice per unit of proprietary methods$1.84 for aggregate gross proceeds of approximately $15,000,000. Each unit consisted of one share of the Company’s common stock and algorithms which enables CoSense and can be applieda warrant to detect a variety of analytes in exhaled breath.
Recent Developments
In January 2018, a fund managed by Sabby converted an aggregate of 1,000 shares of their Series B Convertible Stock into 200,000 shares of Common Stock.
On February 2, 2018, the Company issued 47,766 shares of Common Stock to move forward with pilot salesmembers of Serenz to pharmacies in the E.U.its Board of Directors as compensation for Board of Directors fees earned during the second quarter of 2016 to gather commercial feedback in preparation of a possible full launch of Serenz later in 2016.
Financial overview
Summary
We have not generated net income from operations to date, and, at December 31, 20152017 and December 31, 2014,2016, we had an accumulated deficit of approximately $86$114.0 million and $70$98.3 million, respectively, primarily as a result of research and development and general and administrative expenses. We may never be successful in commercializing our neonatologynovel therapeutics products including CoSense, therapeutic products or in developing additional products.for the treatment of rare diseases. Accordingly, we expect to incur significant losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.
Revenue recognition
We apply the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605,
Revenue Recognition, to recognize revenue. We begin recognizing revenue when persuasive evidence of an arrangement exists, such as a contract or purchase order, delivery has occurred, no significant obligations with regard to implementation or integration exist, the fee is fixed or determinable, and collectability is reasonably assured.Research and development expenses
Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits, consultant fees, prototype expenses, certain facility costs and other costs associated with clinical trials, net of reimbursed amounts. Costs to acquire technologies to be used in research and development that have not reached technological feasibility, and have no alternative future use, are expensed to research and development costs when incurred.
The Company recorded the value of contingent future consideration to be paid for the acquisition of Essentialis as a liability in March 2017 at the date of the acquisition, and the change in fair value of such consideration is recorded in Research and Development expenses for the year ended December 31, 2017.
Sales and marketing expenses
Sales and marketing expenses consist principally of personnel-related costs, professional fees for consulting expenses, and other expenses associated with commercial activities. We anticipate these expenses will increase significantly in future periods, reflecting the increased level of sales and marketing activity necessary for the commercial launch of CoSense.
General and administrative expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, insurance, rent, and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure, other administrative expenses and increased professional fees associated with being a public reporting company.
Other income (expense), net
Other income (expense), net is primarily comprised of changes in the fair value of the Series A, Series BC and Series C2017 PIPE common stock warrant liabilities.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations are based upon our audited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On anon-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 23 to our audited financial statements contained herein.
Series BA, Series C and the 2017 PIPE Warrants
We account for the Series BA, Series C and 2017 PIPE warrants, collectively referred to as the Warrants, issued in connection with our IPO in accordance with the guidance in Accounting Standards Codification (ASC) 815-40.ASC 815Derivatives and Hedging. The Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. 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 cashless exercise provisioncash settlement feature that allows for exerciseprecludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would be computed using the warrants at any time between four and fifteen months after issuance, on a cashless basis for a number of common shares that increases asBlack Scholes Option Pricing Model, which is equivalent to fair value computed using the market price of our common stock decreases, and exercisable at a discount to the price of our common stock at the time. The terms of the Series B warrants do not explicitly limit the potential number of shares, thereby the exercise of the B warrants could result in our obligation to deliver potentially unlimited number of shares upon settlement. As such, share settlement in not within our control and as provided under ASC 815-40, the warrants do not meet the criteria for equity treatment and are recorded as a liability. Accordingly, weBinomial Lattice Valuation Model.
We classified the Series B warrantsWarrants as liabilities at their fair market value at the date of the IPO and willre-measure the warrants at each balance sheet date until they are exercised or they expire. Any change in the fair value is recognized as other income (expense) in our statementthe Statement of operations.
Series D Warrants
We account for the Series D Warrants in accordance with the guidance in ASC 815
Derivatives and Hedging. The Series D Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. They also contain a cashless exercise feature that provides for their net share settlement at the option of the holder in the event that there is no effective registration statement covering the continuous offer and sale of theSeries A and Series B Convertible Preferred Stock
We classified our Series A and Series B Convertible Preferred Stock as permanent equity on our balance sheet in accordance with authoritative guidance for the classification and measurement of hybrid securities and distinguishing liability from equity instruments. The preferred stock is not redeemable at the option of the holder.
Further, we evaluated our Series A and Series B Convertible Preferred Stock and determined that it is considered an equity host under ASC 815,
Derivatives and Hedging. In making this determination, we followed the whole instrument approach which compares an individual feature against the entire preferred stock instrumentwhich includes that feature. Our analysis was based on a consideration of the economic characteristics and risks of each series of preferred stock. More specifically, we evaluated all of the stated and implied substantive terms and features, including (i) whether the preferred stock included redemption features, (ii) how and when any redemption features could be exercised, (iii) whether the holders of preferred stock were entitled to dividends, (iv) the voting rights of the preferred stock and (v) the existence and nature of any conversion rights. As a result, we concluded that the preferred stock represents an equity host, the conversion feature of all series of preferred stock is considered to be clearly and closely related to the associated preferred stock host instrument. Accordingly, the conversion feature in the preferred stock is not considered an embedded derivative that requires bifurcation.
Research and development expense
Research and development costs are expensed as incurred. Research and development expense includes payroll and personnel expenses;expenses, consulting costs;expenses, and external contract research and development expenses; and allocated overhead, including rent, equipment depreciation and utilities, and relate to both company-sponsored programs as well as costs incurred pursuant to reimbursement arrangements.expenses. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing contracts and purchase orders, reviewing the terms of our intellectual property agreements, communicating with our applicable personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees to:
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred. However, due to the nature of these estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies or other research activity.
Stock-based compensation expense
For the years ended December 31, 20152017 and December 31, 20142016 stock-based compensation expense was $942,369$1,000,251 and $345,435,$871,270, respectively of which, stock compensation expense of approximately $120,220 and
$132,000 was classified in discontinued operations, in 2017 and 2016, respectively. As of December 31, 20152017, we had $1,917,245$1.2 million of total unrecognized compensation expense, which we expect to recognize over a period of approximately 2.52.6 years. The intrinsic value of all outstanding stock options as of December 31, 20152017, was approximately $67,165.zero. We expect to continue to grant equity incentive awards in the future as we continue to expand our number of employees and seek to retain our existing employees, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.
Stock-based compensation costs related to stock options granted to employees and directors are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award. Stock options we grant to employees generally vest over four years.
The fair value of an equity award granted to anon-employee generally is determined in the same manner as an equity award granted to an employee. In most cases, the fair value of the equity securities granted is more reliably determinable than the fair value of the goods or services received. In June 2016, we granted 11,000 NSOs to sales representatives of Bemes, Inc. Of the 11,000 options granted, 5,499 options with a fair value of $26,355 vested immediately upon grant. Accelerated vesting of the remaining options was contingent on the satisfaction of certain performance requirements, which were not met. Regardless of not achieving accelerated vesting, the remaining options have a one year cliff vesting. As a result, we recognized $13,502 in expense for the remaining options during 2016, which vested during the first quarter of 2017. Total expense for the two groups of options reflects the fair value of our common stock on the applicable vesting commencement dates.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share of common stock could have been significantly different. These assumptions include:
| • | Expected volatility: We calculate the estimated volatility rate based on a peer index of common stock of comparable companies. |
| • | Expected term: We do not believe we are able to rely on our historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term for use in estimating the fair value-based measurement of our options. Therefore, we have opted to use the “simplified method” for estimating the expected term of options. |
| • | Risk-free rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to liquidity. |
| • | Expected dividend yield: We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero. |
There were 926,384622,755 options granted in the year ended December 31, 2014. There2017, and there were 955,713267,851 options granted in the year ended December 31, 2015.2016. In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our stock-based compensation expense calculations on a prospective basis.
Business combinations
Business combinations are recorded in accordance with ASC 805 and with recent guidance established by ASU2017-01 issued by the Financial Accounting Standards Board, or FASB, in January 2017. Business
The Company’s acquisition of Essentialis was determined to be an asset acquisition, and the total value of the purchase consideration was allocated to the asset acquired. The asset acquired was recorded as the sum of the estimated fair value of the shares issued on the completion of the merger, the estimated fair value of the shares to be issued under the holdback and milestone stock payment provisions in the future, and the shares to be issued, the estimated fair value of the contingent consideration to be paid for achieving certain commercial milestones in the future, and the value equivalent to the increase in the liability for deferred taxes resulting from the tax effect of the net assets and liabilities acquired.
Contingent consideration
Contingent consideration elements of a business combination are recorded in accordance with ASC 805 which provides that, when contingent consideration terms provide for future payment obligations, the obligation is measured at its fair value on the acquisition date, and the subsequent increase or decrease of the value of the estimated amounts of contingent consideration to be paid is be recognized as expense or income, respectively, in the statement of operations.
The Company’s agreement to pay the selling shareholders of Essentialis for achieving certain commercial milestones resulted in the recognition of a contingent consideration, which was recorded at the inception of the transaction, and subsequent changes to estimate of the amounts of contingent consideration to be paid will be recognized as expenses or income in the statement of operations. The fair value of the contingent consideration is based on the Company’s analysis of the likelihood of the drug indication moving from phase II through approval in the Federal Drug Administration approval process and then reaching the cumulative revenue milestones.
Impairment of Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair valuefairvalue of the identifiable assets acquired and liabilities assumed. Good willGoodwill is presumed to have an indefinite life and is not subject to amortization. Goodwill is reviewedWe test for impairment annuallyof goodwill on an annual basis in the fourth quarter and wheneverat any other time when events occur, or changes in circumstances indicate that the carrying valueamount of the goodwill may not be recoverable.
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors, an adverse action or assessment by a regulator, change in customer, target market and strategy, unanticipated competition, loss of key personnel, or the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed.
An assessment of qualitative factors may be performed to determine whether it is necessary to perform thetwo-step quantitative goodwill impairment test. If the result of the qualitative assessment is that it is more likely than not (i.e. greater than 50% likelihood) that the fair value of a reporting unit, is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required. At our testing date, we did not perform the qualitative assessment.
Under the quantitative test, if the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in the Consolidated Statements of Operations as “Impairment of goodwill.” Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures: amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties, using present value techniques of estimated future cash flows, or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.
Based on our organizational structure and our financial information during 2017 and 2016, we determined that we have onlyoperate in one operating segment and two reporting units. The only reporting unit underwith goodwill was the criteriaNeoForce (“NFI”) unit which is reported in ASC 280, Segment Reporting,discontinued operations in 2017 and accordingly, all2016, and in assets and liabilities held for sale at December 31, 2016.
During the fourth quarter of our goodwill is associated with our company. Our review of2016, we tested the NFI reporting unit’s goodwill for indicators of impairment is performed atunder the company level.
Under the first step of the goodwillauthoritative guidance for impairment test, used to identify potential impairment, comparestesting, the fair value of the NFI reporting unit was determined based on the income approach, which estimates fair value based on the future discounted cash flows. We assumed a cash flow period of 5 years, annual revenue growth rates of 38.2% to its carrying63.9%, a discount rate of 20.5%, and a terminal value equivalent to one times final year sales. While projected revenue growth is above average, beginning revenue is quite low and the acquisition of new customers, mainly hospitals and health plans, is expected to result in relatively large increments of growth. We also performed sensitivity analyses to estimate the effect of significantly lower revenue growth on estimated fair value. IfWe believe the assumptions and rates used in the impairment test are reasonable, but they are judgmental, and variations in any of the assumptions or rates could result in a materially different calculation of impairment. The determination of estimated fair value of goodwill required the reporting unit exceeds its carrying amount, goodwilluse of significant unobservable inputs which are considered Level 3 fair value measurements. Based on the reporting unit is considered not impaired, and the secondfirst step of the authoritative guidance on impairment test is not required.
The NFI reporting unit was acquired during the carrying value andfourth quarter of 2015. We had no impairment existed.
Income Taxes
We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that will more likely than not be realized.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenues and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future. We have recorded a deferred tax asset in jurisdictions where ultimate realization of deferred tax assets is more likely than not to occur.
We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.
We account for uncertainty in income taxes as required by the provisions of ASC Topic 740,
Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available evidenceindicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.
In addition, the use of net operating loss and tax credit carryforwards may be limited under Section 382 of the Internal Revenue Code in certain situations where changes occur in the stock ownership of a company. In the event that we have had a change in ownership, utilization of the carryforwards could be restricted.
Results of Continuing Operations
Comparison of the Years Ended December 31, 20152017 and 2014
Year Ended December 31, | Increase (decrease) | |||||||||||||
| 2015 | 2014 | Amount | Percentage | |||||||||||
| Revenue | $ | 607,472 | $ | — | $ | 607,472 | N/A | |||||||
| Cost of goods sold | 352,683 | — | 352,683 | N/A | ||||||||||
| Gross profit | 254,789 | — | 254,789 | N/A | ||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | 4,536,244 | 2,242,216 | 2,294,028 | 102 | % | |||||||||
| Sales and marketing | 1,737,470 | 252,359 | 1,485,111 | 100 | % | |||||||||
| General and administrative | 6,140,821 | 2,665,154 | 3,475,667 | 130 | % | |||||||||
| Total | 12,414,535 | 5,159,729 | 7,254,806 | 141 | % | |||||||||
| Income (Loss) from operations | (12,159,746 | ) | (5,159,729 | ) | (7,000,017 | ) | 136 | % | ||||||
| Interest income | — | 1,085 | (1,085 | ) | (100 | )% | ||||||||
| Interest expense | — | (4,130,394 | ) | 4,130,394 | (100 | )% | ||||||||
| Other income (expense), net | (3,748,800 | ) | (3,948,578 | ) | 199,778 | (5 | )% | |||||||
| Net loss | $ | (15,908,546 | ) | $ | (13,237,616 | ) | $ | (2,670,930 | ) | 20 | % | |||
| Year Ended December 31, | Increase (decrease) | |||||||||||||||
| 2017 | 2016 | Amount | Percentage | |||||||||||||
| (in thousands) | ||||||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | $ | 3,069 | $ | 2,247 | $ | 822 | 37 | % | ||||||||
Sales and marketing | 26 | — | 26 | — | ||||||||||||
General and administrative | 6,584 | 6,077 | 507 | 8 | % | |||||||||||
Change in fair value of contingent consideration | 2,492 | — | 2,492 | — | ||||||||||||
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Total | 12,171 | 8,324 | 3,847 | 46 | % | |||||||||||
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Loss from operations | (12,171 | ) | (8,324 | ) | (3,847 | ) | 46 | % | ||||||||
Change in fair value of warrants, income (expense) | (967 | ) | 1,667 | (2,634 | ) | 158 | % | |||||||||
Cease-use income (expense) | 4 | (94 | ) | 98 | 104 | % | ||||||||||
Other income (expense) | (590 | ) | 13 | (603 | ) | 4,638 | % | |||||||||
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Interest and other income (expense), net | (1,553 | ) | 1,586 | (3,139 | ) | 198 | % | |||||||||
Loss from continuing operations before provision for tax benefit | (13,724 | ) | (6,738 | ) | (6,986 | ) | 104 | % | ||||||||
Provision for tax benefit | 1,650 | — | 1,650 | — | ||||||||||||
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Loss from continuing operations | (12,074 | ) | (6,738 | ) | (5,336 | ) | 79 | % | ||||||||
Loss from discontinued operations: | ||||||||||||||||
Operating | (3,407 | ) | (5,327 | ) | 1,920 | 36 | % | |||||||||
Loss on sale of assets, net of tax effect | (186 | ) | — | (186 | ) | — | ||||||||||
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Total | (3,593 | ) | (5,327 | ) | 1,734 | 33 | % | |||||||||
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Net loss | $ | (15,667 | ) | $ | (12,065 | ) | $ | (3,602 | ) | 30 | % | |||||
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Revenue
The company has not commenced commercialization of DCCR, its current sole novel therapeutic product, and accordingly, through December 31, 2017, has generated no revenue was recognizedin continuing operations.
Research and development expense
Research and development expense of $3,069,000 for the year ended December 31, 2017 increased by $822,000 over 2016 resulting primarily from efforts directed toward development of DCCR which the Company acquired with the Essentialis acquisition during 2017.
Research and development expense devoted to continuing operations in the year ended December 31, 2014.2016, consists of approximately $950,000 of salaries and related benefit expenses for employees not directly committed to the discontinued research and development efforts, which are classified as discontinued operations, together with indirect expenses of rent, facilities, and consultants that indirectly support the Company’s general research and development efforts.
Sales and marketing expense
Sales and marketing expense of $26,000 for the year ended December 31, 2017 consisted of expense incurred to revise the Company’sweb-site. The company has not commenced commercialization of DCCR, its current sole novel therapeutic product, and accordingly, through December 31, 2017, has incurred no sales and marketing activities in continuing operations.
General and administrative expense
General and administrative expense of $6,584,000 for the year ended December 31, 2017 increased $507,000 over that of 2016 resulting primarily from amortizing $1.6 million of the patent intangible recorded in the Essentialis acquisition, which was partially offset by a reduction in expenditures of $1.1 million for professional fees directed to corporate and intellectual property activities.
General and administrative expense for the year ended December 31, 2016, increased $86,000 compared to 2015, due primarily to increases in legal and facilities related expenses of $283,000 and $71,000, respectively, which were partially offset by a reduction in consulting related services and salaries of $240,000 and $45,000, respectively.
Change in fair value of contingent consideration
The Company is obligated to make cash payments of up to a maximum of $30 million to Essentialis stockholders upon the achievement of certain future commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of the Essentialis merger agreement. The fair value of the liability for the contingent consideration payable by the Company achieving the commercial sales milestones of $100 million and $200 million was initially established as approximately $2,590,000 at the time of the merger and approximately $5,082,000 at December 31, 2017, based on the Company’s assessment that it could reach the commercial sales milestones of in 2023 and 2025, respectively.
Other income (expense), net
Net other expense of $1.5 million in the year ended December 31, 2017, decreased by $3.1 million from net other income of $1.6 million in 2016 primarily due to the expense resulting from the increase in the value of the liability for Series A and 2017 PIPE Warrants and to the approximated $600,000 value of the commitment shares issued to Aspire Capital. Other income in the year ended December 31, 2016 is comprised primarily of the decrease in the value of the liability for warrants by $1.7 million, which was partially offset by $100,000 ofcease-use expense.
Results of Discontinued Operations
Discontinued operationsconsist of the Company’s activities previously dedicated to the development and commercialization of 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, products that included temperature probes, scales, surgical tables and patient surfaces. In March 2017, the Company determined to divest, sell or otherwise dispose of the CoSense, Neo Force, Inc., and Serenz businesses in order to focus on the development and commercialization of novel therapeutics for the treatment of rare diseases. The discontinued operations for the development and commercialization of innovative diagnostic devices and therapeutics are summarized below.
| Year Ended December 31, | Increase (decrease) | |||||||||||||||
| 2017 | 2016 | Amount | Percentage | |||||||||||||
Revenue | $ | 735,212 | $ | 1,450,788 | $ | (715,576 | ) | 49 | % | |||||||
Cost of goods sold | 820,098 | 1,509,306 | (689,208 | ) | 46 | % | ||||||||||
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Gross profit | (84,886 | ) | (58,518 | ) | (26,368 | ) | 45 | % | ||||||||
Operating expenses: | ||||||||||||||||
Research and development | 2,426,829 | 2,937,662 | (510,833 | ) | 17 | % | ||||||||||
Sales and marketing | 218,706 | 1,630,591 | (1,411,885 | ) | 87 | % | ||||||||||
General and administrative | 669,175 | 659,227 | 9,948 | 2 | % | |||||||||||
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Total operating expenses | 3,314,710 | 5,227,480 | (1,912,770 | ) | 37 | % | ||||||||||
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Income (Loss) from operations | (3,399,596 | ) | (5,285,998 | ) | (1,886,402 | ) | 36 | % | ||||||||
Other income (expense), net | (8,000 | ) | (19,896 | ) | (11,896 | ) | 60 | % | ||||||||
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Loss from discontinued operations: | ||||||||||||||||
Operating loss | (3,407,596 | ) | (5,305,894 | ) | (1,898,298 | ) | 36 | % | ||||||||
Loss on sale of assets, net of taxes | (185,979 | ) | — | (185,979 | ) | — | ||||||||||
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Loss from discontinued operations | (3,593,575 | ) | — | — | ||||||||||||
Provision for deferred taxes | — | 21,700 | (21,700 | ) | — | |||||||||||
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Loss from discontinued operations, net of tax effect | $ | (3,593,575 | ) | $ | (5,327,594 | ) | $ | (1,734,019 | ) | 33 | % | |||||
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Revenue
During the year ended December 31, 2015,2017, product revenues of $735,000 declined by $716,000 from 2016 due primarily to the sale of NeoForce in July 2017 after which no revenues were earned or reported. During the year ended December 31, 2016, we recognized $219,917 of government grant revenue from a new grant awarded during the second quarter of 2015, and $387,555$1.5 million of product revenue from sales of CoSense, Precision Sampling Sets and NFI products,products. Revenue increased by $843,000 during 2016 compared to the prior year primarily due to the inclusion of which $279,000a full year of revenue related to NFI products subsequent to the acquisition of NeoForce's assets in September 2015.
Research and development expense
Research and development expense inof $2.4 million for the year ended December 31, 2015 increased $2.3 million as compared2017 declined by $511,000 from 2016 due primarily to the year ended December 31, 2014. The increase was primarily due to increased headcountsale of NeoForce in July 2017, after which no further research and development materialswas directed to or recorded for that operation and for a curtailment of spending for the developmentSerenz product as the Company considered it a discontinued operation after the acquisition of our CoSense product.
Sales and marketing expense
Sales and marketing expense of $219,000 for the year ended December 31, 2014. Interest expense during 2014 was2017, which decreased by $1,412,000 compared to the prior year, consisted primarily of expenses incurred in the United Kingdom with efforts associated with the Company’s sales effort for its discontinued Serenz products primarily due to the outstanding debt balancecessation of $18 million fromsales of Serenz in the 2010-2014 convertible notesUnited Kingdom and to the reduction of sales of all medical device products in the United States. Sales and marketing expense for the year ended December 31, 2016 decreased $107,000 over the prior year, due to the decrease of direct sales personnel concurrent with signing a distributor agreement with Bemes.
General and administrative expense
General and administrative expense of $669,000 for the year ended December 31, 2017 was materially consistent with that converted atof 2016. General and administrative expense for the timeyear ended December 31, 2016, increased $509,000 compared to the prior year, due primarily to increases in salaries together with related benefits and legal expenses of approximately $359,000 and $177,000 respectively.
Other income (expense), net
Net other expense for the IPO in November 2014.
Liquidity and Capital Resources
On November 18, 2014, we completed our IPO, pursuant to which we issued 1,650,000 units (each unit consisting of one share of common stock, one Series A warrant and one Series B warrant) and received net proceeds of approximately $8.0 million, after deducting underwriting discounts and commissions and IPO related expenses.
During the year ended December 31, 2016, the Company implemented plans to reduce its expenses, including reducing its workforce, eliminating outside consultants, reducing legal fees and implementing a plan to allow Board members to receive common stock, in lieu of cash payments for serving on the Board and certain related committees.
On January 27, 2017, we entered into the 2017 Aspire Purchase Agreement with Aspire Capital, Fund, LLC, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0$17.0 million in value of shares of our Common Stock over the 24-month30-month term of the purchase agreement. DuringFurther, on the quarter ended September 30, 2015, we issueddate of the closing of the financing, as defined in the Merger Agreement, the Company sold to Aspire Capital, and Aspire Capital shall purchase from the Company an aggregate of 506,585$2.0 million of the Company’s common stock. The Company issued Aspire Capital 141,666 shares of Common Stock toas commitment shares under the 2017 Aspire Capital in exchange for approximately $1.4 million.
On December 11, 2017, the Company entered into a Securities Purchase Agreement, or the SabbyUnit Purchase Agreement, with funds managed by Sabby Management, LLC,purchasers of the Company’s securities pursuant to which the Company sold and issued 8,141,116 immediately separable units at a price per unit of $1.84 for aggregate gross proceeds of approximately $15,000,000 Each unit consisted of one share of the Company’s common stock and a warrant to purchase up to $10 million0.74 of Series A Convertible Preferred Stock,a share of the Company’s common stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 shares of common stock, and corresponding warrants, or Preferred Stock, together with related Series Dthe 2017 PIPE Warrants, to purchase 6,024,425 shares of our Common Stock.common stock. Soleno refers to the Shares and the Warrant Shares collectively as the Resale Shares. The saleCompany also granted
certain registration rights to the selling stockholders pursuant to the Unit Purchase Agreement pursuant to which, among other things, the Company prepared and filed a registration statement with the SEC to register for resale the Resale Shares. The registration statement was declared effective in February 2018.
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 Preferred Stock is expectedbreakdown 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 take place in two separate closings. On October 15, 2015, the datea primarily therapeutic drug product company. Going forward, OAHL will be responsible for funding a portion of the first closing, we received proceedsCapnia operations. As of approximately $4.1 million, netDecember 31, 2017, OAHL had acquired no shares of $0.4 million in estimated expenses. On January 8, 2016, the date of the second closing, we received proceeds of approximately $5 million, net of $0.5 million in estimated expenses.
At December 31, 2015,2017, we had cash and cash equivalents of $5.5$17.1 million, a majority of which is$16.8 million was invested in a money market fund at anAAA-rated financial institution.
We expect to incur substantial expenditures in the foreseeable future for the clinical trial, development and potential commercialization of Serenz and CoSense products, as well as clinical trials for our therapeutic products.the DCCR product. We may continue to require additional financing to develop our future products and fund operations for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. We anticipate that we may need to raise substantial additional capital, the requirements of which will depend on many factors, including:
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 Serenz.
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.
Cash flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| Cash Flows from Continuing Operations: | |||||||
| Net cash provided by (used in) operating activities | $ | (10,299,330 | ) | $ | (4,484,362 | ) | |
| Net cash used in investing activities | (1,320,777 | ) | (30,683 | ) | |||
| Net cash provided by financing activities | 9,157,920 | 11,202,985 | |||||
| Net increase (decrease) in cash and cash equivalents | $ | (2,462,187 | ) | $ | 6,687,940 | ||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
Cash Flows | ||||||||
Net cash used in continuing operating activities | $ | (6,918,768 | ) | $ | (7,260,708 | ) | ||
Net cash used in discontinued operating activities | (3,031,190 | ) | (6,237,272 | ) | ||||
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Net cash used in operating activities | (9,949,958 | ) | (13,497,980 | ) | ||||
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Net cash used in continuing investing activities | (561,998 | ) | (14,795 | ) | ||||
Net cash provided by (used in) discontinued investing activities | 940,780 | (23,885 | ) | |||||
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Net cash used in investing activities | 378,782 | (38,680 | ) | |||||
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Net cash provided by continuing by continuing financing activities | 23,944,687 | 10,768,133 | ||||||
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Net cash provided by financing activities | 23,944,687 | 10,768,133 | ||||||
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Net increase in cash and cash equivalents from continuing operations | 16,584,141 | 3,492,630 | ||||||
Net decrease in cash and cash equivalents from discontinued operations | (2,210,630 | ) | (6,261,157 | ) | ||||
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Net increase (decrease) in cash and cash equivalents | $ | 14,373,511 | $ | (2,768,527 | ) | |||
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Cash used in continuing operating activities
During the year ended December 31, 2015,2017, the Company used net cash of $6.9 million for continuing operating activities, resulting primarily from the loss from continuing operations of $12.1 million, which was adjusted for thenon-cash items consisting primarily of $1.6 million ofnon-cash expense for depreciation and amortization, $2.5 million of onnon-cash expense for the change in the fair value of contingent consideration for the acquisition of Essentialis, $0.9 million for thenon-cash expense associated with stock-based compensation, and $1.0 million for thenon-cash expense resulting from the change in fair value of the liability for warrants, all of which were partially offset by thenon-cash provision for income tax benefit in the amount of $1.6 million.
During the year ended December 31, 2016, net cash used in continuing operating activities was $10.2$7.3 million, which wasresulting primarily due tofrom the usenet loss from continuing operations of funds in our operations, as well as adjustments$6.8 million, adjusted fornon-cash items includingconsisting primarily of the $0.5$1.7 millionnon-cash income from the change in fair value of warrants and the Series C Warrants inducement chargeuse of $3.0 millioncash for increases in prepaid expenses and other long-term assets and the $0.9 million of stock based compensation expense, offset by increasesdecrease in accounts payable, which were offset by the $739,000 ofnon-cash stock-based compensation expense a $534,000 increase in accrued compensation and accrued liabilities of $1.5 million.
Cash used in operatingcontinuing investing activities in
In the year ended December 31, 2014 totaled $4.5 million, which2017, the Company used $573,000 of cash primarily for the payment of costs associated with the acquisition of Essentialis.
In the year ended December 31, 2016, cash was primarily due to a net loss, as well as adjustmentsused for non-cash items, including the change in the fair valuepurchases of preferred stock warrants of $3.9 million and the non-cash interest expense relating to convertible promissory notes of $4.1 million.
Cash used in investingprovided by continuing financing activities
During the year ended December 31, 2015, we used $1.02017, the Company obtained net cash of $23.9 million to acquire NeoForce. Cash used in investing activities inresulting from the year ended December 31, 2015 consisted primarilyproceeds of investment in equipment, change in restricted cash$10.0 million issuance of common stock immediately upon closing the acquisition of Essentialis together with the $15.0 million of proceeds from the issuance of common stock and payment to acquire patents.
During the year ended December 31, 2014,2016, cash used in investing activities consisted primarily of investment in equipment.
Cash used in discontinued operating activities
During the year ended December 31, 20152017, the Company used net cash provided by financingof $3.0 million for discontinued operating activities, was $9.2 million, consistingresulting primarily of $4.2 million in proceeds from issuance of Common Stock as a result of the exercise of Series A Warrants and Series B Warrants, issuance of Common Stock to Aspire Capital for $1.4 million and the $0.3 million received from the exerciseloss from discontinued operations of Common Stock options, offset by payment of IPO costs$3.6 million, adjusted for thenon-cash expenses associated with stock compensation and Series B transaction costs of $0.7 million and the repayment of the outstanding balance on our line of credit of $0.1 million.
During the year ended December 31, 2014,2016, the Company used $6.2 million net cash provided by financingin discontinued operating activities, was $11.2 million,resulting primarily from the net loss of $5.3 million from discontinued operations adjusted for the additional cash use of reducing accrued compensation and other current liabilities in the amount of $998,000, which was partially offset by $132,000 ofnon-cash stock-based compensation expense.
Cash used in discontinued investing activities
In the year ended December 31, 2017, the Company obtained approximately $941,000 from investing activities for discontinued operations resulting primarily from the sale of NFI operations in July 2017 that provided cash proceeds of $720,000 and from cash received from our joint-venture partner to reimburse operating expenses.
In the IPO.
Discontinued financing activities
The Company had no financing activities related to discontinued operations in 2017 nor in 2016.
Contractual Obligations and Commitments
As of December 31, 2015,2017, we had cash and cash equivalents of approximately $5.5 million. We believe that our cash resources are sufficient to meet our cash needs for at least the next 12 months.
The following table summarizes our contractual obligations as of December 31, 2015.
| Payments due by period | |||||||||||||||||||
Less than 1 year | 1 to 3 years | 4 to 5 years | After 5 years | Total | |||||||||||||||
| Lease obligations | $ | 698,945 | $ | 1,714,788 | $ | — | $ | — | $ | 2,413,733 | |||||||||
| Total | $ | 698,945 | $ | 1,714,788 | $ | — | $ | — | $ | 2,413,733 | |||||||||
| Payments due by period | ||||||||||||||||||||
| Less than 1 year | 1 to 3 years | 4 to 5 years | After 5 years | Total | ||||||||||||||||
Lease obligations | $ | 629,923 | $ | 334,747 | — | — | $ | 964,670 | ||||||||||||
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Total | $ | 629,923 | $ | 334,747 | — | — | $ | 964,670 | ||||||||||||
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We are obligated to make future payments to third parties underin-license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones. As the amount and timing of sublicense fees and the achievement and timing of these milestones are not probable and estimable, such commitments have not been included on our balance sheet or in the contractual obligations tables above. We are also obligated to make certain payments of deferred compensation to management upon completion of certain types of transactions. As the amount and timing of such payments are not probable and estimable, such commitments have not been included on our balance sheet or in the contractual obligations tables above.
On February 28, 2017, we settled the Lawsuit (see Note 7) by agreeing to pay $175,000 for dismissal of the Lawsuit. This amount was recorded as a current liability on the balance sheet as of December 31, 2016 and recognized as general and administrative expense in the statement of operations for the year ended December 31, 2016. The stipulation of dismissal is pending with the court.
Off-Balance Sheet Arrangements
As of December 31, 2015,2017, we had nooff-balance sheet arrangements as defined in Item 303(a)(4) of RegulationS-K as promulgated by the SEC.
Accounting Guidance Update
Recently AdoptedIssued Accounting Guidance
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $5.5$17.1 million at December 31, 2015. These amounts were2017. This balance was invested primarily in money market funds and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.
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To the Soleno Therapeutics, Inc. (formerly known as Capnia, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Soleno Therapeutics, Inc. (formerly known as Capnia, Inc.) (the “Company”) as of December 31, Explanatory Paragraph – Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on We conducted our audits in accordance with the standards of the Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2014. San Francisco, CA April 2, 2018Audit Committee of theand Shareholders20152017 and 2014, and2016, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity/(deficit)equity, and cash flows for each of the twoyears in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017and 2016, and the results of its operations and its cash flows for each of the two years then ended. in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.thesethe Company’s financial statements based on our audits.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includessupportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capnia, Inc., as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
(formerly known as Capnia, Inc. Consolidated Balance Sheets Assets Current assets Cash and cash equivalents Restricted cash Prepaid expenses and other current assets Current assets held for sale Total current assets Long-term assets Property and equipment, net Other assets Intangible assets, net Long-term assets held for sale Total assets Liabilities and stockholders’ equity Current liabilities Accounts payable Accrued compensation and other current liabilities Current liabilities held for sale Total current liabilities Long-term liabilities Series A warrant liability Series C warrant liability 2017 PIPE Warrant liability Contingent liability for Essentialis purchase price Other liabilities Long-term liabilities held for sale Total liabilities Commitments and contingencies (Note 7) Stockholders’ equity Preferred Stock, $.001 par value, 10,000,000 shares authorized: Series B convertible preferred stock, 13,780 shares designated at December 31, 2017, and December 31, 2016; 4,571 and 12,780 shares issued and outstanding at December 31, 2017, and at December 31, 2016, respectively. Liquidation value of zero. Common stock, $0.001 par value, 100,000,000 shares authorized, 19,238,972 and 3,357,387 shares issued and outstanding at December 31, 2017, and December 31, 2016, respectively. Additionalpaid-in-capital Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements December 31, 2015 December 31, 2014 Assets Current assets Cash and cash equivalents $ 5,494,523 $ 7,956,710 Accounts receivable 156,127 — Restricted Cash 35,000 20,000 Inventory 551,008 109,336 Prepaid expenses and other current assets 167,642 252,272 Total current assets 6,404,300 8,338,318 Long-term assets Property and equipment, net 85,745 57,607 Goodwill 718,003 — Other intangible assets, net 916,807 — Other assets 76,340 — Total assets $ 8,201,195 $ 8,395,925 Liabilities and stockholders’ equity (deficit) Current liabilities Accounts payable $ 695,056 $ 986,799 Accrued compensation and other current liabilities 1,632,679 201,457 Series B warrant liability 865,000 Line of credit and accrued interest — 101,529 Total current liabilities 3,192,735 1,289,785 Long-term liabilities Series A warrant liability 1,212,803 857,362 Series B warrant liability — 17,438,731 Series C warrant liability 462,437 Other liabilities 109,404 — Commitments and contingencies (Note 8) Stockholders’ equity (deficit) Series A convertible preferred stock, $0.001 par value, 40,000 shares authorized, 4,555 and 0 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively. 5 — Common stock, $0.001 par value, 100,000,000 shares authorized, 14,017,909 and 6,769,106 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively. 14,018 6,769 Additional paid-in-capital 89,456,466 59,141,405 Accumulated deficit (86,246,673 ) (70,338,127 ) Total stockholders’ equity (deficit) 3,223,816 (11,189,953 ) Total liabilities and stockholders’ equity (deficit) $ 8,201,195 $ 8,395,925 December 31,
2017 December 31,
2016 $ 17,099,507 $ 2,725,996 35,000 35,000 342,927 246,570 516,373 793,728 17,993,807 3,801,294 22,885 42,021 125,530 125,530 20,413,056 — 466,387 1,596,007 $ 39,021,665 $ 5,564,852 $ 633,104 $ 410,512 973,054 1,050,466 126,611 246,400 1,732,769 1,707,378 351,713 194,048 5,880 85,490 5,076,000 — 5,081,840 — 13,163 61,739 225,392 81,000 12,486,757 2,129,655 5 13 19,239 3,357 140,494,976 101,743,714 (113,979,312 ) (98,311,887 ) 26,534,908 3,435,197 $ 39,021,665 $ 5,564,852
(formerly known as Capnia, Consolidated Statements of Operations Operating Expenses Research and development Sales and marketing General and administrative Change in fair value of contingent consideration Total operating expenses Operating loss Interest and other income (expense) Cease-use income (expense) Change in fair value of warrants liabilities Other income (expense) Total other income (expense) Loss from continuing operations before provision for income tax benefit Provision for income tax benefit from continuing operations Loss from continuing operations Loss from discontinued operations: Operating loss Loss on sale of assets, net of tax effect Loss from discontinued operations Net loss Loss on extinguishment of convertible preferred stock Net loss applicable to common stockholders Loss per common share from continuing operations, basic and diluted Loss per common share from discontinued operations, basic and diluted Net loss per common share, basic and diluted Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share See accompanying notes to consolidated financial statements.Inc. 2015 2014 Product revenue $ 387,555 $ — Government grant revenue 219,917 Total revenue 607,472 — Cost of goods sold 352,683 — Gross profit 254,789 — Expenses Research and development 4,536,244 2,242,216 Sales and marketing 1,737,470 252,359 General and administrative 6,140,821 2,665,154 Total expenses 12,414,535 5,159,729 Operating income (loss) (12,159,746 ) (5,159,729 ) Interest and other income (expense) Interest income — 1,085 Other expense (183,565 ) (7,243 ) Interest expense — (4,130,394 ) Change in fair value of warrants liabilities (515,860 ) (3,941,335 ) Inducement charge for Series C warrants (3,049,375 ) — Net loss $ (15,908,546 ) $ (13,237,616 ) Basic and diluted net loss per common share $ (1.69 ) $ (10.42 ) Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share 9,425,880 1,270,033 For the Years Ended
December 31, 2017 2016 $ 3,068,742 $ 2,247,141 25,731 — 6,584,650 6,076,976 2,492,192 — 12,171,315 8,324,117 (12,171,315 ) (8,324,117 ) 4,167 (93,749 ) (967,055 ) 1,667,117 (590,114 ) 13,129 (1,553,002 ) 1,586,497 (13,724,317 ) (6,737,620 ) 1,650,467 — (12,073,850 ) (6,737,620 ) (3,407,596 ) (5,327,594 ) (185,979 ) — (3,593,575 ) (5,327,594 ) (15,667,425 ) (12,065,214 ) — 3,651,172 (15,667,425 ) $ (15,716,386 ) $ (1.35 ) $ (3.35 ) (0.40 ) (1.72 ) $ (1.75 ) $ (5.07 ) 8,977,795 3,101,496
(formerly known as Capnia, Inc.) CONSOLIDATED STATEMENTS OF Balances at January 1, 2016 Stock-based compensation Issuance of Series A Convertible Less transaction costs Issuance of common stock for Series B warrant cashless exercises Issuance of common stock through conversion of Series A preferred Issuance of common stock for stock option exercises Issuance of Series B Convertible Preferred Less transaction costs Redemption of Series A Convertible Preferred Issuance of common stock through conversion of Series B preferred Issuance of common stock to board members in lieu of cash payments for quarterly board fees Net Loss Balances at December 31, 2016 Stock-based compensation Issuance of common stock on conversion of Series B Convertible Preferred shares Issuance of common stock to board members in lieu of cash payments for quarterly board fees Issuance of common stock to acquire Essentialis Sale of shares under the 2017 Aspire Purchase Agreement Issuance of shares to Aspire Capital in lieu of commitment fees Rounding adjustment resulting from 1 for 5 reverse split Sale of shares to investors in the 2017 PIPE, net of costs of $1,172,485 Fair value at transaction date of warrants to purchase common stock under the 2017 PIPE Net Loss Balances at December 31, 2017 See accompanying notes to consolidated financial statementsCAPNIA, INC.CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY/(DEFICIT) Common Stock Additional
Paid-In
Capital Accumulated
Deficit Total
Stockholders’
Deficit Shares Amount Shares Amount Shares Amount Shares Amount Balances at January 1, 2014 31,250 $ 1,500,000 119,140 $ 6,862,939 715,039 $ 15,445,109 522,360 $ 522 $ 19,197,109 $ (53,393,268 ) $ (34,195,637 ) Stock-based compensation — — — — — — — — 345,435 — 345,435 Conversion of preferred stock to common stock in IPO (31,250 ) (1,500,000 ) (119,140 ) (6,862,939 ) (715,039 ) (15,445,109 ) 865,429 865 23,807,183 — 23,808,048 Stock warrant liability reclassification — — — — — — — — 1,220,718 — 1,220,718 Issuance of common stock in IPO (net of discounts & commission of $861,948) — — — — — — 1,650,000 1,650 9,844,902 — 9,846,552 Issuance of Series A & B warrants for overallotment exercise — — — — — — — — 18,975 — 18,975 Beneficial conversion feature in connection with related party convertible promissory notes — — — — — — — — 1,723,984 — 1,723,984 Conversion of 2010/2012 notes payable into common stock in IPO — — — — — — 3,165,887 3,166 15,406,944 — 15,410,110 Conversion of 2014 notes payable into units in IPO — — — — — — 552,105 552 2,511,567 — 2,512,119 Deferred IPO costs — — — — — — — — (1,830,450 ) — (1,830,450 ) Series B warrants treated as derivative liability — — — — — — — — (11,649,106 ) — (11,649,106 ) Series A warrants treated as derivative liability — — — — — — — — (1,494,259 ) — (1,494,259 ) Net loss — — — — — — — — — (13,237,616 ) (13,237,616 ) Balances at December 31, 2014 — — — — — — 6,769,106 6,769 59,141,405 (70,338,127 ) (11,189,953 ) Stock based compensation — — — — — — — — 942,369 $ — 942,369 Issuance of common stock for stock option exercises — — — — — — 83,848 84 293,489 $ — 293,573 Issuance of common stock for Series A warrant exercises — — — — — — 24,000 24 155,976 $ — 156,000 Issuance of common stock for Series B warrant exercises (net of transaction costs of $306,116) — — — — — — 619,512 619 3,720,094 $ — 3,720,713 Issuance of common stock for Series B warrant cashless exercises — — — — — — 5,879,560 5,880 416,660 $ — 422,540 Issuance of common stock for 2010/2012 warrant cashless exercises — — — — — — 13,407 13 (13 ) $ — — Contribution of Series B warrants — — — — — — — — 3,332 $ — 3,332 Derecognition of Series A warrant liability upon exercise — — — — — — — — 42,000 $ — 42,000 Derecognition of Series B warrant liability upon exercise — — — — — — — — 18,853,215 $ — 18,853,215 Issuance of shares in conjunction with BDDI asset purchase — — — — — — 50,000 50 112,350 $ — 112,400 Issuance of shares to Aspire Capital — — — — — — 71,891 72 183,250 $ — 183,322 Sales of shares through Aspire ATM vehicle — — — — — — 506,585 507 1,433,687 $ — 1,434,194 Issuance of Series A Convertible Preferred shares(net of transaction costs of $396,343) 4,555 5 — — — — — — 4,158,652 $ — 4,158,657 Net loss — — — — — — — — — $ (15,908,546 ) (15,908,546 ) Balances at December 31, 2015 4,555 5 — — — — 14,017,909 14,018 89,456,466 (86,246,673 ) 3,223,816 Series A Series B Additional
Paid-In
Capital Accumulated
Deficit Total
Stockholders’
Equity Convertible
Preferred Stock Convertible
Preferred Stock Common Stock Shares Amount Shares Amount Shares Amount 4,555 $ 5 — $ — 2,803,580 $ 2,804 $ 89,467,681 $ (86,246,673 ) $ 3,223,816 871,270 871,270 5,445 5 5,444,995 5,445,000 (374,661 ) (374,661 ) 97,040 97 593,487 593,584 (2,220 ) (2 ) 240,000 240 (238 ) — 11,683 12 70,091 70,103 13,780 14 13,779,986 13,780,000 (353,105 ) (353,105 ) (7,780 ) (8 ) (7,779,992 ) (7,780,000 ) (1,000 ) (1 ) 200,000 200 (199 ) — 5,084 5 24,400 24,405 (12,065,214 ) (12,065,214 ) — — 12,780 13 3,357,387 3,357 101,743,714 (98,311,887 ) 3,435,197 1,000,251 1,000,251 (8,209 ) (8 ) 1,641,800 1,642 (1,634 ) — 90,306 90 277,695 277,786 3,783,388 3,783 17,242,712 17,246,495 2,083,333 2,083 9,997,917 10,000,000 141,666 142 601,941 602,083 (24 ) — — — 8,141,116 8,141 13,819,380 13,827,521 (4,187,000 ) (4,187,000 ) (15,667,425 ) (15,667,425 ) — $ — 4,571 $ 5 19,238,972 $ 19,239 $ 140,494,976 $ (113,979,312 ) $ 26,534,908
(formerly known as Capnia, Inc. Consolidated Statements of Cash Flows Cash flows from operating activities: Net loss Loss from discontinued operations Loss from continuing operations Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Stock-based compensation expense Income tax benefit Board fees paid with common stock Change in fair value of stock warrants Change in fair value of contingent consideration Loss on disposition of equipment Inducement charge for Series C warrants Noncash expense of issuing shares to Aspire Capital Change in operating assets and liabilities: Prepaid expenses and other assets Other long-term assets Accounts payable Accrued compensation and other current liabilities Other long-term liabilities Net cash used in continuing operating activities Net cash used in discontinued operations Net cash used in operating activities Cash flows from investing activities: Costs of Essentialis acquisition Security deposit on sublease Purchase of property and equipment Net cash used in continuing investing activities Net cash provided by (used in) discontinued investing activities Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from issuance of common stock Proceeds from sale of common stock and common stock warrants Cash paid for the cost issuance of common stock and common stock warrants Proceeds from exercise of common stock options Net proceeds from issuance of Series A Convertible Preferred Net proceeds from issuance of Series B Convertible Preferred Redemption of Series A Convertible Preferred stock in conjunction with issuance of Series B Convertible Preferred stock Series A Convertible Preferred transaction costs paid Net cash provided by continuing financing activities Net cash provided by discontinued financing activities Net cash provided by financing activities Net increase in cash and cash equivalents from continuing operations Net decrease in cash and cash equivalents from discontinued operations Net increase (decrease) in cash and equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosure of cash flow information Cash paid for income taxes Supplemental disclosures of noncash investing and financing information Issuance of common stock for Essentialis acquisition Warrants issued in connection with sale of common stock Contingent cash consideration of Essentialis acquisition Costs of issuing common stock and common stock warrants recorded in accounts payable Conversion of Series A preferred to common stock Conversion of Series B preferred to common stock Series B preferred convertible stock transaction costs included in accounts payable Fixed asset purchases included in accounts payable De-recognition of Series B warrant liability through cashless exercise See accompanying notes to consolidated financial statements. 2015 2014 Cash flows from operating activities: Net loss $ (15,908,546 ) $ (13,237,616 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 108,228 28,516 Stock-based compensation expense 942,369 345,435 Loss on disposition of property and equipment — 7,727 Change in fair value of stock warrants 515,860 3,941,335 Non-cash interest expense relating to convertible promissory notes & amortization of discount on notes — 4,128,863 Inducement charge for Series C warrants 3,049,375 — Noncash expense of issuing shares to Aspire Capital 183,322 — Non-cash interest expense relating to line of credit — 1,529 Change in operating assets and liabilities: Accounts receivable (156,127 ) 149,605 Inventory (441,672 ) (109,336 ) Other receivables — — Prepaid expenses and other assets 84,630 (167,123 ) Other long-term assets (76,340 ) — Accounts payable 211,945 353,897 Accrued compensation & other current liabilities 1,187,626 72,806 Net cash used in operating activities (10,299,330 ) (4,484,362 ) Cash flows from investing activities: Acquisition of Neoforce assets (1,000,000 ) — Acquisition of BDDI asset (patent) (250,000 ) — Increase in restricted cash (15,000 ) — Purchase of property and equipment (55,777 ) (30,683 ) Net cash used in investing activities (1,320,777 ) (30,683 ) Cash flows from financing activities: Proceeds from exercise of common stock options 293,573 — Proceeds from exercise of Series A warrants 156,000 — Proceeds from exercise of Series B warrants 3,720,713 — Proceeds from issuance of common stock to Aspire Capital 1,434,194 — Proceeds from issuance of Series A Convertible Preferred 4,230,150 — Repayment of credit line (101,529 ) — Proceeds from issuance of preferred stock warrants — 1,946 Proceeds from issuance of convertible notes payable — 2,490,781 Proceeds from line of credit — 100,000 Proceeds from Initial Public Offering — 10,727,475 Initial Public Offering costs paid (575,181 ) (2,117,217 ) Net cash provided by financing activities 9,157,920 11,202,985 Net increase (decrease) in cash and cash equivalents (2,462,187 ) 6,687,940 Cash and cash equivalents, beginning of period 7,956,710 1,268,770 Cash and cash equivalents, end of period $ 5,494,523 $ 7,956,710 Supplemental disclosures of noncash investing and financing information Series A preferred convertible stock transaction costs included in Accounts Payable $ 71,493 $ — De-recognition of Series B warrant liability through cash exercise $ 6,747,765 $ — De-recognition of Series B warrant liability through cashless exercise $ 12,527,991 $ — De-recognition of Series A warrant liability through cash exercise $ 42,000 $ — BDDI patent purchase consideration included in accrued liabilities $ 200,000 $ — Shares issued as consideration for BDDI patent purchase $ 112,400 $ — Cashless exercise of 2010 and 2012 warrants $ 13 $ — Contribution of Series B warrants $ 3,332 $ — Initial Public Offering costs accrued and included in Accounts Payable $ — $ 575,181 Beneficial conversion feature related to the warrants to purchase shares of convertible preferred stock in connection with convertible promissory notes $ — $ 1,723,984 Issuance of warrants for the purchase of convertible preferred stock in connection with notes payable $ — $ 966,978 2014 notes payable converted into units in the IPO $ — $ 2,512,119 2010/2012 notes payable converted into common stock in conjunction with IPO $ — $ 15,410,110 For the Years Ended
December 31, 2017 2016 $ (15,667,425 ) $ (12,065,214 ) (3,593,575 ) (5,327,594 ) (12,073,850 ) (6,737,620 ) 1,611,271 18,670 880,031 739,232 (1,651,267 ) — 277,786 24,404 967,055 (1,667,117 ) 2,492,192 — — 768 — 602,083 — (96,356 ) (87,552 ) — (49,190 ) 190,630 (76,828 ) (78,303 ) 534,486 (40,040 ) 40,039 (6,918,768 ) (7,260,708 ) (3,031,190 ) (6,237,272 ) (9,949,958 ) (13,497,980 ) (572,592 ) — 13,163 — (2,569 ) (14,795 ) (561,998 ) (14,795 ) 940,780 (23,885 ) 378,782 (38,680 ) 10,000,000 — 15,008,158 — (1,063,471 ) — — 70,102 — 5,070,339 — 13,479,185 — (7,780,000 ) — (71,493 ) 23,944,687 10,768,133 — — 23,944,687 10,768,133 16,584,141 3,492,630 (2,210,630 ) (6,261,157 ) 14,373,511 (2,768,527 ) 2,725,996 5,494,523 $ 17,099,507 $ 2,725,996 $ 800 $ — $ 17,246,495 $ — $ 4,187,000 $ — $ 2,589,648 $ — $ 117,164 $ — $ — $ 1,200,000 $ — $ 1,000,000 $ — $ 52,290 $ — $ 11,200 $ — $ 593,584
(formerly known as Capnia, Inc. December 31, Notes to Consolidated Financial Statements2015
Note 1. Description of Business
Soleno Therapeutics, Inc. (formerly known as Capnia, Inc.) (the “Company” or “Soleno”) was incorporated in the State of Delaware on August 25, 1999, and is located in Redwood City, California. The Company developsinitially developed and commercializescommercialized neonatology devices and diagnostics. TheAdditionally, the Company also hashad a therapeutics platform based on its proprietary technology for precision metering of gas flow.
On September 2, 2015, the Company established NeoForce, Inc. ("NFI"(“NFI”), a wholly owned subsidiary incorporated in the State of Delaware. OnDelaware, and on September 8, 2015, NFI, acquired substantially all of the assets of an unrelated privately held company NeoForce Group, Inc. ("NeoForce"(“NeoForce”) in exchange for an upfront cash payment of $1.0 million and royalties on future sales (see Note 15).sales. NeoForce developeddevelops innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets that the Company is now marketingmarketed through NFI.
On April 27, 2015, the Company established Soleno Therapeutics UK Ltd. (formerly Capnia UK Limited,Limited), a wholly owned foreign subsidiary in the United Kingdom. The functional currency of the U.K. subsidiary is the British pound. There have been no significant activities for this entity to date.
On March 7, 2017, Soleno completed its merger, or the Merger, with Essentialis, Inc., a Delaware corporation, or Essentialis in accordance with the Merger Agreement by and between Soleno Therapeutics and Essentialis dated December 22, 2016, or the Merger Agreement. After the Merger, the Company’s primary focus is transitioning to the development and commercialization of novel therapeutics for the treatment of rare diseases. Essentialis was a privately held, clinical stage biotechnology 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. Prior to the Merger, Essentialis’s efforts were focused primarily on developing and testing product candidates that target theATP-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.
Subsequent to the merger with Essentialis, the Company explored opportunities to divest, sell or dispose of the NeoForce, CoSense, and Serenz businesses. The Company’s first diagnostic product,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, with a secondary emphasis on its joint venture with OAHL for the CoSense technology. CoSense is 510(k) cleared for sale in the U.S. and received CE Mark certification for sale in the E.U. The Company continues to separately evaluate alternatives for its Serenz portfolio. The operations directly related to the NeoForce, CoSense, and Serenz business are reported herein as discontinued operations and the related assets are reported as assets held for sale in accordance with ASC205-20-45-10.®
On May 8, 2017, Soleno received stockholder approval to amend the Amended and Restate Certificate of Incorporation of the Company, to change the name of the Company to Soleno Therapeutics, Inc.
The Company completed the sale of stock of its 100% wholly-owned subsidiary, NeoForce, Inc. on July 18, 2017, pursuant to a Stock Purchase Agreement, or NFI Purchase Agreement, with NeoForce Holdings, Inc., aidsor
NFI Holdings, a 100% 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 October 6, 2017, the Company effected aone-for-five (1:5) reverse stock split of its then outstanding Common Stock and, accordingly, all common share and per share data are retrospectively restated to give effect of the split for all periods presented herein.
On December 4, 2017, Soleno, and its wholly-owned subsidiary, Capnia, Inc., a Delaware corporation, or Capnia, entered into a joint venture with OptAsia Healthcare Limited, a Hong Kong company limited by shares, or OAHL, with the purpose of developing and commercializing medical monitors, including the CoSense®End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, that measureend-tidal carbon monoxide in diagnosisbreath to assist in the detection of excessive hemolysis in neonates, a condition in which red blood cells degrade rapidly. When present in neonates with jaundice, hemolysis is a dangerous conditionrapidly and which can lead to adverse neurological outcomes. CoSense has 510(k) clearance for sale in the U.S. with a specific Indication for Use related to hemolysis issued, and has received CE Mark certification for sale in the European Union (“E.U.”). CoSense is commercially available in the U.S. In addition, the Company is applying its research and development efforts to additional diagnostic products based on its Sensalyze Technology Platform, a portfolio of proprietary methods and devices which enables CoSense and can be applied to detect a variety of analytes in exhaled breath and other products for the neonatology market. The Company has also obtained CE Mark certification in the E.U. for Serenz, a therapeutic product candidate for the treatment of symptoms related to allergic rhinitis (“AR”).
Note 2. Liquidity, Financial ConditionGoing Concern and Management’s Plans
The Company had a net loss of $15.9$15.7 million for the year ended December 31, 20152017 and has an accumulated deficit of approximately $86.2$114.0 million at December 31, 20152017 from having incurred losses since its inception. The Company has approximately $3.2$16.3 million of working capital at December 31, 2015 ($4.1 million of working capital when excluding the Series B warrant liability)2017 and used approximately $10.3$10.0 million of cash in its operating activities during the year ended December 31, 2015.2017. The Company has financed its operations principally through issuances of debt and equity securities.
On October 12, 2015, the Company entered into a Securities2015 Purchase Agreement (the “Sabby Purchase Agreement”) with funds managed by Sabby Management, LLC ("Sabby"), to purchase up to $10 million worth of Series A Convertible Preferred Stock (the “Preferred Stock”). The sale of the Preferred Stock was set to taketook place in two separate closings. On October 15, 2015, the date of the first closing, the Company received proceeds of approximately $4.1 million, net of $0.4 million in estimated expenses. Upon the second closing, which closed on January 8, 2016, the Company received proceeds of approximately $5.0 million, net of $0.5 million in estimated expenses.
On June 29, 2016, the Company entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to which the Company agreed to sell to Sabby, in a private placement, an aggregate of up to 13,780 shares of the Company’s Series B Convertible Preferred Stock at an aggregate purchase price of $13,780,000, which shares are convertible into 2,756,000 shares of trhe Company’s Common Stock, based on a fixed conversion price of $5.00 per share on anas-converted basis. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%.
In connection with the 2016 Sabby Purchase Agreement, the Company also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were originally purchased by Sabby under the 2015 Sabby Purchase Agreement and which shares represent 841,081 shares of Common Stock on anas-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, the Company received approximately $5.6 million of net proceeds (see Note 15)10).
On December 22, 2016, the Company entered into the Merger Agreement and Plan with Essentialis. Consummation of Contents
During the year ended December 31, 2016, the Company implemented plans to reduce its expenses, including reducing its workforce, eliminating outside consultants, reducing legal fees and implementing a plan to allow Board members to receive common stock, in lieu of cash payments.
On January 27, 2017, The Company entered into a Common Stock Purchase Agreement (the “2017 Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $17.0 million in value of shares of Common Stock over the30-month term of the 2017 Aspire Purchase Agreement. The Company issued Aspire Capital 141,666 shares of Common Stock as commitment shares under the 2017 Aspire Purchase Agreement. The 2017 Aspire Purchase Agreement was terminated upon the closing of the 2017 PIPE Offering.
On December 11, 2017, the Company entered into the Unit Purchase Agreement with certain stockholders, pursuant to which the Company sold and issued 8,141,116 immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of approximately $15,000,000. Each unit consisted of one share of the Company’s common stock and a warrant to purchase 0.74 shares of the Company’s common stock at an exercise price of $2.00 a share, for an aggregate of 8,141,116 Shares and corresponding warrants to purchase an aggregate of 6,024,425 Warrant Shares, together referred to as the Resale Shares. The Company also granted certain registration rights to these stockholders, pursuant to which, among other things, the Company prepared and filed a registration statement with the SEC to register for resale the Resale Shares. The registration statement was declared effective in February 2018.
The accompanying 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 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 generateresult 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 revenue from a variety of sources, including salesand may be required to raise additional capital to complete its clinical trials, pursue product development initiatives and penetrate markets for the sale of its neonatology products, other diagnostic products, license fees, milestone payments, and research and development payments in connection with potential future strategic partnerships. However, to date, the Company has generated minimal revenue. The Company may never generate revenue that is sufficient to be profitable in the future. If the Company does not generate significant revenue, it may have to raise capital through additional equity or deb financing. The Company's failure to achieve sustained profitability could depress the value of the Company and could impair the ability to raise capital.
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
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of 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 liabilities and equityfinancial instruments, stock-based compensation, value and life of acquired intangibles, and allowancesthe valuation of contingent liabilities for accounts receivable and inventory.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents at two U.S. commercial banks that management believes are of high credit quality. Cash and cash equivalents deposited with these commercial banks exceeded the Federal Deposit Insurance Corporation insurable limit at December 31, 20152017 and December 31, 2014.2016. The Company expects this tothe maintenance of balances in excess of insurable limits will continue.
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting, making operating decisions, and assessing financial performance. All long-lived assets are maintained in the United States of America.
Cash and Cash Equivalents
The Company considers all highly liquid investments, including its money market fund, purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are held in institutions in the U.S. and the U.K. and include deposits in a money market fund which was unrestricted as to withdrawal or use.
Accounts Receivable
Accounts receivable as of December 31, 20152017 and 2016 consist of balances due from customers in the normal course of business. The Company did not record an allowance for doubtful accounts as this balance was deemed fully collectible.
Accounts receivable are classified as Assets Held for Sale (See Note 8).
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of payments primarily related to insurance and short-term deposits. Prepaid expenses are initially recorded upon payment and are expensed as goods or services are received.
Inventory
Inventory as of December 31, 2014 consistedconsists of raw materials to be used in the manufactureassembly of our products.the Company’s products, work-in-progress and finished goods. As of December 31, 2015,2017, the Company’s inventory consists of approximately $213,000 of raw materials, $30,000 of work-in-progress, and $177,000 of finished goods. As of December 31, 2016, the Company’s inventory includes approximately $106,000$382,000 of raw material, $398,000$101,000 ofwork-in-process and $46,000$177,000 of finished goods. Inventory is stated at the lower of cost or marketnet realizable value under thefirst-in,first-out (FIFO) method.
Inventory is classified as Assets Held for Sale (See Note 8).
Patent
On May 11, 2010, we entered into an Asset Purchase Agreement with BioMedical Drug Development, Inc., or BDDI, pursuant to which BDDI agreed to sell certain technology to us and BDDI received and was entitled to receive, among other consideration, certain royalty payments related to the technology. In June 30, 2015, the Company entered into an amendment ofand BDDI amended the BDDI Asset Purchase Agreement, (the “BDDI Amending Agreement”), underpursuant to which the Company committed to pay aggregate cash payments of $450,000 and issued 40,0008,000 shares of Common Stock to an affiliate of BDDI. With respect to the aggregate cash payments of $450,000, the Company paid an affiliate of BDDI an initial sum of $150,000 on July 1, 2015, and is obligated to pay $100,000 on each of the six, twelve and eighteen-month anniversaries of the signing of the amended agreement. The Company made the first installment of $100,000 on December 21, 2015. The remaining $200,000 payable under this agreement has been included in Accrued compensation and other current liabilities on the balance sheet. Under the original Asset Purchase Agreement dated June 11, 2010, the Company purchased a patent for Breath End Tidal Gas Monitor. The patent was issued on June 19, 2003 and expires on August 1, 2027. The Company has capitalized the fair value of the patent purchased as an intangible asset on its consolidated balance sheet and is amortizing the fair value over the remaining useful life of the patent.
The BDDI patent is reported as an Intangible Asset and classified as Assets Held for Sale. (See Note 8.)
In July 2015,March 2017, the Company also entered intocompleted the acquisition of Essentialis, Inc., a consulting agreementDelaware corporation, or Essentialis in accordance with the Merger Agreement by and between Soleno Therapeutics and Essentialis dated December 22, 2016. The merger transaction has been accounted for as an affiliateasset acquisition under the acquisition method of BDDI. As partaccounting and accordingly, the value of this consulting agreementasset acquired in the Company issued 10,000 sharesamount of $22.0 million was assigned to the affiliate of BDDI.
Business Combinations
For business combinations the Company utilizes the acquisition method of accounting in accordance with ASC Topic 805,
Business Combinations. These standards require that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies. Acquisition costs are expensed as incurred.The Company recognizes separately from goodwill the fair value of assets acquired and the liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the acquisition date fair values of the assets acquired, and liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may retroactively record adjustments to the fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
Property and Equipment, Net
Property and equipment are stated at cost net of accumulated depreciation and amortization calculated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.
Certain property and equipment are classified as Assets Held for Sale. (See Note 8.)
Long-Lived Assets
The Company reviews its long-lived assets for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount and the fair value of the assets and fair value.
Intangible Assets
Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives which range in term from 5 to 12of 11 years. The useful life of the intangible asset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life.
Intangible assets consist of the following at December 31, 2015:
| Amount | Accumulated Amortization | Net Amount | Useful Lives (years) | ||||||||||
| Patents and trademarks | $ | 697,890 | $ | (32,155 | ) | $ | 665,735 | 5-12 | |||||
| Customer contracts | 259,730 | (8,658 | ) | 251,072 | 10.00 | ||||||||
| Total | $ | 957,620 | $ | (40,813 | ) | $ | 916,807 | ||||||
| Amount | Accumulated Amortization | Net Amount | Useful Lives (years) | |||||||||||||
Patents and merger costs | $ | 22,002,623 | $ | (1,589,567 | ) | $ | 20,413,056 | 11 | ||||||||
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Total | $ | 22,002,623 | $ | (1,589,567 | ) | $ | 20,413,056 | |||||||||
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Future amortization expense for intangible assets over their remaining useful lives is as follows:follows.
Year ending December 31 | Patents and trademarks | |||
2018 | $ | 1,944,101 | ||
2019 | 1,944,101 | |||
2020 | 1,944,101 | |||
2021 | 1,944,101 | |||
2022 | 1,944,101 | |||
2023 and thereafter | 10,692,553 | |||
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Total | $ | 20,413,056 | ||
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Amortization expense for the years ended December 31, 2017 and 2016, was $1,661,734 and $99,343, respectively, of which amortization expense of $72,167 and $99,343 is reported in discontinued operations for the year ended December 31, 2017 and 2016, respectively.
| Year ending December 31: | Patents and trademarks | Customer contracts | Total Amortization | ||||||
| 2016 | $ | 73,370 | $ | 25,973 | $ | 99,343 | |||
| 2017 | 73,370 | 25,973 | 99,343 | ||||||
| 2018 | 73,370 | 25,973 | 99,343 | ||||||
| 2019 | 73,370 | 25,973 | 99,343 | ||||||
| 2020 and thereafter | 372,255 | 147,180 | 519,435 | ||||||
| Total | $ | 665,735 | $ | 251,072 | $ | 916,807 | |||
Goodwill
The Company tests its goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its reporting unit’s carrying value to its implied fair value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances. ThereThe Company did not perform the qualitative assessment, but made its determination using the quantitative approach for goodwill impairment. Using the quantitative approach, the Company determined that there was no impairment of goodwill for the year ended December 31, 2015. Such goodwill2016.
Goodwill is not deductibleclassified as Assets Held for tax purposes and represents the value placed on entering new markets and expanding market share.
Revenue Recognition
The Company began recognizing sales of CoSense during the year ended December 31, 2015. In addition, the Company began recognizing sales of NFI pulmonary resuscitation products after the acquisition of Neoforce'sNeoforce’s assets in September 2015.
The Company recognizes revenue when all of the following criteria are met:
For a majority of sales, where the Company delivers its product to hospitals or medical facilities, the Company recognizes revenue upon delivery, which represents satisfaction of the required revenue recognition criteria. The Company does not offer rights of return or price protection and it has no post-delivery obligations. The Company offers a limitedone-year warranty to most customers. Estimated warranty obligations are recorded at the time of sale and to date, warranty costs have been insignificant.
Revenues are incurred and the related services are rendered, provided that the applicable performance obligations under the government grants have been met. Funds received under government grants are recordedreported as revenue if the Company is deemed to be the principal participant in the contract arrangements because the activities under the contracts are part of the Company’s development programs. If the Company is not the principal participant, the funds from government grants are recorded as a reduction to research and development expense. Funds received from government grants are not refundable and are recognized when the related qualified research and development expenses are incurred and when there is reasonable assurance that the funds will be received.
Research and Development
Research and development costs are charged to operations as incurred. Research and development costs consist primarily of salaries and benefits, consultant fees, prototype expenses, certain facility costs and other costs associated with clinical trials, net of reimbursed amounts.
Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are expensed to research and development costs when incurred.
Certain Research and Development expenses are reported as Discontinued Operations. (See Note 8.)
Change in fair value of contingent consideration
The Company recorded the value of contingent future consideration to be paid for the acquisition of Essentialis as a liability in March 2017 at the date of the acquisition. The increase in value of the liability for the contingent consideration of December 31, 2017, is recorded as operating expense in the consolidated statement of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts recorded for income tax purposes. Deferred income taxes are classified as current or non-current, based on the classifications of the related assets and liabilities giving rise to the temporary differences. A valuation allowance is provided against the Company’s deferred income tax assets when their realization is not reasonably assured.
The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.
The loss from discontinued operations is reported net of the related effect for income taxes in the Statement of Operations.
Convertible Preferred Stock and other Hybrid Instruments
The Company'sCompany’s convertible preferred stock was classified as permanent equity on its consolidated balance sheet in accordance with authoritative guidance for the classification and measurement of hybrid securities and distinguishing liability from equity instruments. The preferred stock is not redeemable at the option of the holder.
Further, the Company evaluated its Series A and Series B Convertible Preferred Stock and determined that it is considered an equity host under ASC 815,
Derivatives and Hedging. In making this determination, theCommon Stock Purchase Warrants and Other Derivative Financial Instruments
The Company classifies Common Stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement ornet-share settlement or (ii) give the Company a choice ofnet-cash settlement or settlement in its own shares (physical settlement ornet-share
settlement). The Company classifies any contracts
Stock-Based Compensation
For stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the estimated fair value on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables.
Stock-based compensation expense related to stock options granted tonon-employees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from thenon-employee.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.
In May 2014, the FASB issued ASU No. 2014-09,
reporting periods. The Company is also in the process of evaluating the new standard against its existing revenue recognition accounting policies to determine the effect the guidance will have on its consolidated financial statements and what changes to systems and controls may be warranted.
In January 2017, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (ASU)2017-04:“Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU2017-04”), which removes Step 2 from the goodwill impairment test. It is effective for public entities for annual and interim periods beginning after December 15, 2016. 2019. Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The adoption of this ASU has no material impact on the Company’s financial position and results of operations.
In April 2015,January 2017, the FASB proposedissued ASU 2017 -01 “Business Combinations (Topic 805): Clarifying the Definition of a Business which clarifies the definition of a business to deferassist entities with evaluating whether transactions should be accounted for one yearas acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early application of the amendments in ASU 2017 -01 are allowed for transactions for which the acquisition date is before the effective date of the new revenue standard, with an optionamendments, but only when the transactions have not been reported in the financial statements that would permit companies to adopthave been issued. The Company early adopted ASU 2017 -01 for the standard as early asacquisition of Essentialis, Inc. (see Note 9).
In May 2017, the original effective date. Early adoption priorFASB issued ASU2017-09: Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting which clarifies which changes to the originalterms or conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective datebeginning after December 15, 2017; early adoption is not permitted. The Company has not determinedis currently evaluating the potential effects of thiseffect that ASU2017-09 will have on itsthe Company’s consolidated financial statements.
In June 2014,July 2017, the FASB issued ASU No. 2014-12,
On December 22, 2017, the SEC staff also issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Specifically, SAB 118 provides a measurement period for companies to evaluate the impacts of the 2017 Tax Act on their financial statements. This measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared,
and analyzed the information that was needed in order to complete the accounting requirements, and cannot exceed one year. There-measurement of U.S. deferred tax assets and liabilities were approximately $10.6 million with corresponding offset to valuation allowance. The Company estimated a loss for all its foreign entities including FIN 48 liabilities and therefore did not record for any transition tax pursuant to IRC Section 965.
In February 2018, the FASB issued ASU amends ASC 220, Income Statement—Reporting Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.” In addition, under the ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. The standard is effective beginning after December 15, 2018 and early adoption is permitted. The Company has not determinedis currently evaluating the potential effects of thiseffect that ASU2017-09 will have on itsthe Company’s consolidated financial statements.
Note 4. Fair Value of Financial Instruments
The carrying value of the Company’s cash, and cash equivalents, restricted cash, accounts receivable, and accounts payable, and accrued liabilities, approximate fair value due to the short-term nature of these items. Based on the borrowing rates available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the line of credit approximates fair value.
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:
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 December 31, 2015 | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets | |||||||||||||||
| Money market fund | $ | 3,803,929 | $ | 3,803,929 | — | — | |||||||||
| Liabilities | |||||||||||||||
| Series A warrant liability | 1,212,803 | 1,212,803 | — | — | |||||||||||
| Series B warrant liability | 865,000 | — | — | 865,000 | |||||||||||
| Series C warrant liability | 462,437 | — | — | 462,437 | |||||||||||
| Total common stock warrant liability | $ | 2,540,240 | $ | 1,212,803 | — | $ | 1,327,437 | ||||||||
| Fair Value Measurements at December 31, 2014 | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets | |||||||||||||||
| Money market fund | $ | 7,891,888 | $ | 7,891,888 | $ | — | $ | — | |||||||
| Liabilities | |||||||||||||||
| Series A warrant liability | 857,362 | 857,362 | — | — | |||||||||||
| Series B warrant liability | 17,438,731 | — | — | 17,438,731 | |||||||||||
| Total common stock warrant liability | $ | 18,296,093 | $ | 857,362 | — | $ | 17,438,731 | ||||||||
| Fair Value Measurements at December 31, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets | ||||||||||||||||
Money market fund | $ | 16,790,456 | $ | 16,790,456 | ||||||||||||
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Liabilities | ||||||||||||||||
Series A warrant liability | $ | 351,713 | $ | 351,713 | — | — | ||||||||||
Series C warrant liability | 5,880 | — | — | $ | 5,880 | |||||||||||
2017 PIPE warrant liability | 5,076,000 | — | — | 5,076,000 | ||||||||||||
Essentialis purchase price contingent liability | 5,081,840 | — | — | 5,081,840 | ||||||||||||
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Total common stock warrant and contingent consideration liability | $ | 10,515,433 | $ | 351,713 | — | $ | 10,163,720 | |||||||||
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| Fair Value Measurements at December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets | ||||||||||||||||
Money market fund | $ | 2,563,247 | $ | 2,563,247 | — | — | ||||||||||
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Liabilities | ||||||||||||||||
Series A warrant liability | 194,048 | 194,048 | — | — | ||||||||||||
Series C warrant liability | 85,490 | — | — | 85,490 | ||||||||||||
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Total common stock warrant liability | $ | 279,538 | $ | 194,048 | — | $ | 85,490 | |||||||||
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The Series A Warrant is a registered security that trades on the open market. Themarket 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 measurementsmeasurement of the Series B and Series C Warrants areis based on significant inputs that are unobservable and thus represent Level 3 measurements. The Company’s estimated fair value of the Series BC Warrant liability is calculated using a Monte Carlo simulation.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 (see Note 6).rates. The Company’s estimated fair value of the Series C Warrant liability is2017 PIPE Warrants was calculated using a Monte Carlo simulation of a geometric Brownian motion model. The Monte Carlo simulation pricing model requires the Black-Scholes valuation model. Keyinput of highly subjective assumptions include the volatility of the Company’s stock,including the expected warrantstock price volatility, the expected term, the expected dividend yield and the risk-free interest rates (see Note 6).rate. The Level 3 estimates are based, in part, on subjective assumptions.
On January 13, 2016, the Company entered into an agreement to sublease the Company’s excess space located in Redwood City. By the end of February, the Company removed all equipment, furniture and fixtures being stored in this excess space and ceased use of this space. The fair value of thecease-use liability was calculated using the remaining lease payments, offset by futuresub-lease payments, offset by deferred rent amortization, and discounted to present value using the Company’s current cost of capital of 20%. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.
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 financial instruments, which are treated as liabilities, as follows:
| Series A Warrant | Series B Warrant | Series C Warrant | ||||||||||||||||||
| Number of Warrants | Liability | Number of Warrants | Liability | Number of Warrants | Liability | |||||||||||||||
| Balance at December 31, 2014 | 2,449,605 | $ | 857,362 | 2,449,605 | $ | 17,438,731 | — | $ | — | |||||||||||
| Change in value of Series A Warrants | — | 397,441 | — | — | — | — | ||||||||||||||
| De-recognition of Series A Warrant liability upon exercise | (24,000 | ) | (42,000 | ) | — | — | — | — | ||||||||||||
| De-recognition of Series B Warrant liability upon cash exercise of 619,512 warrants in Private Transaction (619,512 shares issued) | — | — | (619,512 | ) | (6,747,765 | ) | — | — | ||||||||||||
| De-recognition of Series B Warrant liability upon cashless exercise of 1,713,045 warrants (5,879,560 shares issued) | — | — | (1,713,045 | ) | (12,527,991 | ) | — | — | ||||||||||||
| De-recognition of Series B Warrant liability upon contribution of 468 warrants back to the Company | — | — | (468 | ) | (3,332 | ) | — | — | ||||||||||||
| Change in value of Series B Warrants | — | — | — | 2,705,357 | — | — | ||||||||||||||
| Record Series C Warrant Liability as inducement charge (589,510 warrants in Private Transaction, 905 warrants in tender offer ) | — | — | — | — | 590,415 | 3,049,375 | ||||||||||||||
| Change in value of Series C Warrants | — | — | — | — | — | (2,586,938 | ) | |||||||||||||
| Balance at December 31, 2015 | 2,425,605 | $ | 1,212,803 | 116,580 | $ | 865,000 | 590,415 | $ | 462,437 | |||||||||||
| Series A Warrant | Series C Warrant | 2017 PIPE Warrants | Purchase Price Contingent Liability | |||||||||||||||||||||||||
| Number of Warrants | Liability | Number of Warrants | Liability | Number of Warrants | Liability | |||||||||||||||||||||||
Balance at January 1, 2017 | 485,121 | $ | 194,048 | 118,083 | $ | 85,490 | — | — | ||||||||||||||||||||
Change in value of Series A Warrants | — | 157,665 | — | — | — | — | ||||||||||||||||||||||
Change in value of Series C Warrants | — | — | — | (79,610 | ) | — | — | |||||||||||||||||||||
Issuance in 2017 PIPE Warrants | 6,024,425 | $ | 4,187,000 | |||||||||||||||||||||||||
Change in value of 2017 PIPE Warrants | — | — | — | — | — | 889,000 | ||||||||||||||||||||||
Issuance of contingent liability on March 7, 2017 | $ | 2,589,648 | ||||||||||||||||||||||||||
Change in value of contingent liability | 2,492,192 | |||||||||||||||||||||||||||
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Balance at December 31, 2017 | 485,121 | $ | 351,713 | 118,083 | $ | 5,880 | 6,024,425 | $ | 5,076,000 | $ | 5,081,840 | |||||||||||||||||
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Note 5. Property and Equipment, Net
Property and equipment consisted of the following:
| December 31, 2015 | December 31, 2014 | ||||||
| Furniture and fixtures | $ | 236,366 | $ | 180,238 | |||
| Computer hardware | 52,112 | 27,555 | |||||
| Leasehold improvements | 9,117 | 10,726 | |||||
| $ | 297,595 | $ | 218,519 | ||||
| Less accumulated depreciation and amortization | (211,850 | ) | (160,912 | ) | |||
| Total | $ | 85,745 | $ | 57,607 | |||
| December 31, 2017 | December 31, 2016 | |||||||
Computer hardware | $ | 60,610 | $ | 56,527 | ||||
Furniture and fixtures | 23,074 | 23,074 | ||||||
Leasehold improvements | 12,848 | 12,849 | ||||||
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| 96,532 | 92,450 | |||||||
Less accumulated depreciation and amortization | (73,647 | ) | (50,429 | ) | ||||
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Total | $ | 22,885 | $ | 42,021 | ||||
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Depreciation expense was $67,415$43,716 and $28,516$33,328 for the fiscal years ended December 31, 20152017 and December 31, 2014,2016, respectively.
Depreciation expense of $22,012 and $13,628 was classified in discontinued operations for the years ended December 31, 2017, and 2016, respectively.
Note 6. Warrant Liabilities
Warrants terms
The Company has issued multiple warrant series, of which the Series A Warrants, Series BC Warrants and Series C2017 PIPE Warrants (the “Warrants”). are considered liabilities pursuant to the guidance established byASC 815 Derivatives and Hedging.
The Company’s Series A, Series B and Series C Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. TheyThe Series A and Series C Warrants also contain a cashless exercise feature that provides for their net share settlement at the option of the holder in the event that there is no effective registration statement covering the continuous offer and sale of the warrantsSeries A Warrants and shares underlying shares.the Series A Warrants, or the shares underlying the Series C Warrants, respectively. The Company is required to comply with certain requirement to cause or maintain the effectiveness of a registration statement for the offer and sale of these securities.the shares underlying the Warrants and for the offer and sale of the Series C Warrants. The WarrantSeries A and Series C Warrants contracts further provide for the payment of liquidated damages at an amount per month equal to 1% of the aggregate VWAP of the shares into which each Warrant is convertible into 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 IPO or Private Transaction 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 warrantsWarrants 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 is equivalent to fair value computed using the Binomial Lattice Option Model.
Accounting Treatment
The Company accounts for the Warrants in accordance with the guidance inASC 815
The Company classified the Series A, Series B, and C Warrants, with a term greater than one year, as long-term liabilities at their fair value and willre-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 statement of operations.
Series A Warrants
The Company has issued 2,449,605489,921 Series A Warrants to purchase shares of its Common Stock at an exercise price of $6.50$32.50 per share in connection with the IPO unit offering describedoffered in Note 2.the Company’s initial public offering (“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 warrantsWarrants started trading on the NASDAQ under the symbol CAPNW.SLNOW. As the warrantsSeries A Warrants are publicly traded, the Company uses the closing price on the measurement date to determine the fair value of these warrants.
Since their issuance, a total of 24,0004,800 Series A Warrants werehave been exercised. As of December 31, 2015,2017, the fair value of the 2,425,605485,121 outstanding Series A warrantsWarrants was approximately $1.2 million,$352,000, and the increase of $0.4 million$158,000 in fair value during the year ended December 31, 20152017 was recorded as other expense in the statement of operations.
| December 31, 2015 | December 31, 2014 | ||||
| Volatility | 90 | % | 87 | % | |
| Expected Term (years) | 0.12 | 1.10 | |||
| Expected dividend yield | — | % | — | % | |
| Risk-free rate | 0.65 | % | 0.26 | % | |
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 589,510117,902 shares of the Company’s Common Stock at an exercise price of $6.50$32.50 per share, resulting in thede-recognition of $6.7 million of the previously issued Series B warrantWarrant liability and gross proceeds to the Company of approximately $3.8 million based on the exercise price of the Series B warrants.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 $6.25$31.25 per share and will expire on March 5, 2020.
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 FormS-4, which was declared effective on June 25, 2015 and expired on July 24, 2015. During July 2015, certain Series B Warrant holder(s) 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 $5,882.
The Series C Warrants are exercisable into 118,083 shares of the Company’s Common Stock. As of December 31, 2017, the fair value of the Series C Warrants was determined to be $5,880. The decline in the fair value of the liability for the Series C Warrants of $79,610 in the year ended December 31, 2016 was recorded as other income in the consolidated statement of operations.
The Company has calculated the fair value of the Series C warrantsWarrants using a Black-Scholes pricing model, which is equivalent to the fair value computed using the Binomial Lattice Option Model. The Black-Scholes pricing model requires the input of highly subjective assumptions including the expected stock price volatility. The Company used the following inputs:
| December 31, 2015 | March 5, 2015 | ||||
| Volatility | 90 | % | 86 | % | |
| Expected Term (years) | 4.17 | 5.00 | |||
| Expected dividend yield | — | % | — | % | |
| Risk-free rate | 1.76 | % | 1.35 | % | |
| December 31, 2017 | December 31, 2016 | |||||||
Volatility | 90 | % | 90 | % | ||||
Expected Term (years) | 2.17 | 3.17 | ||||||
Expected dividend yield | — | % | — | % | ||||
Risk-free rate | 1.57 | % | 1.51 | % | ||||
Warrants Issued as Part of the CompanyUnits in the 2017 PIPE Offering
The 2017 PIPE Warrants were issued a tender offeron December 15, 2017 in to the remaining holders2017 PIPE Offering, pursuant to a Warrant Agreement with each of Series B warrantsthe investors in the 2017 PIPE Offering, and entitle the holder to inducepurchase one share of the holders to cash exercise the outstanding Series B warrants in exchange for new Series C Warrants withCompany’s common stock at an exercise price of $6.25equal to $2.00 per share, that expire on March 5, 2020. 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 Diazoxide Choline Controlled-Release (DCCR) tablet in Prader-Willi syndrome (PWS).
The tender offer was extended to warrant holders under a registration statement filed withexercise price and number of shares of common stock issuable upon exercise of the SEC on Form S-4, which was declared effective on June 25, 2015 and expired on July 24, 2015. During July 2015,2017 PIPE Warrants may be adjusted in certain
In the event of 905 Series C Warrants and proceedsa change of control of the Company, the holders of unexercised warrants may present their unexercised warrants to the Company, of $5,882.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.
The new Series C Warrants are exercisable into 590,415 shares of the Company’s Common Stock. As of December 31, 2015,Company has calculated the fair value of the Series C2017 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.
| December 31, 2017 | December 15, 2017 (date of issue) | |||||||
Volatility | 67 | % | 67 | % | ||||
Expected Term (years) | 0.8 years | 0.8 years | ||||||
Expected dividend yield | — | % | — | % | ||||
Risk-free rate | 1.76 | % | 1.71 | % | ||||
The 2017 PIPE Warrants were issued on December 15, 2017 with an estimated fair value of $4,187,000. At December 31, 2017, the fair value of the 2017 PIPE Warrants was determined to be $0.5 million. The declineestimated at $5,076,000 and the cost of $889,000 associated with the increase in the fair value of the warrants of $2.6 million in the year ended December 31, 2015 was recorded as expense in other incomeexpense in the consolidated statement of operations.
Note 8.7. Commitments and Contingencies
(i)Facility Leases
On July 1, 2015 the Company executed a new four year four-yearnon-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 (see Note 15).
The Company also leases office space under anon-cancelable operating lease agreement whichthat was set to expire in May 2015. On2015, and in February 2, 2015 the Company signed an amendment to its lease agreement, extending the lease through June 2018. The amendment provides for monthly lease payments of $22,000 beginning in June 2015, with increases in the following two years. The Company subleased this facility in January 2016 (see Note 15).
Minimum rental commitments under all noncancelable leases with an initial term in excess of one year as of December 31, 20152017 were as follows:
| Year ending December 31: | Operating Leases | ||
| 2016 | $ | 698,945 | |
| 2017 | 750,118 | ||
| 2018 | 629,923 | ||
| 2019 | 334,747 | ||
| Total | $ | 2,413,733 | |
Year ending December 31 | Operating Leases | |||
2018 | $ | 629,923 | ||
2019 | 334,747 | |||
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Total | $ | 964,670 | ||
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The table above does not consider the impact of lease payments the Company will receive under the sublease executed in January 2016 (see Note 15).
Rent expense was $375,000$514,000 and $230,000$595,000 during the years ended December 31, 20152017 and 2014,2016, respectively.
(ii) Shareholder lawsuit
On February 16, 2017, the Lawsuit captionedGarfield v. Capnia, Inc., et al., Case No.C17-00284 was filed in Superior Court of the State of California, County of Contra Costa against the Company and certain of its officers and directors. The Lawsuit alleged, generally, that the Company’s directors breached their fiduciary duties to the Company’s stockholders by seeking to sell control of the Company through an allegedly defective process, and on unfair terms. The Lawsuit also alleged that defendants failed to disclose all material facts concerning the proposed merger with Essentialis to stockholders. The Lawsuit sought, among other things,
equitable relief that would have enjoined the consummation of the proposed merger, compensatory and/or rescissory damages, and attorneys’ fees and costs. The Company made certain supplemental disclosures in a Current Report on Form8-K filed with the SEC on February 28, 2017 in connection with plaintiff’s agreement to voluntarily dismiss plaintiff’s claims in the Lawsuit.
On February 28, 2017, the Company agreed to make additional supplemental disclosures and pay $175,000 for dismissal of the lawsuit. This amount was accrued as a current liability on the balance sheet as of December 31, 2016 and recorded as an expense in general and administrative expense on the statement of operations for the year ended December 31, 2016.
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.
Under ASC205-20-45-10, during the period in which a component meets the assets held for sale and discontinued operations criteria, an entity must present the assets and liabilities of the discontinued operation separately in the asset and liability sections of the balance sheet for the comparative reporting periods. The prior period balance sheet should be reclassified for the held for sale items. For income statements, the current and prior periods should report the results of operations of the component in discontinued operations when comparative income statements are presented.
The components of the Balance Sheet accounts presented as assets and liabilities held for sale follow.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
Current assets | ||||||||
Accounts receivable | $ | 50,193 | $ | 133,337 | ||||
Inventory | 420,312 | 660,391 | ||||||
Prepaid expenses and other current assets | 45,868 | — | ||||||
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Current assets held for sale | 516,373 | 793,728 | ||||||
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Long-term assets | ||||||||
Property & equipment, net | 19,867 | 60,539 | ||||||
Goodwill | — | 718,003 | ||||||
Other intangible assets | 446,521 | 817,465 | ||||||
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Long-term assets held for sale | 466,388 | 1,596,007 | ||||||
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Current liabilities | ||||||||
Accounts payable | 50,860 | 123,379 | ||||||
Accrued compensation and other current liabilities | 75,751 | 119,021 | ||||||
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Total current liabilities for sale | 126,611 | 246,400 | ||||||
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Long-term liabilities | ||||||||
Other long-term liabilities | 225,392 | 81,000 | ||||||
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Long-term liabilities held for sale | $ | 225,392 | $ | 81,000 | ||||
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The components of the Statement of Operations presented as Discontinued Operations follow.
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
Product revenue | $ | 735,212 | $ | 1,450,788 | ||||
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Total revenue | 735,212 | 1,450,788 | ||||||
Cost of product revenue | 820,098 | 1,509,306 | ||||||
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Gross profit loss | (84,886 | ) | (58,518 | ) | ||||
Expenses | ||||||||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
Research and development | 2,426,829 | 2,937,662 | ||||||
Sales and marketing | 218,706 | 1,630,591 | ||||||
General and administrative | 669,175 | 659,227 | ||||||
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Total expenses | 3,314,710 | 5,227,480 | ||||||
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Operating loss | (3,399,596 | ) | (5,285,998 | ) | ||||
Other income (expense) | (8,000 | ) | (19,896 | ) | ||||
Loss on sale of assets | (185,979 | ) | — | |||||
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Net loss from discontinued operations, net of tax effect of $21,700 in 2016 | $ | (3,593,575 | ) | $ | (5,327,594 | ) | ||
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Stock-based compensation expense of approximately $120,000 and $132,000 was classified in discontinued operations for the years ended December 31, 2017, and 2016, respectively.
(ii) NFI Sale
On September 2, 2015, the Company established NeoForce, Inc. (“NFI”), a wholly owned subsidiary of the Company and through NFI, acquired substantially all of the assets of an unrelated privately held company NeoForce Group, Inc.(“NeoForce”).
On July 18, 2017, the Company agreedcompleted the sale of stock of its 100% wholly-owned subsidiary, NFI, primarily related to pay the formerCompany’s portfolio of neonatology resuscitation business pursuant to a Stock Purchase Agreement (the “Purchase Agreement”), dated as of July 18, 2017, with NeoForce shareholderHoldings, Inc. (“Holdings”), a 100% 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. The Company will also receive the total outstanding accounts receivable and inventory held by NFI at the date of sale, as it is collected or sold, respectively. The transactions contemplated by the Purchase Agreement are a continuation of a process previously disclosed by the Company of evaluating strategic alternatives and focusing on the Company’s rare disease therapeutic business. The Purchase Agreement includes customary terms and conditions, including an annual royaltyadjustment to the purchase price based on inventory and accounts receivables, and provisions that require the Company to indemnify Holdings for certain losses that it incurs as a result of a breach by the Company of its representations and warranties in the Purchase Agreement and certain other matters. Proceeds from the sale are payable to the Company as follows: (1) a $720,000 payment to the Company in cash on July 18, 2017, (2) the value of outstanding accounts receivable as it is collected by NFI following July 18, 2017, payable on a monthly basis, and (3) the value of inventory as it is sold following July 18, 2017, payable on a monthly basis. The Purchase Agreement contains customary representations and warranties of each of the parties.
(iii) CoSense Joint Venture Agreement
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 perioddisorder in which CO and bilirubin are produced in excess as byproducts of 36 months. 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 of 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. As of December 31, 2017, OAHL had acquired no shares of Capnia. The Company will report for its ownership position in Capnia pursuant to ASC 810.
Note 9. Acquisition of Essentialis Inc.
On March 7, 2017, the Company acquired Essentialis through the merger of the Company’s wholly-owned subsidiary Company E Merger Sub, Inc., a Delaware corporation (“Merger Sub”), whereby Merger Sub merged into Essentialis, with Essentialis surviving the merger as a wholly owned subsidiary of the Company.
The transaction has been accounted for as an asset acquisition under the acquisition method of accounting. The amendments in ASU2017-01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets and activities is not a business.
In consideration, the Company issued 3,783,388 shares of common stock to stockholders of Essentialis on March 7, 2017. The Company held back 182,675 shares of common stock as partial recourse to satisfy indemnification claims, and such shares will be issued to Essentialis stockholders on the1-year anniversary of the closing of the merger. The Company is in-process of distributing the shares for the 1-year anniversary at the time of filing this report. The Company is also obligated to issue an additional 913,389 shares of common stock to Essentialis stockholders upon the achievement of a development milestone. Additionally, upon the achievement of certain commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of the Merger Agreement, the Company is obligated to make cash earnout payments of up to a maximum of $30 million to Essentialis stockholders.
Since the acquisition was determined to be an asset acquisition, the total value of the purchase consideration will be allocated to the asset acquired. The fair value of the shares issued on the completion of the merger and of the contingent shares to be issued in the future was based on the stock price of the Company on the date of completion of the merger. In addition, the trading history of the Company was reviewed to assess the reliability of the implied consideration value. The Company trades on the NASDAQ, a major U.S. stock exchange, and has significant average daily trading volume with tight intradaybid-ask spreads. These characteristics indicate Soleno’s shares are actively traded and provide a reliable indication of value. On March 7, 2017, the date of the transaction close, the Company’s stock was trading at $3.85 per common share. Additionally, the average closing price of the stock in the 30 calendar days leading up to the close was also approximately $3.85. Accordingly, the fair value of the shares issued on March 7, 2017 and the estimated fair value of the contingent shares to be issued in the future are based on this stock price.
The agreement to pay cash upon the annual royalty resultedachievement of the commercial milestones result in the recognition of a contingent consideration, which is recognized at the inception of the transaction, and subsequent changes to estimate of the amounts of contingent consideration to be paid will be recognized as charges or credits in the statement of operations.consideration. The fair value of the contingent cash consideration is based on preliminary cash flow projections, growththe Company’s analysis of the likelihood of the drug indication moving from phase II through approval in expected product salesthe Federal Drug Administration approval process and other assumptions.then reaching the cumulative revenue milestones. In determining the likelihood of this occurring, the analysis relied on 2016 research published by BIO, Biomedtraker, & Amplion titles “Clinical Development Success Rates 2006-2015.” Based on management’s assessment, a 56% probability of achieving each milestone was determined to be reasonable. Additionally, the assumptions,Company anticipates that it could reach the commercial milestones of $100 million and $200 million in applicable revenue in 2023 and 2025, respectively.
The Company recorded the acquisition pursuant to the guidance in ASC 805, which provides that not all of the relevant information needed to complete acquisition-date measurements may be obtainable or known at the time of closing the acquisition and in time for issuance of interim or annual financial statements. Therefore, ASC 805 provides for a “measurement period” during which adjustments to the provisional valuation amounts initially recorded can be made in order to reflect information, existing at the acquisition date, but of which management subsequently obtains or becomes aware. ASC 805 provides that the measurement period can extend for up to, but not exceed, one year.
Management engaged independent professional assistance and advice in order to assess the fair value of the Royaltycontingent stock and cash consideration as of March 7 and December 31, 2017. During the process of determining the fair value of the contingent consideration at December 31, 2017, the Company became aware that certain of the subjective assumptions made at the time of the initial valuation should be modified based upon management’s increased understanding of the commercial capabilities of the DCCR drug of which it became aware subsequent to the acquisition. Accordingly, the Company determined that it was determinedappropriate to adjust the provisional valuation amounts recorded for the contingent stock and cash consideration made at the inception in March 2017. As a result, the value of the contingent cash consideration to be $153,000paid upon completing successive sales milestones increased and the value of the contingent stock consideration payable upon timing milestones was reduced; the resulting combined change to the total contingent consideration was not material. The initial valuation of the contingent consideration determined the fair value of the contingent stock consideration to be $4,220,000 and the fair value of the contingent cash consideration to be $1,090,000, for the combined value of $5,310,000 for the total of the stock and cash contingent consideration. The revision of the initial valuation of
the contingent consideration, made within the measurement period, determined the fair value of the contingent stock consideration to be $2,680,000 and the fair value of the contingent cash consideration to be $2,590,000, for the combined value of $5,270,000 for the total of the contingent stock and cash consideration.
Also subsequent to March 7, 2017 and prior to reporting the balance sheet and results of operations as of December 31, 2017, and for the year then ended, the Company completed its assessment of the tax effect on the net assets acquired by obtaining the independent study and report regarding the change in control in the previously outstanding stock of Essentialis. As a result of completing the study, the Company determined that, pursuant to Section 382 of the Internal Revenue Code, the utilization of Essentialis’s federal and state operating loss carryforwards were limited, which required the Company to record a net deferred tax liability in the amount of $1,651,000. As a consequence of recording the net deferred tax liability, the Company’s valuation allowance was reduced by $1,651,000, which resulted in the provision for income tax benefit and an increase in the value of the intangible asset acquired.
Accordingly, the initial purchase cost of the asset acquired was adjusted as of March 2017 and to reflect the change in the fair value of the contingent stock and cash consideration and for the effect of the Section 382 limitation, and the net increase in amortization of the related intangible asset was recorded in the fourth quarter of 2017.
The probability weighted milestone payments were discounted to determine the present value of future cash payments. The analysis utilized the weighted average cost of capital (WACC) discount rate. The WACC used for the first and second milestones were 30% and 21%, respectively.
The aggregate purchase price consideration was as follows.
Fair value of stock consideration | $ | 17,246,495 | ||
Fair value of contingent consideration | 2,589,648 | |||
|
| |||
Total purchase price consideration | $ | 19,836,143 | ||
|
|
The fair value of the asset acquired is as follows.
Patents | $ | 19,836,143 | ||
|
| |||
Net Assets Acquired | $ | 19,836,143 | ||
|
|
As an asset acquisition, the Company also capitalized approximately $573,000 of total costs incurred to complete the acquisition consisting of legal fees of $469,000, printing fees of $75,000 and accounting and other fees of $29,000. Additionally, the Company recorded as part of the purchase price consideration the value equivalent to the deferred tax liability that resulted from acquiring the assets in the amount of approximately $1,651,000. The total intangible asset of $22.0 million was recorded on the balance sheet and is being amortized ratably over the life of the patents through June 30, 2028.
The acquisition of Essentialis assets was completed in March 2017 and the purchase price was established at the date of closing based upon consideration paid at closing and an estimate of the future contingent consideration to be paid. Subsequent to the acquisition date and prior to reporting the balance sheet and results of operations as of December 31, 2017, and for the year then ended, the Company completed and finalized its assessments of the fair value of consideration paid and of the tax effect on the net assets acquired resulting from the change in control in the previously outstanding stock of Essentialis. As a result of completing the study of the fair value of the consideration paid, the Company revised the initial estimate of the fair value paid at closing and of the future contingent consideration to be paid; accordingly, the initial purchase cost of the asset acquired was adjusted as of March 2017 and the change in amortization of the related intangible asset was recorded in the
fourth quarter of 2017. As a result of completing the study of the tax effect, the Company determined that, pursuant to Section 382 of the Internal Revenue Code, the utilization of Essentialis’s operating loss carryforwards were limited, which required the Company to record a tax liability in the amount of $1.6 million, deferred to future periods, for the assets acquired for which the cost was recorded as an element of the of assets required. Accordingly, the initial purchase cost of the asset acquired was adjusted as of March 2017 and the increase in amortization of the related intangible asset was recorded in the fourth quarter of 2017.
The fair value of the liability for the contingent consideration payable by the Company achieving the commercial sales milestones of $100 million and $200 million was initially established as approximately $2,590,000 at the time of the merger and approximately $5,082,000 at December 31, 2015 (see 2017, based on the Company’s assessment that it could reach the commercial sales milestones of in 2023 and 2025, respectively.
Note 13).
Convertible Preferred Stock
The Company is authorized to issue 100,000,00010,000,000 shares of common stock asPreferred Stock.
The Company issued a total of December 31, 201410,000 Series A Convertible Preferred Stock under the 2015 Sabby Purchase Agreement, with a par value of $0.001 and a stated value of $1,000 per share.
In June 2016, the Company has issued 4,555entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to which the Company agreed to sell to Sabby, in a private placement, a total of 13,780 Series AB Convertible Preferred Stock, with a par value of $0.001 and a stated value of 1,000$1,000 per share. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. In July 2016, the Company issued 13,780 Series B Convertible Preferred Stock shares to Sabby, and during the years ended December 31, 2017 and 2016, the holders of the Series B Convertible Preferred Stock converted 8,209 and 1,000 shares, respectively, of the Series B Convertible Preferred Stock resulting in the issuance of 1,641,800 and 200,000, respectively, shares of Common Stock. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. The Series AB Convertible Preferred Stock do not have an expiration date and are not redeemable.
In connection with the 2016 Sabby Purchase Agreement, the Company also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were originally purchased by Sabby under the 2015 Sabby Purchase Agreement and which shares represent 841,081 shares of Common Stock on anas-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After repurchase of the Series A Convertible Preferred Stock and determined that it is considered an equity host under ASC 815,
The Company accounts forhas recognized the repurchase of the Series A Convertible Preferred Stock in accordance withas an extinguishment of the guidance in ASC 815
Common Stock
On December 22, 2016, the Company entered into the Merger Agreement and Plan with Essentialis. Consummation of the merger was subject to various closing conditions, including the Company’s consummation of a financing of at least $8 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 stockholders, which the Company received on March 6, 2017.
On March 7, 2017, the Company completed the merger with Essentialis and issued 3,783,388 shares of common stock to shareholders of Essentialis. The Company held back 182,676 shares of common stock as partial recourse to satisfy indemnification claims, and such shares will be issued to Essentialis stockholders on the1-year anniversary of the closing of the merger. The Company is also obligated to issue an additional 913,389 shares of common stock to Essentialis stockholders upon the achievement of a development milestone. Assuming that we issue all of the shares of our common stock held back and the development milestone is achieved, we would issue a total of 4,879,453 shares of common stock to Essentialis stockholders. Additionally, upon the achievement of certain commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of this securities agreementthe Merger Agreement, we are obligated to make cash earnout payments of up to a maximum of $30 million to Essentialis stockholders. The merger consideration described above will be reduced by any such shares of common stock issuable, or cash earnout payments payable, to Essentialis’ managementcarve-out plan participants and determined that it is probable thatother service providers of Essentialis, in each case, in accordance with the terms of the Merger Agreement.
On January 27, 2017, the Company will maintainentered into the 2017 Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an effectiveaggregate of $17.0 million in value of shares of our Common Stock over the30-month term of the purchase agreement. Further, on the date of the closing of the financing, as defined in the Merger Agreement, the Company shall sell to Aspire Capital, and Aspire Capital shall purchase from the Company an aggregate of $2.0 million of the Company’s common stock.
In December 2017, the Company entered into a Securities Purchase Agreement, or the Unit Purchase Agreement, with purchasers of the Company’s securities pursuant to which the Company sold and issued 8,141,116 immediately separable units at a price per unit of $1.84 for aggregate gross proceeds of approximately $15,000,000 Each unit consisted of one share of the Company’s common stock and a warrant to purchase 0.74 of a share of the Company’s common stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 shares of common stock, and corresponding warrants, or the 2017 PIPE Warrants, to purchase 6,024,425 shares of common stock. Soleno refers to the Shares and the Warrant Shares collectively as the Resale Shares. The Company also granted certain registration rights to the investors pursuant to the Unit Purchase Agreement pursuant to which, among other things, the Company prepared and filed a registration statement and have sufficient shares upon conversion and has therefore not recorded a liabilitywith the SEC to register for potential liquidated damages.
Stock Option Plan
The Company has adopted the 1999 Incentive Stock Plan, the 2010 Equity Incentive Plan, and the 2014 Equity Incentive Plan (together, the Plans). The 1999 Incentive Stock Plan expired in 2009, and the 2010 Equity
Incentive Plan has been closed to new issuances. Therefore, the Company may issue options to purchase shares of common stock to employees, directors, and consultants only under the 2014 Equity Incentive Plan. 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 and directors. NSOs may
Options are to be granted at an exercise price not less than fair value for an ISO or 85% of fair value for an NSO. 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 Company recognized stock-based compensation expense related to options granted to employees and directors for the fiscal years ended December 31, 20152017 and 20142016 of $942,369$1,000,251 and $345,435,$871,270, respectively of which $120,220 and $132,038 was recorded in discontinued operations in 2017 and 2016, respectively. 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 as of December 31, 20152017 and December 31, 2014.
Stock compensation expense was allocated between departments as follows;
| Year ended | |||||||
| December 31, 2015 | December 31, 2014 | ||||||
| Research & Development | $ | 148,948 | $ | 64,020 | |||
| Sales & Marketing | 62,533 | 8,335 | |||||
| General & Administrative | 730,888 | 273,080 | |||||
| Total | $ | 942,369 | $ | 345,435 | |||
| Year ended | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
Research & Development | $ | 93,237 | $ | 63,535 | ||||
General & Administrative | 786,794 | 675,697 | ||||||
|
|
|
| |||||
Total | $ | 880,031 | $ | 739,232 | ||||
|
|
|
| |||||
The Company granted options to purchase 955,713622,755 and 926,384267,851 of the Company’s common stock in 20152017 and 2014.2016. 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 for the year ended December 31, 2015:
| Year Ended | |||||
| December 31, 2017 | December 31, 2016 | ||||
Expected life (years) | 5.5-6.08 | ||||
Risk-free interest rate | |||||
Volatility | 61%-69% | 65%-73% | |||
Dividend rate | —% | —% | |||
The Black-Scholes option-pricing model requires the use of a group of public companies operating in the Company’s industry. The expected life of stock options represents the average of the contractual term of the options and the weighted-average vesting period, as permitted under the simplified method. The Company has elected to use the simplified method, as the Company does not have enough historical exercise experience to provide a reasonable basis upon whichhighly subjective assumptions to estimate the expected term and the stock option grants are considered “plain vanilla” options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the timefair value of grant.stock-based awards. These assumptions include:
| • | Expected volatility: The estimated volatility rate based on a peer index of common stock of comparable companies in the Company’s industry. |
| • | Expected term: The expected life of stock options represents the average of the contractual term of the options and the weighted-average vesting period, as permitted under the simplified method. The Company has elected to use the simplified method, as the Company does not have enough historical exercise experience to provide a reasonable basis upon which to estimate the expected term and the stock option grants are considered “plain vanilla” options. |
| • | Risk-free rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to liquidity. |
| • | Expected dividend yield: The Company has never declared or paid any cash dividends and do 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 years ended December 31, 20152017 and 20142016 as issued under the Plans:
| Shares Available for Grant | Number of Options Outstanding | Weighted-Average Exercise Price per Share | Weighted Average Remaining Contractual Term | ||||||||
| (in years) | |||||||||||
| Balance at December 31, 2013 | 124,824 | 239,606 | $ | 3.36 | |||||||
| 2014 Plan authorized | 1,437,165 | — | — | ||||||||
| Closed 2010 Plan | (123,523 | ) | — | — | |||||||
| Options granted | (926,384 | ) | 926,384 | 7.15 | |||||||
| Options canceled/forfeited | 93,979 | (93,979 | ) | 6.75 | |||||||
| Balance at December 31, 2014 | 606,061 | 1,072,011 | 6.34 | 8.67 | |||||||
| Additional shares authorized | 270,764 | — | — | ||||||||
| Options granted | (955,713 | ) | 955,713 | 3.08 | |||||||
| Options exercised | — | (83,848 | ) | 3.50 | |||||||
| Options canceled/forfeited | 85,037 | (85,037 | ) | 5.03 | |||||||
| Balance at December 31, 2015 | 6,149 | 1,858,839 | $ | 4.82 | 8.75 | ||||||
| Options vested at December 31, 2014 | — | 578,889 | $ | 5.58 | 7.46 | ||||||
| Options vested and expected to vest at December 31, 2014 | — | 1,072,011 | $ | 6.34 | 8.67 | ||||||
| Options vested at December 31, 2015 | — | 922,927 | $ | 5.06 | 7.47 | ||||||
| Options vested and expected to vest at December 31, 2015 | — | 1,858,839 | $ | 4.82 | 8.75 | ||||||
| Shares Available for Grant | Number of Options Outstanding | Weighted- Average Exercise Price per Share | Weighted Average Remaining Contractual Term | |||||||||||||
| (in years) | ||||||||||||||||
Balance at January 1, 2016 | 1,229 | 371,768 | $ | 24.10 | 8.75 | |||||||||||
Additional shares authorized | 112,143 | — | — | |||||||||||||
Amendment to plan to authorize additional shares | 300,000 | — | — | — | ||||||||||||
Options granted | (267,851 | ) | 267,851 | $ | 6.80 | — | ||||||||||
Options exercised | — | (11,683 | ) | $ | 6.00 | — | ||||||||||
Options canceled/forfeited | 46,249 | (46,249 | ) | $ | 15.45 | — | ||||||||||
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|
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|
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|
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| |||||||||
Balance at December 31, 2016 | 191,770 | 581,687 | $ | 17.10 | 8.48 | |||||||||||
Additional shares authorized | 134,295 | — | — | — | ||||||||||||
Amendment to plan to authorize additional shares | 1,785,837 | — | — | — | ||||||||||||
Options granted | (622,755 | ) | 622,755 | $ | 3.04 | |||||||||||
Options exercised | — | — | — | — | ||||||||||||
Options canceled/forfeited | 177,455 | (177,455 | ) | $ | 8.84 | — | ||||||||||
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| |||||||||
Balance at December 31, 2017 | 1,666,602 | 1,026,987 | $ | 9.99 | — | |||||||||||
|
| |||||||||||||||
Options vested at December 31, 2017 | 554,763 | $ | 13.87 | 7.03 | ||||||||||||
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| |||||||||||
Options vested and expected to vest at December 31, 2017 | 1,026,987 | $ | 9.99 | 7.94 | ||||||||||||
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The weighted-average grant date fair value of employee options granted was $1.66$1.88 and $1.03$4.05 per share for the year ended December 31, 20152017 and December 31, 2014,2016, respectively. At December 31, 20152017 total unrecognized employee stock-based compensation was $1,917,245,$1.2 million, which is expected to be recognized over the weighted-average remaining vesting period of 2.52.6 years. As of December 31, 2015,2017, the outstanding stock options had an intrinsic value of $67,165.
The fair value of an equity award granted to anon-employee generally is determined in the same manner as an equity award granted to an employee. In most cases, the fair value of the equity securities granted is more reliably determinable than the fair value of the goods or services received. Stock-based compensation related to its grant of options tonon-employees has not been material to date.
In June 2016, the Company granted 11,000 NSOs to sales representatives of Bemes, Inc. Of the 11,000 options granted, 5,499 options with a fair value of $26,355 vested immediately upon grant. Accelerated vesting of the remaining options were contingent on the satisfaction of certain performance requirements, that were not met. Regardless of not achieving accelerated vesting, the remaining options have aone-year cliff vesting. As a result, the Company recognized $13,502 in expense for the remaining options during 2016, which vested during the first quarter of 2017. Total expense for the two groups of options reflects the fair value of the Company’s common stock on the applicable vesting commencement dates.
2014 Employee Stock Purchase Plan
Soleno’s board of directors and stockholders have adopted the 2014 Employee Stock Purchase Plan, or the ESPP. The ESPP has become effective, and ourthe board of directors will implement commencement of offers thereunder in its discretion. A total of 139,83927,967 shares of ourthe Company’s Common Stock has been made available for sale under the ESPP. In addition, ourthe ESPP provides for annual increases in the number of shares available for issuance under the plan on the first day of each year beginning in the year following the initial date that ourthe board of directors authorizes commencement, equal to the least of:
As of December 31, 20152017, there were no purchases by employees under this plan.
Series D Warrants
The Company has issued 1,280,324256,064 Series D Warrants in October 2015, with an exercise price of $2.46$12.30 and a term of five years expiring on October 15, 2020. The Company’s Series D Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. They also contain a cashless exercise
Accounting Treatment
The Company accounts for the Series D Warrants in accordance with the guidance in ASC 815
Derivatives and Hedging. As indicated above, the Company is not required under any circumstance to settle any Series D Warrant exercise for cash. The Company has therefore classified the value of the Series D Warrants as permanent equity.Other Common Stock Warrants
As of December 31, 2015,2017 and 2016, the Company had 480,14796,029 Common Stock warrants outstanding from the 2010/2012 convertible notes, with an exercise price of $4.87$24.35 and a term of 10 years expiring in November 2024. During the year ended December 31, 2015, 43,720 Common Stock warrants were cashless exercised resulting in the issuance of 13,407 shares of the Company’s Common Stock. The Company also has outstanding 9,2591,851 Common Stock warrants issued in 2009, with an exercise price of $21.60$108.00 and a term of 10 years, expiring in January 2019 and 82,50016,500 Common Stock warrants issued to the underwriter in ourthe Company’s IPO, with an exercise price of $7.14$35.70 and a term of 10 years, expiring in November 2024.
Note 11. Income Taxes
The geographical distribution of loss before income taxes are summarized below.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
United States | $ | (13,706,889 | ) | $ | (6,501,997 | ) | ||
Foreign | (17,429 | ) | (235,623 | ) | ||||
|
|
|
| |||||
Total | $ | 13,724,318 | $ | (6,737,620 | ) | |||
|
|
|
| |||||
Loss resulting from discontinued operations | $ | (3,593,575 | ) | $ | (5,305,894 | ) | ||
|
|
|
| |||||
Taxes allocated to discontinued operations | — | $ | 21,700 | |||||
|
|
|
| |||||
The components of the Company had no material current, deferred, or totalprovision for income tax expensebenefit follows.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
Current: | ||||||||
Federal | $ | — | $ | — | ||||
State | 800 | — | ||||||
Foreign | — | — | ||||||
|
|
|
| |||||
| — | — | |||||||
Deferred | ||||||||
Federal | (1,578,355 | ) | — | |||||
State | (72,912 | ) | — | |||||
|
|
|
| |||||
Foreign | — | — | ||||||
|
|
|
| |||||
| (1,651,267 | ) | — | ||||||
|
|
|
| |||||
Total provision for income tax benefit | $ | (1,650,467 | ) | $ | — | |||
|
|
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| |||||
The provision for income tax benefit results from accounting for the acquired assets and liabilities of Essentialis resulting in a portion of the Company’s valuation allowance in the years ended December 31, 2015 and 2014. A reconciliationamount of $1.6 million being released.
The provision for income tax expense with amounts determinedbenefit differs from the amount estimated by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:the operating loss from continuing operations due to the following.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
Tax on the loss before income tax expense computed at the federal statutory rate of 34% | $ | (4,666,395 | ) | $ | (2,290,862 | ) | ||
State tax (benefit) at statutory rate, net of federal benefit | (67,321 | ) | (136,982 | ) | ||||
Tax reform | 10,613,026 | — | ||||||
Foreign rate differential | 2,614 | 35,343 | ||||||
Change in Valuation Allowance | (8,484,728 | ) | 2,355,170 | |||||
Change in research and development credits | (121,382 | ) | (129,974 | ) | ||||
Stock Based Compensation—ISO | 294,913 | 274,506 | ||||||
Change in fair value of warrants | 343,179 | (619,067 | ) | |||||
Acquisition costs | 203,197 | — | ||||||
Loss on sale of NFI | (677,132 | ) | — | |||||
Other | 909,562 | 511,866 | ||||||
|
|
|
| |||||
Provision for income tax benefit | $ | (1,650,467 | ) | — | ||||
|
|
|
| |||||
| Years Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| Tax on the loss before income tax expense computed at the federal statutory rate of 34% | $ | (5,408,551 | ) | $ | (4,717,063 | ) | |
| State tax (benefit) at statutory rate, net of federal benefit | (928,107 | ) | (13,020 | ) | |||
| Change in Valuation Allowance | 4,199,154 | 1,578,347 | |||||
| Change in research and development credits | (60,991 | ) | 316,311 | ||||
| Change in fair value of warrants | 1,493,215 | 2,960,766 | |||||
| Other | 705,280 | (125,341 | ) | ||||
| Income tax expense | $ | — | $ | — | |||
| Effective income tax rate | — | % | — | % | |||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 20152017 and 2014:
| December 31, | |||||||
| 2015 | 2014 | ||||||
| Non-Current Deferred Tax Assets: | |||||||
| Reserves and accruals | $ | 287,850 | $ | 71,953 | |||
| Net Operating Loss Carryforwards | 26,174,912 | 22,125,807 | |||||
| Research and development credits | 1,381,296 | 1,345,833 | |||||
| Intangible Assets | (74,113 | ) | 46,784 | ||||
| Fixed Assets | 9,080 | (10,505 | ) | ||||
| Total Non-Current Deferred Tax Assets | 27,779,025 | 23,579,872 | |||||
| Valuation Allowance | (27,779,025 | ) | (23,579,872 | ) | |||
| Net Deferred Tax Assets | $ | — | $ | — | |||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
Non-Current Deferred Tax Assets: | ||||||||
Reserves and accruals | $ | 144,876 | $ | 159,163 | ||||
Assets held for sale | 17,428 | 63,540 | ||||||
Net Operating Loss Carryforwards | 25,485,703 | 30,291,080 | ||||||
Tax credit carryforwards | 1,807,163 | 1,580,253 | ||||||
Capital loss carryover | 459,201 | |||||||
Stock-based compensation—NSO | 35,533 | |||||||
|
|
|
| |||||
Grossnon-current deferred tax assets | 27,949,904 | 32,094,036 | ||||||
Intangible Assets | (4,414,340 | ) | (74,376 | ) | ||||
Fixed Assets | (2,397 | ) | (1,764 | ) | ||||
|
|
|
| |||||
Totalnon-current deferred tax liabilities | (4,416,737 | ) | (76,141 | ) | ||||
Total deferred tax assets | 23,533,167 | 32,017,896 | ||||||
|
|
|
| |||||
Valuation allowance | (23,533,167 | ) | (32,017,895 | ) | ||||
|
|
|
| |||||
Net deferred tax assets | $ | — | $ | — | ||||
|
|
|
| |||||
The Company has recorded a full valuation allowance against its net deferred tax assets due to the uncertainty as it believes that it is more likely than not thatto whether such assets will not be realized. The valuation allowance increased by $4,199,154$8,484,728 from December 31, 20142016 to December 31, 20152017 primarily due to the generation of current year net operating losses and research and development credits claimed.
As of December 31, 2015,2017, the Company had $67,263,865$104.5 million of federal, and $56,650,176$50.0 million of state and $253,000 of foreign net operating loss, respectively,losses available to offset future taxable income. The federal net operating loss carryforwards begins to expire in 2019, and the state net operating loss carryforwards will begin to expire in 2016,2017 and the foreign net operating loss carryforward can be carried forward indefinitely, if not utilized. As of December 31, 2015,2017, the Company also had $1,328,082$1.6 million of federal and $977,574$1.3 million of state research and development credit carryforwards, respectively.carryforwards. The federal research and development credit carryforward begins to expire in 2024 and the state research and development credit can be carried forward indefinitely.
Utilization of the use of net operating loss and tax credit carryforwardscarry forwards are subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may be limitedresult in the expiration of the net operating loss before utilization. The Company completed Section 382 analysis through December 2016 and determined that an ownership change, as defined under Section 382 of the Internal Revenue Code, occurred in June 2016. The Company’s tax attributes are subject to an annual limitation of approximately $0.5 million per year for federal purposes.
United States taxes and foreign withholding taxes have not been provided on undistributed earnings for certain situations where changes occur innon-United States subsidiaries as of December 31, 2017, as the stock ownership of a company. In the event that the Company has had a change in ownership, utilization of the carryforwards couldearnings, if any, are intended to be restricted.indefinitely reinvested.
The following tables summarize the activities of gross unrecognized tax benefits:
| December 31, | |||||||
| 2015 | 2014 | ||||||
| Beginning balance | 673,247 | — | |||||
| Increase related to prior year tax positions | — | 628,383 | |||||
| Decreases related to prior year tax positions | (13,207 | ) | — | ||||
| Increase related to Current year tax positions | 31,657 | 44,864 | |||||
| Decreases related to current year tax positions | — | — | |||||
| Ending Balance | $ | 691,697 | $ | 673,247 | |||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
Beginning balance | $ | 794,962 | $ | 691,697 | ||||
Decreases related to prior year tax positions | (4,459 | ) | 35,804 | |||||
Increase related to current year tax positions | 63,002 | 67,461 | ||||||
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Ending Balance | $ | 853,504 | $ | 794,962 | ||||
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There were no unrecognized tax benefits that would impact the effective tax rate were approximately none and none as of December 31, 20152017 and December 31, 2014, respectively.2016. As of December 31, 2015, $691,697 of2017, unrecognized tax benefits of $853,504 would be offset by a change in valuation allowance.
The Company files income tax returns in the U.S. federal jurisdiction, and certain state jurisdictions.jurisdictions and United Kingdom. In the normal course of business, the Company is subject to examination by federal, state, local and localforeign jurisdictions, where applicable. In the U.S federal jurisdiction, tax years 1999 forward remain open to examination, and in the state tax jurisdiction, years 20052006 forward remain open to examination and in the foreign jurisdiction, years 2015 forward remain open to examination. The Company is currently not under audit by any federal, state, local or localforeign jurisdiction.
On December 22, 2017, H.R. 1, also known as the FASB issued ASU 2015-17,
Additionally, on December 22, 2017, the SEC staff also issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax credit.effects of the 2017 Tax Act. Specifically, SAB 118 provides a measurement period for companies to evaluate the impacts of the 2017 Tax Act on their financial statements. This measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements, and cannot exceed one year.
There-measurement of U.S. deferred tax assets/liabilities were approximately $10.6 million with corresponding offset to valuation allowance. The ActCompany estimated a negative earning & profit for all its foreign entities including FIN 48 liabilities and therefore did not have a material impact on the Company's effectiverecord for any transition tax rate for fiscal 2015 duepursuant to the effect of the valuation allowance on the Company's deferred tax assets.
The Company uses the “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement criteria for income tax benefits. The Company has determined it has no material unrecognized assets or liabilities related to uncertain tax positions as of December 31, 2015.2017. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as a component of other expense.
Note 12. Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted-average number of Common Stock actually outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of Common Stock outstanding and dilutive potential Common Stock that would be issued upon the exercise of Common Stock warrants and options. For the year ended December 31, 20152017 and 2014,2016, the effect of issuing the potential common stock is anti-dilutive due to the net losses in those periods and the number of shares used to compute basic and diluted earnings per share are the same in each of those periods.
The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported (in Common Stock equivalent shares):
| As of December 31, | |||||
| 2015 | 2014 | ||||
| Convertible preferred stock | 2,462,162 | — | |||
| Warrants issued to 2010/2012 convertible note holders to purchase common stock | 480,147 | 523,867 | |||
| Options to purchase common stock | 1,858,839 | 1,072,011 | |||
| Warrants issued in 2009 to purchase common stock | 9,259 | 9,259 | |||
| Warrants issued to underwriter to purchase common stock | 82,500 | 82,500 | |||
| Series A warrants to purchase common stock | 2,425,605 | 2,449,605 | |||
| Series B warrants to purchase common stock | 116,580 | 2,449,605 | |||
| Series C warrants to purchase common stock | 590,415 | — | |||
| Series D warrants to purchase common stock | 1,280,324 | — | |||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
Convertible preferred stock | 914,200 | 2,556,000 | ||||||
Warrants issued to 2010/2012 convertible note holders to purchase common stock | 102,070 | 102,070 | ||||||
Options to purchase common stock | 1,026,987 | 581,686 | ||||||
Warrants issued in 2009 to purchase common stock | 1,851 | 1,851 | ||||||
Warrants issued to underwriter to purchase common stock | 16,500 | 16,500 | ||||||
Series A warrants to purchase common stock | 485,121 | 485,121 | ||||||
Series C warrants to purchase common stock | 118,083 | 118,083 | ||||||
Series D warrants to purchase common stock | 586,182 | 586,162 | ||||||
2017 PIPE warrants | 6,024,425 | — | ||||||
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Total | 9,275,419 | 4,447,473 | ||||||
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Note 13. NeoForce Group, Inc. Acquisition
The Compensation Committee of the Board of Directors of the Company through its wholly owned subsidiary Neoforce, Inc ("NFI"), acquired substantially all ofrecommended, and the assets of NeoForce in exchangeBoard approved a new compensation plan for an upfront cashthe payment of $1.0 million. In addition,quarterly Board fees. At the Company agreed to pay the former NeoForce shareholder an annual royalty payment for a periodelection of 36 months (“Royalty”) in the low single digits based on net sales of NeoForce products that were acquired by the Company. As of December 31, 2015, the Company recorded $8,372 of Royalty payable.
In 2017, the Compensation Committee of the contingent consideration is based on preliminary cash flow projections, growthBoard of Directors recommended, and the Board approved a revised compensation plan pursuant to which all board fees are paid in expected product sales and other assumptions. Based on the assumptions, the fair valueCommon Stock of the Royalty was determinedCompany. Payment to be $153,000 at the dateBoard of acquisition and at December 31, 2015. The fair valueDirectors in shares of the royalty was determined by applyingCompany’s Common Stock is made after the income approach, using several significant unobservable inputs for projected cash flows and a discount rate of 20% commensurate with the Company’s cost of capital and expectationclose of the revenue growth for products at their life cycle stage. These inputs are considered Level 3 inputs underquarter in which the fair value measurements and disclosure guidance.
| Cash consideration | $ | 1,000,000 | |
| Fair value of contingent consideration | 153,000 | ||
| Total purchase price consideration | $ | 1,153,000 | |
| Net tangible assets acquired | $ | 39,377 | |
| Customer contracts | 259,730 | ||
| Patents | 135,890 | ||
| Goodwill | 718,003 | ||
| Net Assets Acquired | $ | 1,153,000 | |
| December 31, | December 31, | ||||||
| 2015 | 2014 | ||||||
| Pro forma total revenues | $ | 1,168,846 | $ | 987,853 | |||
| Pro forma net loss | $ | (16,002,126 | ) | $ | (13,307,030 | ) | |
| Pro forma net loss per share – basic and diluted | $ | (1.70 | ) | $ | (10.48 | ) | |
| Pro forma weighted-average shares-basic and diluted | 9,425,880 | 1,270,033 | |||||
Note 14. Defined Contribution Plan
The Company sponsors a 401(k) Plan, which stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations of eligible compensation. The Company may match employee contributions in amounts to be determined at the Company’s sole discretion. To date, the Company has not made any matching contributions.
Note 15. Subsequent Events
(i) Sabby conversion of Series B convertible stock
In January 5, 2016, January 27, 2016 and March 16, 2016, the two funds2018, a fund managed by Sabby converted 1,665an aggregate of 1,000 shares of their Series AB Convertible Stock into 900,000200,000 shares of Common Stock.
(ii) Common shares issued to directors in payment of quarterly board of director fees
On January 8, 2016, the Company completed the second closing under the Sabby Purchase Agreement entered into on October 12, 2015 with funds managed by Sabby. The Company issued 5,445 shares of Series A Convertible Preferred Stock with a stated value of $1,000 per share and par value of $0.001. In addition,February 2, 2018, the Company issued 1,471,622 Series D Warrants to the funds managed by Sabby and 58,865 Series D Warrants to Maxim Group, LLC as underwriter. The Company received proceeds of approximately $5 million, net of $0.5 million in estimated expenses.
None.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the supervisionSecurities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission, or SEC, rules and forms, and that such information is accumulated and communicated to our Chiefmanagement to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our Principal Executive Officer and ChiefPrincipal Financial Officer, and withafter evaluating the participation of our audit committee, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and15d-15(e))as of December 31, 2015. The term “disclosurethe end of the period covered by this Annual Report on Form10-K, have concluded that, based on such evaluation, our disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, withinwith the time periods specified in the SEC’s rules and forms. Disclosure controlsforms, and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief
Internal Control over Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015 at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule13a-15(f) under the Exchange Act Rules 13a-15(f) and 15d-15(f).Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal Executive Officer and Principal Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with United States generally accepted accounting principles.
Because of the effectiveness of ourits inherent limitations, internal control over financial reporting as of December 31, 2015 based on the guidelines established in
Management conducted an evaluation of the effectiveness of our control over financial reporting based on the 2013 framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
Changes in Internal Controls
There have been no changes to our internal control over financial reporting that occurred during our last fiscal quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 20162018 Annual Meeting of Stockholders. The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report onForm 10-K.
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 20162018 Annual Meeting of Stockholders. The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report onForm 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item to our Definitive Proxy Statement for our 20162018 Annual Meeting of Stockholders. The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report onForm 10-K.
AND DIRECTOR INDEPENDENCE
The information required by this item to our Definitive Proxy Statement for our 20162018 Annual Meeting of Stockholders. The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report onForm 10-K.
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 20162017 Annual Meeting of Stockholders. The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report onForm 10-K.
| 1. | Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Annual Report onForm 10-K |
| 2. | Financial Schedules: All schedules have been omitted because the information called for is not required or is shown either in the financial statements or in the notes thereto. |
| 3. | Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report onForm 10-K. |
EXHIBIT INDEX
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Soleno Therapeutics, Inc. (formerly Capnia, Inc.) Each person whose individual signature appears below hereby authorizes and appoints Anish Bhatnagar, Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ ANISH BHATNAGAR Anish Bhatnagar President, Chief Executive Officer and Director (Principal Executive Officer and /S/ ERNEST MARIO Ernest Mario Chairman /S/ RAJEN DALAL Rajen Dalal Director /S/ WILLIAM G. HARRIS William G. Harris Director /S/ MAHENDRA SHAH Mahendra Shah Director /S/ JAMES GLASHEEN James Glasheen Director /S/ STUART COLLINSON Stuart Collinson Director 125CAPNIA, INC.Date: April 2, 2018 Date: March 25, 2016By: S/ ANISH BHATNAGAR President and Chief Executive Officer and David O’Toole, and each of them, with full power of substitution and resubstitution and full power to act, without the other, as his or her true and lawfulattorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that saidattorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.Signature Title Date /S/ ANISH BHATNAGAR
Principal Financial and Accounting Officer) March 25, 2016Anish Bhatnagar(Principal Executive Officer)/S/ DAVID D. O’TOOLEChief Financial OfficerMarch 25, 2016David D. O’Toole(Principal Financing and Accounting Officer)/S/ ERNEST MARIOChairmanMarch 25, 2016Ernest Mario/S/ EDGAR G. ENGLEMANDirectorMarch 25, 2016Edgar G. Engleman/S/ STEINAR J. ENGELSENDirectorMarch 25, 2016Steinar J. Engelsen/S/ STEPHEN KIRNONDirectorMarch 25, 2016Stephen Kirnon/S/ WILLIAM JAMES ALEXANDERDirectorMarch 25, 2016William James Alexander/S/ WILLIAM G. HARRIS�� DirectorMarch 25, 2016William G. Harris103EXHIBIT INDEX Incorporated by Reference from Description of Document 3.1 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock 8-K October 15, 2015 3.1 X 3.2 Amended and Restated Certificate of Incorporation of Capnia, Inc. S-1/A August 7, 2014 3.2 3.4 Amended and Restated Bylaws of Capnia, Inc. S-1/A July 1, 2014 3.4 4.1 Form of the Common Stock certificate. S-1/A August 5, 2014 4.1 4.2 Amended And Restated Investors’ Rights Agreement, dated March 20, 2008, by and among Capnia, Inc. and certain holders of the Capnia, Inc.’s capital stock named therein S-1 June 10, 2014 4.2 4.3 Form of Series A Warrant Agreement. S-1/A August 7, 2014 4.3 4.4 Form of the Series A Warrant certificate. S-1/A July 1, 2014 4.4 4.5 Form of Underwriters’ Compensation Warrant. S-1/A June 10, 2014 4.5 4.6 Form of Convertible Promissory Note issued in February 2010 and March 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.6 4.7 Form of Warrant to Purchase Shares issued in February 2010 and March 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.7 4.8 Form of Convertible Promissory Note issued in November 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.8 4.9 Form of Warrant to Purchase Shares issued in November 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.9 4.10 Form of Convertible Promissory Note issued in January 2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.10 4.11 Form of Warrant to Purchase Shares issued in January 2012 in connection with Capnia, Inc.’s 2012 convertible note financing. S-1 June 10, 2014 4.11 4.12 Form of Convertible Promissory Note issued in July 2012 and August 2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.12 4.13 Form of Warrant to Purchase Shares issued in July 2012 and August 2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.13 Incorporated by Reference from Description of Document 4.14 Form of Convertible Promissory Note issued in April, August and October 2014 in connection with the 2014 convertible note financing. S-1 June 10, 2014 4.14 4.15 Form of Warrant to Purchase Shares issued in April, August and October 2014 in connection with the 2014 convertible note financing. S-1 June 10, 2014 4.15 4.16 Form of unit certificate. S-1/A July 1, 2014 4.16 4.17 Form of Series B Warrant Agreement. S-1/A August 7, 2014 4.17 4.18 Form of the Series B Warrant Certificate. S-1/A July 1, 2014 4.18 4.19 Form of the Series C Warrant Agreement. S-4 April 1, 2015 4.19 4.20 Form of the Series C Warrant certificate. S-4 April 1, 2015 4.20 4.21 Form of the Series D Common Stock Purchase Warrant 8-K October 15, 2015 4.21 4.22 Form of Placement Agent Warrant 8-K October 15, 2015 4.22 4.23 Form of Series D Common Stock Warrant Certificate 8-K October 15, 2015 4.23 4.24 Form of Series A Convertible Preferred Stock Certificate 8-K October 15, 2015 4.24 9.10 Form of Voting Agreement 8-K October 15, 2015 9.10 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. S-1/A June 10, 2014 10.1 10.2 1999 Incentive Stock Plan and forms of agreements thereunder. S-1/A June 10, 2014 10.2 10.3 2010 Equity Incentive Plan and forms of agreements thereunder. S-1/A June 10, 2014 10.3 10.4 2014 Equity Incentive Plan and forms of agreements thereunder. S-1/A July 1, 2014 10.4 10.5 2014 Employee Stock Purchase Plan and forms of agreements thereunder. S-1/A July 1, 2014 10.5 10.6 Offer Letter, dated June 22, 2007, by and between Capnia, Inc. and Ernest Mario, Ph.D. S-1 June 10, 2014 10.6 10.7 Employment Agreement, dated April 6, 2010, by and between Capnia, Inc. and Anish Bhatnagar. S-1 June 10, 2014 10.7 10.8 Offer Letter, dated May 29, 2013, between Capnia, Inc. and Anthony Wondka. S-1 June 10, 2014 10.8 10.9 Offer Letter, dated April 17, 2014, by and between Capnia, Inc. and Antoun Nabhan. S-1 June 10, 2014 10.9 10.10 Asset Purchase Agreement dated May 11, 2010, by and between Capnia, Inc. and BioMedical Drug Development Inc. S-1 June 10, 2014 10.10 10.11 Convertible Note and Warrant Purchase Agreement, dated February 10, 2010, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.11 10.12 Amendment No. 1 to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated November 10, 2010, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.12 Incorporated by Reference from Description of Document 10.13 Amendment No. 2 to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated January 17, 2012, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.13 10.14 Convertible Note and Warrant Purchase Agreement, dated January 16, 2012, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.14 10.15 Omnibus Amendment to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated July 31, 2012, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.15 10.16 Omnibus Amendment to Convertible Promissory Notes and Warrants to Purchase Shares, dated April 28, 2014, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.16 10.17 Convertible Note and Warrant Purchase Agreement, dated April 28, 2014, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.17 10.18 Omnibus Amendment to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated May 5, 2014, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.18 10.19 Sublease, dated May 20, 2014, by and among Capnia, Inc. and Silicon Valley Finance Group. S-1/A July 1, 2014 10.19 10.20 Offer Letter, dated June 24, 2014, by and between Capnia, Inc. and David D. O’Toole. S-1/A July 22, 2014 10.20 10.21 Loan Agreement by and between Capnia, Inc. and the investors named therein, dated September 29, 2014. S-1/A September 29, 2014 10.21 10.22 Revised Second Tranche Closing Notice and Letter Amendment dated August 18, 2014 relating to the August 2014 Notes. S-1/A November 4, 2014 10.22 10.23 Second Tranche Subsequent Closing Notice and Letter Amendment dated October 22, 2014 relating to the October 2014 Notes. S-1/A November 4, 2014 10.23 10.24 Form of Warrant Exercise Agreement. 8-K/A March 6, 2015 10.24 10.25 Advisory Agreement by and between Capnia, Inc. and Maxim Group LLC, dated March 4, 2015. S-24 April 1, 2015 10.25 10.26 Agreement and First Amendment to Asset Purchase Agreement dated June 30, 2015, by and between Capnia, Inc. and Biomendical Drug Development Inc. and George Tidmarsh MD, PhD. 8-K July 7, 2015 10.26 10.27 Common Stock Purchase Agreement dated June 30, 2015, by and between Capnia, Inc. and George Tidmarsh MD, PhD. 8-K July 7, 2015 10.27 10.28 Registration Rights Agreement dated July 24, 2015 between Capnia, Inc. and Aspire Capital Fund, LLC. 8-K July 7, 2015 10.28 10.29 Common Stock Purchase Agreement dated October 12, 2015 8-K July 7, 2015 10.29 Incorporated by Reference from Description of Document 10.30 Securities Purchase Agreement dated October 12, 2015 8-K October 15, 2015 10.30 10.31 Form of Registration Rights Agreement 8-K October 15, 2015 10.31 10.32 Form of Lock-Up Agreement 8-K October 15, 2015 10.32 10.33 Amendment No. 1 to Securities Purchase Agreement dated October 29, 2015 S-1/A December 22, 2015 10.33 10.34 Transfer and Distribution Agreement: United States: by and between Capnia, Inc. and Bemes, Inc. signed January 26, 2016 8-K January 28, 2016 10.34 April 2, 2018 April 2, 2018 31.1 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. X31.2Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.X32.1*Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.X101.INSXBRL Instance DocumentX101.SCHXBRL Taxonomy Extension Schema DocumentX101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentX101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentX101.LABXBRL Taxonomy Extension Label Linkbase DocumentX101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentX_________________________April 2, 2018 *The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Capnia, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.April 2, 2018 April 2, 2018 April 2, 2018 April 2, 2018