Soleno Therapeutics, Inc.
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: December 31, 2018☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File No.: 001-36593 Soleno Therapeutics, Inc.(Exact name of Registrant as specified in its charter) Delaware 77-0523891(State or other Jurisdiction ofIncorporation or Organization) (I.R.S. EmployerIdentification No.) 1235 Radio Road, Suite 110Redwood City, California 94065(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (650) 213-8444Securities 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 shareSeries A warrants to purchase Common Stock The NASDAQ Capital MarketThe 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 ☒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 ☐ No ☒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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large accelerated filer☐ Accelerated filer☐Non-accelerated filer☒ Smaller reporting company☒ Emerging growth company☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒The aggregate market value of voting stock held by non-affiliates of the registrant on June 30, 2018, based on the closing price of $2.34 for shares of the registrant’scommon stock as reported by the NASDAQ Capital Market, was approximately $27.6 million. Shares of Common Stock held by each executive officer, director and beneficial holderof 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates.As of March 6, 2019 there were 31,755,169 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2019 Annual Meetingof 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 Securitiesand Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2018. Except with respect to information specificallyincorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.  Soleno Therapeutics, Inc.Annual Report on Form 10-KFor the Year Ended December 31, 2018INDEX PART IItem 1Business2 Item 1ARisk Factors14 Item 1BUnresolved Staff Comments50 Item 2Properties51 Item 3Legal Proceedings51 Item 4Mine Safety Disclosures51 PART II Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities52 Item 6Selected Financial Data53 Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operation54 Item 7AQuantitative and Qualitative Disclosures About Market Risk66 Item 8Financial Statements and Supplementary Data67 Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure102 Item 9AControls and Procedures102 Item 9BOther Information102 PART III Item 10Directors, Executive Officers and Corporate Governance103 Item 11Executive Compensation103 Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters103 Item 13Certain Relationships and Related Transactions, and Director Independence103 Item 14Principal Accounting Fees and Services103 PART IV Item 15Exhibits, Financial Statement Schedules104 Signatures112  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThe following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes thatappear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning ofSection 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: “RiskFactors” and Part 2, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are often identifiedby the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” “plan” or “continue,” and similarexpressions or variations. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to: anyprojections 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 rightsand 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 bysuch forward-looking statements. Accordingly, we caution you not to place undue reliance on these statements. Particular uncertainties that could affectfuture results include: our ability to achieve or maintain profitability; our ability to obtain substantial additional capital that may be necessary to expand ourbusiness; our ability to maintain internal control over financial reporting; our dependence on, and need to attract and retain, key management and otherpersonnel; our ability to obtain, protect and enforce our intellectual property rights; potential advantages that our competitors and potential competitors mayhave in securing funding or developing products; business interruptions such as earthquakes and other natural disasters; our ability to comply with laws andregulations; potential product liability claims; and our ability to use our net operating loss carryforwards to offset future taxable income. For a discussion ofsome of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on risk factors that appear inPart I, Item 1A: “Risk Factors” of this Annual Report on Form 10-K and other risks and uncertainties detailed in this and our other reports and filings with theSecurities and Exchange Commission, or SEC. The forward-looking statements in this Annual Report on Form 10-K represent our views as of the date of thisAnnual Report on Form 10-K. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect toupdate 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.1 PART IITEM 1. BUSINESSCompany OverviewWe were incorporated in the State of Delaware on August 25, 1999, and are located in Redwood City, California. On May 8, 2017, we receivedstockholder approval to amend our Amended and Restated Certificate of Incorporation to change our name from “Capnia, Inc.” to “Soleno Therapeutics,Inc.” We initially established our operations as a diversified healthcare company that developed and commercialized innovative diagnostics, devices andtherapeutics addressing unmet medical needs, which consisted of: precision metering of gas flow technology marketed as Serenz® Allergy Relief, or Serenz;the CoSense® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which measures ETCO and aids in the detection of excessive hemolysis, acondition in which red blood cells degrade rapidly and which can lead to adverse neurological outcomes; and, products that included temperature probes,scales, surgical tables, and patient surfaces.On March 7, 2017, we completed our merger, or the Merger, with Essentialis, Inc., a Delaware corporation, or Essentialis, in accordance with theMerger Agreement by and between Soleno Therapeutics and Essentialis dated December 22, 2016, or the Merger Agreement. After the Merger, our primaryfocus has been the development and commercialization of novel therapeutics for the treatment of rare diseases. Essentialis was a privately held, clinical stagebiotechnology company focused on the development of breakthrough medicines for the treatment of rare diseases where there is increased mortality and riskof cardiovascular and endocrine complications. Prior to the Merger, Essentialis’s efforts were focused primarily on developing and testing product candidatesthat target the ATP-sensitive potassium channel, a metabolically regulated membrane protein whose modulation has the potential to impact a wide range ofrare metabolic, cardiovascular, and CNS diseases. Essentialis has tested Diazoxide Choline Controlled Release tablets, 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, orU.S., as well as in the European Union, or E.U.Subsequent to the Merger with Essentialis, we determined to divest, sell or dispose of our business efforts focused on the development andcommercialization of our Serenz and CoSense technologies. Our current research and development efforts are primarily focused on advancing our leadcandidate, DCCR tablets for the treatment of PWS, through late-stage clinical development.Diazoxide Choline Controlled-Release TabletsDCCR tablets consist of the active ingredient diazoxide choline, a choline salt of diazoxide, which is a benzothiadiazine. Once solubilized from theformulation, diazoxide choline is rapidly hydrolyzed to diazoxide prior to absorption. Diazoxide acts by stimulating ion flux through ATP-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 avariety of ways. Agonizing the KATP channel in the hypothalamus has the potential to address hyperphagia, which is an insatiable desire to eat. Agonizingthe 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 yearsof use of the 2-3 times a day orally-administered drug in the approved indications. In addition to the short-term use (<3 months) in the approved indicationsfor Proglycem, there are also extensive data on chronic use in children with congenital hyperinsulinism, or CI, and in adults with insulinoma. Insulinomapatients 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 thefrequency of daily dosing required by current diazoxide formulations. Diazoxide choline is formulated into an extended-release tablet that lowers peakplasma concentration compared to diazoxide oral suspension and slows release of diazoxide from DCCR, making it suitable for once-a-day dosing. Thecontrol of release and absorption of diazoxide achieved using DCCR results in very level and consistent intraday circulating drug levels, and consistentlevels of diazoxide in tissues that are the site of action of the drug (the hypothalamus). In circulation, diazoxide is extensively protein bound. Only unbounddiazoxide is active. The2 consistent absorption of diazoxide may also result in some level of disequilibrium in protein binding, potentiating the therapeutic response to treatment. Thecontrolled rate of absorption, level intraday circulating drug levels and the disequilibrium in protein binding likely results in the potential for improvedtherapeutic response to treatment. Avoiding significant swings in circulating drug levels also has the potential to reduce adverse events which are oftenassociated with transiently high circulating drug levels that often follow rapid absorption from immediate release product formulations.Prader-Willi SyndromePWS is a rare, complex neurobehavioral/metabolic disorder, which is due to the absence of normally active paternally expressed genes from thechromosome 15q11-q13 region. PWS is an imprinted condition with 70-75% of the cases due to a de novo deletion in the paternally inherited chromosome15 11-q13 region, 20-30% from maternal uniparental disomy 15, or UPD, where the affected individual inherited 2 copies of chromosome from their motherand no copy from their father, and the remaining 2-5% from either microdeletions or epimutations of the imprinting center (i.e., imprinting defects; IDs). Thecommittee on genetics of the American Academy of Pediatrics states PWS affects both genders equally and occurs in people from all geographic regions; itsestimated 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 30years of age. The mean age of death reported from a 40-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, obsessiveand compulsive behaviors and mood fluctuations. The majority of older adolescent and adult PWS patients display some degree of aggressive or threateningbehaviors 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.PWS is typically thought of as a genetic obesity, which is often significant. With increasing awareness among families and caregivers leading tosignificant control of food intake, many PWS patients today may not be obese. However, they remain hyperphagic and will typically have a higher body fatand lower lean body mass content. They are prone to cardiometabolic issues such as abnormal lipid profiles, diabetes and hypertension. Other complicationsin PWS patients include greater risk for autistic symptomatology, psychosis, sleep disorders, distress, food stealing, withdrawal, sulking, nail-biting, hoardingand overeating, and more pronounced attention-deficit hyperactivity disorder symptoms, insistence on sameness, and their association with maladaptiveconduct problems. The reported rates of psychotic symptoms, between 6% and 28%, are higher than those for individuals with other intellectual disabilities.Individuals with PWS show age-related increases in internalizing problems such as anxiety, sadness and a feeling of low self-esteem. Males are at greater riskfor aggressive behavior, depression and dependent personality disorder and overall severity of psychopathology than females. Cognitively, most individualswith PWS function in the mild intellectually disability range with a mean IQ in the 60s to low 70s. The combination of food-related preoccupations andnumerous maladaptive behaviors make it difficult for individuals with PWS to perform to their IQ potential.Unmet Medical Needs in PWSThe target indication for DCCR is the treatment of PWS. Currently, the only approved treatment related to PWS is growth hormone which addressesthe short stature associated with PWS, 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 importantsymptom to be relieved by a new treatment. Physical function and body composition symptoms for which a high percentage of respondents indicated werevery important or most important included: 92.9% indicated improving metabolic health (reduces fat / increases muscle) and 81.3% indicated the relatedsymptom of improving activity and stamina. The behavioral and cognitive symptoms rated by respondents as very or most important were: 85.2% indicatedreduction of obsessive/compulsive behavior, 84.6% indicated improvements to intellect/development, and 83.2% indicated reduction of temper outburstseverity and frequency.3 Therefore, there is a clear unmet need in the treatment of PWS to reduce hyperphagia and improve behaviors around food, and to reduce otherbehavioral and cognitive impacts of this complex disease. In addition, improving metabolic health is also an important unmet need.Clinical Trial of DCCR for PWSA Phase III clinical trial is currently being conducted to evaluate the efficacy and safety of DCCR in patients with genetically-confirmed PWS. Thisstudy, DESTINY PWS, is a multi-center, randomized, double-blind, placebo-controlled study with enrollment of approximately 105 children and adults withPWS. Subjects who complete the 15-week DESTINY PWS study may enroll in a long-term, safety extension study. A Phase II clinical trial has been conducted to evaluate the safety and preliminary efficacy of 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 betweenthe 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 atthe discretion of the investigator. Any subject who showed an increase in resting energy expenditure and/or a reduction in hyperphagia from baseline atcertain study visits would be designated a responder, whereas all others would be designated non-responders. This 10-week open-label treatment phase wasfollowed by randomized double-blind, placebo-controlled, withdrawal phase. Responders were randomized in a 1:1 ratio either to continue on activetreatment 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 weredesignated 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. Inaddition, greater improvement in hyperphagia from baseline was observed in those subjects with moderate to severe hyperphagia who received higher DCCRdoses. There was a significant improvement in the number of subjects reporting one or more aggressive and destructive behaviors. During the open-labeltreatment 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 wereassociated with a statistically significant reduction in waist circumference, consistent with the loss of visceral fat. Statistically significant reductions frombaseline in LDL cholesterol and non-HDL cholesterol were observed. The change in triglycerides, while marked, did not reach statistical significance.Safety of DCCR in the Treatment of PWSMany 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, regardless of the relationship to DCCR, included peripheraledema, hyperglycemia, impaired glucose tolerance, upper respiratory tract infections, ear infection, headache, somnolence, constipation, and bruises.Regulatory Status of DCCR for the Treatment of PWSDiazoxide choline is being developed in the U.S. under a current IND and is designated as an Orphan Drug for the treatment of PWS. We announcedsuccessful completion of a scientific advice meeting with the FDA on July 5, 2017. On September 25, 2017, we announced receipt of advice from theCommittee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) regarding DCCR for the treatment of PWS. OnOctober 12, 2017, we announced the receipt of a positive opinion from the Committee for Orphan Medicinal Products (COMP) of the EMA recommendingdiazoxide choline for the treatment of PWS. This designation was granted by the European Commission as EU/3/17/1941. We announced successfulcompletion and receipt of minutes from an End-of-Phase II meeting with the FDA and confirmed alignment on key aspects of the Phase III study design,including the primary endpoint and duration of the trial on February 20, 2018. On July 30, 2018, we announced that DCCR was granted “Fast Track”designation for the treatment of PWS. Fast Track designation is intended to provide patients with serious conditions and unmet medical needs access to newdrugs earlier by assisting their development and accelerating their review by the FDA. Fast Track designation allows additional meetings with the FDA todiscuss our development plan to ensure the appropriate data are collected and encourages4 frequent written communication with the FDA regarding design of clinical trials and use of biomarkers. If certain criteria are met, DCCR may be eligiblefor “Accelerated Approval” and “Priority Review” and also “Rolling Review”, which would allow us to submit to the FDA sections of our New DrugApplication (NDA) as they are finished instead of waiting for all sections to be completed before submitting the marketing application.Market opportunityAn estimated 300,000 to 400,000 individuals worldwide have PWS. An overall prevalence ranging from 1:15,000 to 1:25,000 has been reportedregardless 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 ofimproved 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. andEurope and would therefore be likely to be used in a large proportion of patients.Sales and MarketingNewly diagnosed PWS patients tend to be treated by a multi-disciplinary team led by a pediatric endocrinologist. Many patients receive care at largerclinics devoted to PWS in university-associated hospitals or at children’s hospitals. This concentration of care allows us to consider marketing DCCRwithout 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 thesituation in the U.S., we are likely to need to identify a marketing partner for DCCR in Europe, Japan, and the rest of the world. The final decision on salesand marketing strategy will be made at a later date.PricingWe have not conducted a formal pricing analysis of DCCR in PWS. We anticipate that pricing at launch may be influenced by the product labelnegotiated with the FDA, pharmacoeconomic data developed to support pricing and the potential for greater sales under negotiated government contracts.CompetitionCurrently, the only approved products for PWS are Genotropin® (somatropin), and Omnitrope® (somatropin) which are approved only for growthfailure due to PWS. There are no approved products to address PWS-associated hyperphagia and behaviors, or for any other abnormalities associated with thedisease. However, to our knowledge, there are a number of therapeutic products at various stages of clinical development for the treatment of PWS, includingfor hyperphagia, by Levo Therapeutics, Inc., Millendo Therapeutics, Inc., Zafgen, Inc., Rhythm Pharmaceuticals, Inc., Saniona AB, Insys Therapeutics, Inc.,and GLWL Research, Inc.ManufacturingPharmaceuticalsOur 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. patents and counterparts inother regions of the world, and we have agreements with various third-party manufacturers that are intended to restrict these manufacturers from using orrevealing any unpublished proprietary information.Our third-party manufacturers and corporate partners are independent entities who are subject to their own operational and financial risks over whichwe have no control. If we or any of these third-party manufacturers fail to perform as required, this could cause delays in our clinical trials and regulatoryapplications and submission.5 Regulation of Pharmaceutical Manufacturing ProcessesThe manufacturing process for pharmaceutical products is highly regulated and regulators may shut down manufacturing facilities that they believedo not comply with regulations. We and our third-party manufacturers are subject to current Good Manufacturing Practices, which are extensive regulationsgoverning manufacturing processes, stability testing, record keeping and quality standards as defined by the FDA and the EMA. Similar regulations andrequirements are in effect in other countries.Intellectual PropertyDCCR Patent PortfolioOur patent portfolio surrounding DCCR consists of five issued U.S. patents, one allowed U.S. patent and 10 pending U.S. applications. Our issuedU.S. patents (no.’s 7,572,789, 7,799,777, 9,381,202, 9,757,384, and 9,782,416) expire in 2026 to 2035. We also have one or more issued patents covering theproduct in the E.U., Canada, Japan, China, India, Hong Kong and Australia, and numerous patent applications being prosecuted at the national level in allmajor pharma markets around the world. The issued patents and pending patent applications include protection of: •A large family of salts including diazoxide choline, the active ingredient in DCCR and all pharmaceutical formulations of those salts; •Specific polymorphs (specific crystalline forms) of salts of diazoxide and all pharmaceutical formulations of those polymorphs; •Methods of manufacture of diazoxide choline and specific crystalline forms; •Methods to treat various diseases including a number of aspects of PWS and other rare diseases with DCCR; •Methods to treat obese, overweight and obesity-prone individuals with DCCR; •Pharmaceutical formulations of diazoxide; •Methods to treat various diseases including a number of aspects of PWS and other rare diseases with diazoxide; and •Methods to treat various rare diseases including PWS with KATP channel agonists.Government Regulation - PharmaceuticalsOur operations and activities are subject to extensive regulation by government authorities in the United States and in other countries in which weelect to develop and/or commercialize our products. Our developmental drug products are subject to rigorous regulation. Federal and state statutes andregulations govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. As aresult of these regulations, product development and product approval processes are very expensive and time consuming.A country’s regulatory agency, such as the FDA in the United States, or a region’s agency, such as the EMA for the European Union, must approve adrug before it can be sold in the respective country or countries. The general process for drug approval in the United States is summarized below. Many othercountries, including countries in the European Union and Japan, have very similar regulatory approval processes.Nonclinical TestingBefore 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 drugcandidate’s potential benefits and/or safety. Additional nonclinical testing may be required during the clinical development process such as reproductivetoxicology and juvenile toxicology studies. Carcinogenicity studies in two species are generally required for products intended for long-term use.6 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 otherinformation, are submitted as part of an IND to the FDA. If the FDA does not identify significant issues during the initial 30-day IND review, the drugcandidate 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 eachsubmission.Clinical TrialsThese clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which aresubject 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 volunteersor people with the disease/condition participate in Phase 1. Phase I studies are closely monitored and gather information about how a drug interacts with thehuman 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 effectsare. 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 tothe design of Phase II 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 beingdeveloped. Typically involving up to a few hundred patients, these studies are not large enough to show whether the drug will be beneficial. Instead, Phase IIstudies provide researchers with additional safety data. Researchers use these data to refine research questions, develop research methods, and design newPhase III research protocols.Phase III Studies. Researchers design Phase III 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 ofthe 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 induration, the results are more likely to show long-term or rare side effects.For each clinical trial, an independent IRB or independent ethics committee (IEC), covering each site proposing to conduct a clinical trial mustreview and approve the plan for any clinical trial and informed consent information for subjects before the trial commences at that site and it must monitorthe study until completed. The FDA, other heath authority, the IRB/IEC, or the sponsor may suspend a clinical trial at any time on various grounds, includinga finding that the subjects or patients are being exposed to an unacceptable health risk or for failure to comply with the IRB/IEC’s requirements, or mayimpose other conditions.Clinical trials involve the administration of an investigational drug to human subjects under the supervision of qualified investigators in accordancewith GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in anyclinical trial. Sponsors of clinical trials generally must register and report, at the NIH-maintained website ClinicalTrials.gov, key parameters of certain clinicaltrials.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 oftreatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completedsuccessfully 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 thatthe patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.7 FDA Approval ProcessWhen we believe that the data from our clinical trials show an adequate level of safety and efficacy, we would intend to submit an application tomarket the drug for a particular use, an NDA or BLA with the FDA. The FDA may hold a public hearing where an independent advisory committee of expertadvisors asks additional questions and makes recommendations regarding the drug candidate. This committee makes recommendations to the FDA that arenot 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 United States and sold for that use. It is not unusual, however, for the FDA to reject an application becauseit 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 notready for approval. CRLs generally outline the deficiencies in the submission and may require substantial additional testing or information in order for theFDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfythe regulatory criteria for approval. If and when the deficiencies have been addressed to the FDA’s satisfaction, the FDA will typically issue an approvalletter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.The FDA may also require Phase IV non-registrational studies to explore scientific questions to further characterize safety and efficacy duringcommercial use of our drug. The FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures orfacilities or may require extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not containadequate 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 canwithdraw 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 ourdrugs for us. These facilities are subject to periodic inspections by the FDA. The FDA must also approve foreign establishments that manufacture products tobe 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 theproduct reaches the market. In addition, the FDA may require post-approval testing, including Phase IV studies, and surveillance programs to monitor theeffect of approved products which have been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on theresults of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approvedlabel, 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 ordistribution 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 requirethe development of additional data or conduct of additional pre-clinical studies and clinical trials.Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which thedevelopment program is designed to address the unmet medical need, may be designated as fast track and/or breakthrough candidates by the FDA and may beeligible 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 less than 200,000 persons; in the E.U., theprevalence 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 E.U., products granted orphan designation are subject to reduced fees for protocol assistance, marketing authorizationapplications, inspections before authorization, applications for changes to marketing authorizations, and annual fees, access to the centralized authorizationprocedure, and 10 years of market exclusivity.8 Ongoing RegulationOnce a pharmaceutical product is approved, a product will be subject to pervasive and continuing regulation by the FDA, EMA, and other healthauthorities, including, among other things, recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting ofadverse experiences with the product.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are subject to periodicunannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictlyregulated and generally require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviationsfrom 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 compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market, though the FDA must provide an application holder with notice and an opportunity for a hearing inorder to withdraw its approval of an application. Later discovery of previously unknown problems with a product, including adverse events of unanticipatedseverity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; •fines, warning letters or holds on post-approval clinical trials; •refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of productapprovals; •product seizure or detention, or refusal to permit the import or export of products; and •injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates the marketing, labeling, advertising and promotion of drug and device products that are placed on the market. The FederalTrade Commission, or the FTC, also regulates the promotion and advertising of consumer products. While physicians may prescribe drugs and devices for offlabel uses, manufacturers may only promote for the approved indications and in accordance with the provisions of the approved label. Manufacturers may notpromote 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 regulationsprohibiting 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 are also subject to extensive regulation outside of the United States. In the European Union, there is a centralized approval procedure thatauthorizes marketing of a product in all countries of the European Union through a single application and review process. If this centralized approvalprocedure 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 oftwo simplified application processes: the mutual recognition procedure or the decentralized procedure, both of which rely on the principle of mutualrecognition. After receiving regulatory approval through any of the European registration procedures, separate pricing and reimbursement approvals are alsorequired in most countries. The European Union also has requirements for approval of manufacturing facilities for all products that are approved for sale bythe European regulatory authorities.9 Additional Government RegulationsHIPAA and Other Privacy LawsHIPAA, established for the first-time comprehensive protection for the privacy and security of health information. The HIPAA standards apply tothree types of organizations, or “Covered Entities”: health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcaretransactions electronically. Covered Entities and their Business Associates must have in place administrative, physical, and technical standards to guardagainst the misuse of individually identifiable health information. Because we are a healthcare provider and we conduct certain healthcare transactionselectronically, 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 institutionsand physicians from which we obtain biological specimens that we use in our research and validation work are Covered Entities and must obtain properauthorization from their patients for the subsequent use of those samples and associated clinical information. We may perform future activities that mayimplicate HIPAA, such as providing clinical laboratory testing services or entering into specific kinds of relationships with a Covered Entity or a BusinessAssociate 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, includingcivil and criminal penalties, fines, and exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of ouroperations. HITECH increased the civil and criminal penalties that may be imposed against Covered Entities, their Business Associates and possibly otherpersons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws andseek 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 onthe access, use, and disclosure of health information. All of these laws may impact our business. Our failure to comply with these privacy laws or significantchanges in the laws restricting our ability to obtain tissue samples and associated patient information could significantly impact our business and our futurebusiness plans.Federal and State Billing and Fraud and Abuse LawsAntifraud Laws/Overpayments. As participants in federal and state healthcare programs, we are subject to numerous federal and state antifraud andabuse 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: •the submission, or causing the submission of, false claims or false information to government programs; •deceptive or fraudulent conduct; •performing medically unnecessary procedures; and •prohibitions in defrauding private sector health insurers.We could be subject to substantial penalties for violations of these laws, including denial of payment and refunds, suspension of payments fromMedicare, Medicaid or other federal healthcare programs and exclusion from participation in the federal healthcare programs, as well as civil monetary andcriminal penalties and imprisonment. One of these statutes, the False Claims Act, is a key enforcement tool used by the government to combat healthcarefraud. The False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulentclaim 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 besubject to penalties of $11,181 to $22,363 per false claim, and each use of our product could potentially be part of a different claim submitted to thegovernment. Separately, the HHS office of the Office of Inspector General, or OIG, can exclude providers found liable under the False Claims Act fromparticipating in federally funded healthcare programs, including Medicare and Medicaid. The steep penalties that may be imposed on laboratories and otherproviders under this statute may be disproportionate to the relatively small dollar amounts of the claims made by these providers for reimbursement. Inaddition, even the threat of being excluded from participation in federal healthcare programs can have significant financial consequences on a provider.10 Numerous federal and state agencies enforce the antifraud and abuse laws. In addition, private insurers may also bring private actions. In somecircumstances, private whistleblowers are authorized to bring fraud suits on behalf of the government against providers and are entitled to receive a portion ofany final recovery.Federal and State “Self-Referral” and “Anti-Kickback” RestrictionsSelf-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 tothat laboratory for laboratory tests reimbursable by Medicare, and also prohibits laboratories from submitting a claim for Medicare payments for laboratorytests referred by physicians who, personally or through a family member, have ownership interests in or compensation arrangements with the testinglaboratory. The Stark law contains a number of specific exceptions which, if met, permit physicians who have ownership or compensation arrangements witha testing laboratory to make referrals to that laboratory and permit the laboratory to submit claims for Medicare payments for laboratory tests performedpursuant 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 exceptionsto 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 coveredby private, employer-funded or state and federal employee health plans. The North Carolina self-referral law contains few exceptions for physician investorsin securities that have not been acquired through public trading but will generally permit us to accept referrals from physician investors who buy their sharesin the public market.We have several stockholders who are physicians in a position to make referrals to us. We have included within our compliance plan procedures toidentify requests for testing services from physician investors and we do not bill Medicare, or any other federal program, or seek reimbursement from otherthird-party payors, for these tests. The self-referral laws may cause some physicians who would otherwise use our laboratory to use other laboratories for theirtesting.Providers are subject to sanctions for claims submitted for each service that is furnished based on a referral prohibited under the federal self-referrallaws. These sanctions include denial of payment and refunds, civil monetary payments and exclusion from participation in federal healthcare programs andcivil monetary penalties, and they may also include penalties for applicable violations of the False Claims Act, which may require payment of up to threetimes the actual damages sustained by the government, plus civil penalties of $11,181 to $22,363 for each separate false claim. Similarly, sanctions forviolations 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 payingremuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, forwhich payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” is not defined in thefederal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing ofsupplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair marketvalue. The reach of the Anti-Kickback Statute was also broadened by the PPACA, which, among other things, amends the intent requirement of the federalAnti-Kickback Statute and certain criminal healthcare fraud statutes, effective March 23, 2010. Pursuant to the statutory amendment, a person or entity doesnot need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that aclaim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of theFalse Claims Act or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to bepresented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false orfraudulent. Sanctions for violations of the federal Anti-Kickback Statute may include imprisonment and other criminal penalties, civil monetary penaltiesand exclusion from participation in federal healthcare programs.11 The 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 healthcareprograms 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 itemsor services reimbursed by any source, not only the Medicare and Medicaid programs, and do not contain identical safe harbors. For example, North Carolinahas 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-kickbackprohibitions.Both the federal Anti-Kickback Statute and the North Carolina anti-kickback law are broad in scope. The anti-kickback laws clearly prohibitpayments for patient referrals. Under a broad interpretation, these laws could also prohibit a broad array of practices involving remuneration where one partyis 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 maybe subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care programs, andthe 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 tosimilar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud andabuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. To reduce therisks associated with these various laws and governmental regulations, we have implemented a compliance plan. Although compliance programs can mitigatethe 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 ourbusiness. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.U.S. Healthcare ReformIn March 2010, the PPACA was enacted, which includes measures that have or will significantly change the way healthcare is financed by bothgovernmental and private insurers. Beginning in August 2013, the PPACA and its implementing regulations requires drug and medical device manufacturersto track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” made or distributed to such entities, as wellas any investment interests held by physicians and their immediate family members. Manufacturers are required to report this information to Centers forMedicare & Medicaid Services on an annual basis. Failure to make timely reports to CMS can subject us to significant civil penalties. Various states havealso implemented regulations prohibiting certain financial interactions with healthcare professionals or mandating public disclosure of such financialinteractions. We may incur significant costs to comply with such laws and regulations now or in the future.The Foreign Corrupt Practices ActThe Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering or authorizing payment or offering ofanything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreignentity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in theU.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.12 Other Corporate TransactionsJoint Venture Agreement and Issuance of Shares by Capnia, Inc.In December 2017, we entered into a joint venture agreement, or the Joint Venture Agreement, with OptAsia Healthcare Limited, a Hong Kongcompany, or OAHL, with respect to CoSense with the intent to sell shares of Capnia, Inc., our previously wholly-owned subsidiary into which our CoSensebusiness had been transferred, to OAHL. Under the terms of the Joint Venture Agreement, OAHL agreed to invest up to $2.2 million to purchase shares of ourCapnia subsidiary and as a result of this investment, when made, Capnia would no longer be our wholly-owned subsidiary. Going forward, OAHL would beresponsible 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 VentureAgreement.During October 2018, we determined and agreed that the cumulative investment made by OAHL exceeded $1.2 million as dictated by the JointVenture Agreement between us and OAHL. Accordingly, on October 16, 2018, Capnia issued 1,690,322 shares of its common stock to OAHL, representing53% of its outstanding shares. After the issuance by Capnia, we no longer held a controlling interest in Capnia. The transfer of the 53% ownership stakeresulted in the deconsolidation of Capnia from our financial statements and a $1.9 million gain recognized in the fourth quarter of 2018. Our remaining 47%investment in Capnia is classified as an equity method investment.2018 PIPE OfferingOn December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 10,272,375units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of our common stock and a warrant topurchase 0.05 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and correspondingwarrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018 Resale Shares. Wealso granted certain registration rights to these stockholders, pursuant to which, among other things, we will prepare and file with the SEC a registrationstatement to register for resale the 2018 Resale Shares prior to March 31, 2019. This offering is referred to herein as the 2018 PIPE Offering and the warrantsissued therein are referred to as the 2018 PIPE Warrants.EmployeesAs of December 31, 2018, we had nine full-time employees and fourteen full-time or part-time consultants providing services to us. None of ouremployees 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 InformationOur 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.soleno.life. We make available on our website, free of charge, ourAnnual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, as soon as reasonablypracticable after we electronically file such materials with, or furnish it to, the Securities Exchange and Commission. Our Securities Exchange andCommission reports can be accessed through the Investor Relations section of our internet website. The information found on our internet website is not partof this or any other report we file with or furnish to the Securities Exchange and Commission.13 ITEM 1A. RISK FACTORSAn investment in our securities has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described belowtogether with all the of the other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. If any ofthe following risks actually occur, our business, operating results and financial condition could be harmed, and the value of our stock could go down. Thismeans you could lose all or a part of your investment.Risks related to our financial condition and capital requirementsWe 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 fromthe sale of therapeutic products. As a result, there is limited information for investors to use when assessing our future viability as a company focusedprimarily on therapeutic products and our potential to successfully develop product candidates, conduct clinical trials, manufacture our products on acommercial 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 geneticneurobehavioral/metabolic disease. Our ability to generate product revenues, which may not occur for the foreseeable future, if ever, will depend heavily onthe 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 adequatereimbursement from third-parties, including government payors, for DCCR, may cause us to be unable to generate the revenues necessary to continue ourresearch and development pipeline activities, thereby adversely affecting our business and our prospects for future growth. Further, the success of DCCR willdepend on a number of factors, including the following: •obtain a sufficiently broad label that would not unduly restrict patient access; •receipt of marketing approvals for DCCR in the U. S. and E. U.; •building an infrastructure capable of supporting product sales, marketing, and distribution of DCCR in territories where we pursuecommercialization directly; •establishing commercial manufacturing arrangements with third party manufacturers; •establishing commercial distribution agreements with third party distributors; •launching commercial sales of DCCR, if and when approved, whether alone or in collaboration with others; •acceptance of DCCR, if and when approved, by patients, the medical community, and third-party payers; •the regulatory approval pathway that we pursue for DCCR in the United States; •effectively competing with other therapies; •a continued acceptable safety profile of DCCR following approval; •obtaining and maintaining patent and trade secret protection and regulatory exclusivity; •protecting our rights in our intellectual property portfolio; and •obtaining a commercially viable price for our products. 14 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 successfullycommercialize DCCR, which would materially harm our business.We have a limited commercialization history and have incurred significant losses since our inception, and we anticipate that we will continue to incursubstantial losses for the foreseeable future. We transitioned to be primarily a research and development company, which, together with our limitedoperating history, makes it difficult to evaluate our business and assess our future viability.We are a developer of therapeutics and medical devices with a limited commercialization history. Evaluating our performance, viability or futuresuccess 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 researchand development and general and administrative expenses related to our operations. Investment in product development is highly speculative, because itentails substantial upfront capital expenditures and significant risk that any planned product will fail to demonstrate adequate accuracy or clinical utility. Wehave 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 ofDecember 31, 2018, we had an accumulated deficit of $127.0 million.We expect that our future financial results will depend primarily on our success in developing, launching, selling and supporting our products. Thiswill require us to be successful in a range of activities, including clinical trials, manufacturing, marketing and selling our products. We are only in thepreliminary 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 thefuture. 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 sustainedprofitability 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 to achieve profitability. Our ability to generate significant revenue from product sales andachieve profitability will depend upon our ability, alone or with any future collaborators, to successfully commercialize 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: •develop a commercial organization capable of sales, marketing and distribution of any products for which we obtain marketing approval inmarkets where we intend to commercialize independently; •achieve market acceptance of our current and future products, if any; •set a commercially viable price for our current and future products, if any; •establish and maintain supply and manufacturing relationships with reliable third parties, and ensure adequate and legally compliantmanufacturing to maintain that supply; •obtain coverage and adequate reimbursement from third-party payors, including government and private payors; •find suitable global and U.S. distribution partners to help us market, sell and distribute our products in other markets; •complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities; •complete development activities successfully and on a timely basis; •establish, maintain and protect our intellectual property rights and avoid third-party patent interference or patent infringement claims; and •attract, hire and retain qualified personnel.15 In addition, because of the numerous risks and uncertainties associated with product development and commercialization, including that our plannedproducts may not advance through development, achieve the endpoints of applicable clinical trials or obtain approval, we are unable to predict the timing oramount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyondexpectations if we decide, or are required by the FDA or foreign regulatory authorities, to perform studies or clinical trials in addition to those that wecurrently anticipate.Even if we are able to generate significant revenue from the sale of any of our products that may be approved or commercialized, we may not becomeprofitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on acontinuing 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 fallbelow 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 operatingresults. From time to time, we may enter into collaboration agreements with other companies that include development funding and significant upfront andmilestone payments or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend on development funding andthe achievement of development and clinical milestones under any potential future collaboration and license agreements and sales of our products, ifapproved. These upfront and milestone payments may vary significantly from period to period, and any such variance could cause a significant fluctuation inour operating results from one period to the next. In addition, we measure compensation cost for stock-based awards made to employees at the grant date ofthe award, based on the fair value of the award as determined by our Board of Directors, and recognize the cost as an expense over the employee’s requisiteservice period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock pricevolatility, the magnitude of the expense that we must recognize may vary significantly. Furthermore, our operating results may fluctuate due to a variety ofother factors, many of which are outside of our control and may be difficult to predict, including the following: •our ability to enroll patients in clinical trials and the timing of enrollment; •the cost and risk of initiating sales and marketing activities; •the timing and cost of, and level of investment in, research and development activities relating to our planned products, which will changefrom time to time; •the cost of manufacturing our products may vary depending on FDA and other regulatory requirements, the quantity of production and theterms of our agreements with manufacturers; •expenditures that we will or may incur to acquire or develop additional planned products and technologies; •the design, timing and outcomes of clinical studies; •changes in the competitive landscape of our industry, including consolidation among our competitors or potential partners; •any delays in regulatory review or approval in the U.S. or globally, of any of our planned products; •the level of demand for our products may fluctuate significantly and be difficult to predict; •the risk/benefit profile, cost and reimbursement policies with respect to our future products, if approved, and existing and potential future drugsthat compete with our planned products; •competition from existing and potential future offerings that compete with our products; •our ability to commercialize our products inside and outside of the U.S., either independently or working with third parties; •our ability to establish and maintain collaborations, licensing or other arrangements;16 •our ability to adequately support future growth; •potential unforeseen business disruptions that increase our costs or expenses; •future accounting pronouncements or changes in our accounting policies; and •the changing and volatile global economic environment.The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As aresult, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of ourfuture performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investorsfor 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, orif the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Sucha stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.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 usto delay, reduce or suspend our research and development programs and other operations or commercialization efforts. Raising additional capital maysubject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations, or require us to relinquish rights to our plannedproducts and technologies.The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets andthe satisfaction of liabilities in the normal course of business. As of December 31, 2018, we have incurred significant operating losses since inception andcontinue to generate losses from operations and have an accumulated deficit of $127.0 million. These matters raise substantial doubt about our ability tocontinue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assetamounts 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 besufficient to fund our operations, including expenses related to our current ongoing clinical trial of DCCR. If adequate funds are not available, we may berequired to curtail our operations significantly or to obtain funds through dilutive financings or entering into arrangements with collaborative partners orothers that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.At December 31, 2018, our cash balance was $23.1 million. We intend to raise additional capital, either through debt or equity financings to achieveour business plan objectives, including increased expenses related to additional resources being deployed to manage enrollment of patients and otheractivities related to our current ongoing clinical trial of DCCR. We believe that we can be successful in obtaining additional capital; however, no assurancecan 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 orcontinue as a going concern. To the extent that we are unsuccessful, we may need to curtail or cease our operations and implement a plan to extend payablesor reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.We do not have any material committed external source of funds or other support for our commercialization and development efforts. Until we cangenerate a sufficient amount of product revenue to finance our cash requirements, which we may never achieve, we expect to finance future cash needsthrough a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketingand distribution arrangements. Additional financing may not be available to us when we need it, or it may not be available on favorable terms. If we raiseadditional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties,we may have to relinquish certain valuable rights to our current and planned products, technologies, future revenue streams or research17 programs, or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownershipinterest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect ourstockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specificactions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain adequate financing when needed,we may have to delay, reduce the scope of, or suspend one or more of our clinical studies or research and development programs or our commercializationefforts.We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.From time to time we may consider strategic transactions, such as acquisitions, asset purchases and sales, and out-licensing or in-licensing ofproducts, product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements,including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction mayrequire us to incur non-recurring or other charges, may increase our near and long-term expenditures, could not result in perceived benefits that werecontemplated upon entering into the transaction, and may pose significant integration challenges or disrupt our management or business, which couldadversely affect our operations, solvency and financial results. For example, these transactions may entail numerous operational and financial risks,including: •exposure to unknown and contingent liabilities; •disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates ortechnologies; •incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions; •higher than expected acquisition and integration costs; •the timing and likelihood of payment of milestones or royalties; •write-downs of assets or goodwill or impairment charges; •increased operating expenditures, including additional research, development and sales and marketing expenses; •increased amortization expenses; •difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel; and •impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership.Accordingly, although there can be no assurance that we will undertake or successfully complete any additional transactions of the nature describedabove or that we will achieve an economic benefit that justifies such transactions, any additional transactions that we do complete could have a materialadverse effect on our business, results of operations, financial condition and prospects.We may not be able to enter into strategic transactions on a timely basis or on acceptable terms, which may impact our development andcommercialization plans.We have relied, and expect to continue to rely, on strategic transactions, which include in-licensing, out-licensing, purchases and sales of assets, andother ventures. The terms of any additional strategic transaction that we may enter into may not be favorable to us, and the contracts governing such strategictransaction may be subject to differing interpretations exposing us to potential litigation. We may also be restricted under existing collaboration or licensingarrangements from entering into future agreements on certain terms with potential strategic partners. We may not be able to negotiate additional strategictransactions on a timely basis, on acceptable terms, or at all. If we elect to increase our expenditures to fund development or commercialization activities onour 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 maynot be able to further develop our products or bring them to market and generate product revenue. Furthermore, there is no assurance that any suchtransaction will be successful or that we will derive an economic benefit as a result.18 Risks related to the development and commercialization of our productsWe may not be successful in commercializing our approved productsCommercialization of products is subject to a variety of regulations regarding the manner in which potential customers may be engaged, the mannerin 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 experiencewith product launches may expose us to a higher than usual level of risk of non-compliance with these regulations, with consequences that may include finesor the removal of our approved products from the marketplace by regulatory authorities.If we are unable to execute our sales and marketing strategy for our products, and are unable to gain acceptance in the market, we may be unable togenerate sufficient revenue to sustain our business.Although we believe that DCCR and our other planned products represent promising commercial opportunities, our products may never gainsignificant acceptance in the marketplace and therefore may never generate substantial revenue or profits for us. We will need to establish a market for DCCRglobally and build these markets through physician education, awareness programs, and other marketing efforts. Gaining acceptance in medical communitiesdepends on a variety of factors, including clinical data published or reported in reputable contexts and word-of-mouth between physicians. The process ofpublication in leading medical journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel orworthy of publication. Failure to have our studies published in peer-reviewed journals may limit the adoption of our products. Our ability to successfullymarket our products will depend on numerous factors, including: •the outcomes of clinical utility studies of such products in collaboration with key thought leaders to demonstrate our products’ value ininforming important medical decisions such as treatment selection; •the success of our distribution partners; •whether healthcare providers believe such tests provide clinical utility; •whether the medical community accepts that such tests are sufficiently sensitive and specific to be meaningful in-patient care and treatmentdecisions; and •whether hospital administrators, health insurers, government health programs and other payers will cover and pay for such tests and, if so,whether they will adequately reimburse us.We are relying, or will rely, on third parties with whom we are directly engaged with, but who we do not control, to distribute and sell our products. Ifthese distributors are not committed to our products or otherwise run into their own financial or other difficulties, it may result in failure to achievewidespread market acceptance of our products, and 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 performthese 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 achievecommercial 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 toopportunistically establish collaborations to market, distribute and support DCCR outside of the U.S. and E.U. There are risks involved with establishing ourown sales, marketing, distribution, training and support capabilities. For example, recruiting and training sales and marketing personnel is expensive andtime consuming and could delay any product launch. If the commercial launch of DCCR is delayed or does not occur for any reason, we would haveprematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain orreposition our sales, marketing, training and support personnel.19 Factors that may inhibit our efforts to commercialize DCCR on our own include: •our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel; •the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe DCCR or any future products; •the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companieswith more extensive product lines; •unforeseen costs and expenses associated with creating an independent sales and marketing organization; and •efforts by our competitors to commercialize products at or about the time when our product candidates would be coming to market.If we are unable to establish our own sales, marketing, distribution, training and support capabilities and instead enter into arrangements with thirdparties 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 DCCRourselves. 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 doso 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 andattention to commercialize DCCR effectively. If we do not establish sales, marketing, distribution, training and support capabilities successfully, either onour own or in collaboration with third parties, we will not be successful in commercializing DCCR and achieving profitability, and our business would beharmed.If physicians decide not to order our products in significant numbers, we may be unable to generate sufficient revenue to sustain our business.To generate demand for our current and planned products, we will need to educate physicians and other health care professionals on the clinicalutility, benefits and value of the tests we provide through published papers, presentations at scientific conferences, educational programs and one-on-oneeducation sessions by members of our sales force. In addition, we will need support of hospital administrators that the clinical and economic utility of ourproducts justifies payment for the device and consumables at adequate pricing levels. We need to hire additional commercial, scientific, technical and otherpersonnel to support this process.If our 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 products can provide reliable, high-quality results or treatments. We believe that ourcustomers are likely to be particularly sensitive to any test defects and errors in our products, and prior products made by other companies for the samediagnostic purpose have failed in the marketplace, in part as a result of poor accuracy. As a result, the failure of our current and planned products to performas expected would significantly impair our reputation and the clinical usefulness of such tests. Reduced sales might result, and we may also be subject tolegal claims arising from any defects or errors.If clinical studies of any of our planned products fail to demonstrate safety and effectiveness to the satisfaction of the FDA or similar regulatoryauthorities outside the U.S. or do not otherwise produce positive results, we may incur additional costs, experience delays in completing or ultimately failin completing the development and commercialization of our planned products.Before obtaining regulatory approval for the sale of any planned product we must conduct extensive clinical studies to demonstrate the safety andeffectiveness of our planned products in humans. Clinical studies are expensive, difficult to design and implement, can take many years to complete and areuncertain as to outcome. A failure of one or more of our clinical studies could occur at any stage of testing.20 Numerous unforeseen events during, or as a result of, clinical studies could occur, which would delay or prevent our ability to receive regulatoryapproval or commercialize any of our planned products, including the following: •clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinicalstudies or abandon product development programs; •the number of patients required for clinical studies may be larger than we anticipate, enrollment in these clinical studies may be insufficient orslower than we anticipate, or patients may drop out of these clinical studies at a higher rate than we anticipate; •the cost of clinical studies or the manufacturing of our planned products may be greater than we anticipate; •third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; •we might have to suspend or terminate clinical studies of our planned products for various reasons, including a finding that our plannedproducts have unanticipated serious side effects or other unexpected characteristics or that the patients are being exposed to unacceptablehealth risks; •regulators may not approve our proposed clinical development plans; •regulators or independent institutional review boards, or IRBs, may not authorize us or our investigators to commence a clinical study orconduct a clinical study at a prospective study site; •regulators or IRBs may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliancewith regulatory requirements; and •the supply or quality of our planned products or other materials necessary to conduct clinical studies of our planned products may beinsufficient or inadequate.If we or any future collaboration partners are required to conduct additional clinical trials or other testing of any planned products beyond those thatwe 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 onlymodestly positive or if there are safety concerns, we may: •be delayed in obtaining marketing approval for our planned products; •not obtain marketing approval at all; •obtain approval for indications that are not as broad as intended; •have the product removed from the market after obtaining marketing approval; •be subject to additional post-marketing testing requirements; or •be subject to restrictions on how the product is distributed or used.Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any clinical studies willbegin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical study delays also could shorten any periodsduring which we may have the exclusive right to commercialize our planned products or allow our competitors to bring products to market before we do,which would impair our ability to commercialize our planned products and harm our business and results of operations.21 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, forsuch indication. Our ability to obtain regulatory approval of DCCR depends on, among other things, successful completion of clinical trials bydemonstrating efficacy with statistical significance and clinical meaning, and safety in humans. The results of our current and future clinical trials may notmeet the FDA, the European Medicines Agency, or EMA, or other regulatory agencies’ requirements to approve DCCR for marketing under any specificindication, and these regulatory agencies may otherwise determine that our third parties’ manufacturing processes, validation, and/ or facilities areinsufficient to support approval. As such, we may need to conduct more clinical trials than we currently anticipate and upgrade the manufacturing processesand facilities, which may require significant additional time and expense, and may delay or prevent approval. If we fail to obtain regulatory approval in atimely 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 predictiveof future trial results, and our clinical trials may fail to adequately demonstrate the safety and efficacy of DCCR 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 clinicaltrials 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 bepredictive of the results of later stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in laterstages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. Anumber of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safetyprofiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trialsare 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 avariety of reasons, including failure to: •generate sufficient nonclinical, toxicology, or other in vivo or in vitro data, or clinical safety data to support the initiation or continuation ofclinical trials; •obtain regulatory approval, or feedback on trial design, to commence a trial; •identify, recruit and train suitable clinical investigators; •reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites; •obtain and maintain institutional review board, or IRB, approval at each clinical trial site; •identify, recruit and enroll suitable patients to participate in a trial; •have a sufficient number of patients complete a trial and/or return for post-treatment follow-up; •ensure clinical investigators observe trial protocol or continue to participate in a trial; •address any patient safety concerns that arise during the course of a trial; •address any conflicts or compliance with new or existing laws, rule, regulations or guidelines; •have a sufficient number of clinical trial sites to conduct the trials; •timely manufacture sufficient quantities of product candidate suitable for use at the stage of clinical development; or •raise sufficient capital to fund a trial.22 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 patientpopulation, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials andclinicians’ 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 underdevelopment for the indications we are investigating.There has recently been increased activity in the development of drugs to treat PWS. We are aware of eight other current or proposed clinical trialsevaluating PWS therapies. If all of these clinical trials are ongoing concurrently, given the limited number of patients, it may hamper recruitment andenrollment of qualified patients for our current trial of DCCR in PWS.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 orany other regulatory authority, or if the IRBs of the institutions in which such trials are being conducted suspend or terminate the participation of theirclinical investigators and sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failureto conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by theFDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate abenefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinicaltrial.If we experience delays in the completion of, or termination of, any clinical trial of our product candidates for any reason, the commercial prospectsof our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, anydelays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize ourability 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 ofregulatory approval of our product candidates.We may be unable to obtain regulatory approval for DCCR or other potential product candidates. The denial or delay of any such approval would delaycommercialization and have a material adverse effect on our potential to generate revenue, our business 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 foreignregulatory 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 intendedindication. We have not yet obtained regulatory approval to market any of our product candidates in the U.S. or any other country. Our business dependsupon obtaining these regulatory approvals. The FDA can delay, limit or deny approval of our product candidates for many reasons, including: •our inability to satisfactorily demonstrate that the product candidates are safe and effective for the requested indication; •the FDA’s disagreement with our trial protocol or the interpretation of data from preclinical studies or clinical trials; •the population studied in the clinical trial may not be sufficiently broad or representative to assess safety in the full population for which weseek approval; •our inability to demonstrate that clinical or other benefits of our product candidates outweigh any safety or other perceived risks; •the FDA’s determination that additional preclinical or clinical trials are required; •the FDA’s non-approval of the formulation, labeling or the specifications of our product candidates;23 •the FDA’s failure to accept the manufacturing processes or facilities of third-party manufacturers with which we contract; or •the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficient forapproval.Even if we eventually complete clinical testing and receive approval of any regulatory filing for our product candidates, the FDA may grant approvalcontingent on the performance of costly additional post-approval clinical trials. The FDA may also approve our product candidates for a more limitedindication or a narrower patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary or desirablefor the successful commercialization of our product candidates. To the extent we seek regulatory approval in foreign countries, we may face challengessimilar to those described above with regulatory authorities in applicable jurisdictions. Any delay in obtaining, or inability to obtain, applicable regulatoryapproval for any of our product candidates would delay or prevent commercialization of our product candidates and would materially adversely impact ourbusiness, results of operations and prospects.Even if 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 any planned products receive regulatory approval from the FDA or other regulatory agencies in jurisdictions in which they are not currentlyapproved, they may nonetheless fail to gain sufficient market acceptance by physicians, hospital administrators, patients, healthcare payors and others in themedical 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: •the prevalence and severity of any side effects; •their effectiveness and potential advantages compared to alternative treatments; •the price we charge for our planned products; •the willingness of physicians to change their current treatment practices; •convenience and ease of administration compared to alternative treatments; •the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; •the strength or effectiveness of marketing and distribution support or partners; and •the availability of third-party coverage or reimbursement.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 whohave 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 theestimated prevalence of these diseases may change. There can be no assurance that the prevalence of PWS in the study populations, particularly in thesenewer 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 ofpatients who may benefit from treatment with our product candidates prove to be incorrect, the market opportunities for our product candidate may be smallerthan we believe it is, our prospects for generating revenue may be adversely affected and our business may suffer.24 DCCR is currently under development and we have no sales and distribution personnel, and limited marketing capabilities at the present time tocommercialize DCCR, if we receive regulatory approval. If we are unable to develop a sales and marketing and distribution capability on our own orthrough collaborations or other marketing partners, we will not be successful in commercializing our products, 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 performthese services. For example, recruiting and training a sales force is expensive and time-consuming, and could delay any product launch. If the commerciallaunch 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 wouldhave prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain orreposition 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 tothird 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 soon 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 andattention 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 with respect to our products, but we may not be able to do so, which may cause us to alter our development andcommercialization plans and may cause us to terminate any such programs.We may form strategic alliances, create joint ventures or collaborations, or enter into licensing agreements with third parties that we believe will moreeffectively provide resources to develop and commercialize our programs. For example, we currently intend to identify one or more new partners ordistributors for the commercialization of our products. We face significant competition in seeking appropriate strategic partners, and the negotiation process to secure favorable terms is time-consumingand complex. We may not be successful in our efforts to establish such a strategic partnership for any future products and programs on terms that areacceptable to us, or at all.Any delays in identifying suitable collaborators and entering into agreements to develop or commercialize our future products could negativelyimpact the development or commercialization of our future products, particularly in geographic regions like the E.U., where we do not currently havedevelopment and commercialization infrastructure. Absent a partner or collaborator, we would need to undertake development or commercializationactivities at our own expense. If we elect to fund and undertake development and commercialization activities on our own, we may need to obtain additionalexpertise 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 ourfuture 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 commercialdesirability 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 any planned products will prove safe enough to receiveregulatory approval. Undesirable side effects caused by any of our products could cause us or regulatory authorities to interrupt, delay or halt clinical trials orcould result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority.Additionally, if any of our planned products receives additional marketing approvals, and we or others later identify undesirable side effects caused by suchproduct, a number of potentially significant negative consequences could result, including: •we may be forced to recall such product and suspend the marketing of such product; •regulatory authorities may withdraw their approvals of such product; •regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success ofsuch products;25 •the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containingwarnings about such product; •the FDA may require the establishment or modification of Risk Evaluation Mitigation Strategies or a comparable foreign regulatory authoritymay require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and imposeburdensome implementation requirements on us; •we may be required to change the way the product is administered or conduct additional clinical trials; •we could be sued and held liable for harm caused to subjects or patients; •we may be subject to litigation or product liability claims; and •our reputation may suffer.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 products and we will likely face competition with respect to any planned products that we may seek to develop orcommercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies, medical device companies, and biotechnologycompanies worldwide. These companies may reduce prices for their competing drugs in an effort to gain or retain market share and undermine the value ourproducts might otherwise be able to offer to payers. Potential competitors also include academic institutions, government agencies and other public andprivate 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 andestablished companies. These third parties compete with us in recruiting and retaining qualified technical and management personnel, establishing clinicalstudy 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, orthat we will discover new inventions which we can successfully patent. Moreover, any of our granted patents may be held invalid by a court of competentjurisdiction, 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 coverDCCR. Furthermore, even if our patents are held to be valid and broadly interpreted, third parties may find legitimate ways to compete with DCCR byinventing around our patent. Finally, the process of obtaining new patents is lengthy and expensive, as is the process for enforcing patent rights against analleged infringer. Any such litigation could take years, cost large sums of money and pose a significant distraction to management. Indeed, certainjurisdictions outside of the U.S. and E.U., where we hope to initially commercialize DCCR have a history of inconsistent, relatively lax or ineffectiveenforcement of patent rights. In such jurisdictions, even a valid patent may have limited value. Our failure to effectively prosecute our patents would have aharmful impact on our ability to commercialize DCCR in these jurisdictions.26 Even if we are able to maintain our existing partners in commercializing our products, they 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 countriesrequire approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing approval isgranted. In some foreign markets, pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we mightobtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product andnegatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability torecoup our investment in one or more planned products, even if our planned products obtain regulatory approval.Our ability to commercialize our products successfully also will depend in part on the extent to which reimbursement for these products and relatedtreatments becomes available from government health administration authorities, private health insurers and other organizations. Government authorities andthird-party payers, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establishreimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payershave attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement willbe available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Reimbursement may impactthe demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficultbecause of the higher prices often associated with products administered under the supervision of a physician. If reimbursement is not available or isavailable only to limited levels, we may not be able to successfully commercialize any planned product that we successfully develop.In the 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, includingresearch, development, manufacture, sale and distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs andmay 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 onpayments allowed for lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices forproducts may be reduced by mandatory discounts or rebates required by government healthcare programs or private payers and by any future relaxation oflaws that presently restrict imports of products from countries where they may be sold at lower prices than in the U.S. Third-party payers often rely uponMedicare 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 payers for new products that wedevelop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financialcondition. In some foreign countries, including major markets in the E.U. and Japan, the pricing of prescription pharmaceuticals is subject to governmentalcontrol. In these countries, pricing negotiations with governmental authorities can take nine to twelve months or longer after the receipt of regulatorymarketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial thatcompares the cost-effectiveness of our product to other available therapies. Our business could be materially harmed if reimbursement of our products, if any,is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.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 products. The marketing, sale and use of our products could lead to thefiling 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 amisunderstanding of, or inappropriate reliance upon, the information we provide. If we cannot successfully defend ourselves against claims that our productscaused injuries, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in: •decreased demand for any planned products that we may develop; •injury to our reputation and significant negative media attention;27 •withdrawal of patients from clinical studies or cancellation of studies; •significant costs to defend the related litigation and distraction to our management team; •substantial monetary awards to patients; •loss of revenue; and •the inability to commercialize any products that we may develop.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 satisfyany 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 executivemanagement team and others in key management positions, including Dr. Anish Bhatnagar, our Chief Executive Officer, Jonathan Wolter, our ChiefFinancial Officer, Neil M. Cowen, our Senior Vice President of Drug Development, Kristen Yen, our Vice President of Clinical Operations, and Patricia Hiranoour Vice President of Regulatory Affairs. The collective efforts of each of these persons, and others working with them as a team, are critical to us as wecontinue to develop our technologies, tests and research and development and sales programs. As a result of the difficulty in locating qualified newmanagement, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we were to lose one ormore of these key employees, we could experience difficulties in finding qualified successors, competing effectively, developing our technologies andimplementing our business strategy. Our officers all have employment agreements; however, the existence of an employment agreement does not guaranteeretention 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 theirrespective terms. We have secured a $1.0 million “key person” life insurance policy on our Chief Executive Officer, Dr. Anish Bhatnagar, but do nototherwise 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 anddevelopment and commercialization strategy. Our collaborators, consultants and advisors are generally employed by employers other than us and may havecommitments under agreements with other entities that may limit their availability to us.Management turnover creates uncertainties and could harm our businessWe have experienced changes in our executive leadership in the past. David O’Toole, our Senior Vice President and Chief Financial Officer, resignedfrom employment effective September 11, 2017. Mr. Jonathan Wolter, a partner at FLG Partners, LLC, was retained as our interim Chief Financial Officer andon May 30, 2018, was appointed Chief Financial Officer. Patricia Hirano was appointed Vice President of Regulatory Affairs on January 1, 2019.Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negativelyimpact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are oftendifficult 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 newpersonnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our financialcondition 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 acandidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.28 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 maybe 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 ourability to attract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessaryto support our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientificknowledge that we require and the competition for qualified personnel among biotechnology businesses, we may not succeed in attracting or retaining thepersonnel 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 alliancesand joint ventures that leverage our core technology and industry experience to expand our product offerings or sales and distribution resources. Ourcompany has limited experience with acquiring other companies, acquiring or licensing assets or forming strategic alliances and joint ventures. We may notbe 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 anyacquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingentliabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have amaterial adverse effect on our financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoingoperations and require management resources that would otherwise focus on developing our existing business. We may experience losses related toinvestments 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 anticipatedbenefits of any acquisition, license, strategic alliance or joint venture. To finance such a transaction, we may choose to issue shares of our common stock asconsideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire othercompanies or fund a joint venture project using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitionsthrough 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 doingbusiness outside of the U.S.Our business strategy contemplates international expansion, including partnering with distributors, and introducing our current products and otherplanned products outside the U.S. Doing business internationally involves a number of risks, including: •multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatoryrequirements and other governmental approvals, permits and licenses; •potential failure by us or our distributors to obtain regulatory approvals for the sale or use of our current products and our planned futureproducts in various countries; •difficulties in managing foreign operations; •complexities associated with managing government payer systems, multiple payer-reimbursement regimes or self-pay systems; •logistics and regulations associated with shipping products, including infrastructure conditions and transportation delays; •limits on our ability to penetrate international markets if our distributors do not execute successfully;29 •financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable, and exposure to foreigncurrency exchange rate fluctuations; •reduced protection for intellectual property rights, or lack of them in certain jurisdictions, forcing more reliance on our trade secrets, ifavailable; •natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment oftrade and other business restrictions; and •failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, bymaintaining accurate information and control over sales activities and distributors’ activities.Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, have a materialadverse 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 our products may be potentially subject to malfunction or vulnerable to physical break-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, including onelectronic medical systems. As part of the American Recovery and Reinvestment Act 2009, or ARRA, Congress amended the privacy and security provisionsof the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’sprotected 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 for non-compliance on individuals and entities that provideservices to healthcare providers and other covered entities, collectively referred to as business associates. ARRA also made significant increases in thepenalties 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: notificationrequirements to federal regulators and in some cases, notification to local and national media. Notification is not required under HIPAA if the healthinformation that is improperly used or disclosed is deemed secured in accordance with encryption or other standards developed by HHS. Most states havelaws requiring notification of affected individuals and state regulators in the event of a breach of personal information, which is a broader class of informationthan the health information protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory contractualterms to ensure ongoing protection of personal information. Activities outside of the U.S. implicate local and national data protection standards, imposeadditional compliance requirements and generate additional risks of enforcement for non-compliance. We may be required to expend significant capital andother resources to ensure ongoing compliance with applicable privacy and data security laws, to protect against security breaches and hackers or to alleviateproblems 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 microprocessorsembedded in the device, and despite our efforts to test the software extensively, it is potentially subject to malfunction, physical break-ins, hackers, improperemployee or contractor access, computer viruses, programming errors, or similar problems. Any of these might result in confidential medical, business or otherinformation of other persons or of ourselves being revealed to unauthorized persons.30 Risks related to the operation of our businessAny future distribution or commercialization agreements we may enter into for our products may place the development of these products outside ourcontrol, 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 products. Our likely collaboratorsfor any distribution, marketing, licensing or other collaboration arrangements include large and mid-size companies, regional and national companies, anddistribution or group purchasing organizations. We will have limited control over the amount and timing of resources that our collaborators dedicate to thedevelopment or commercialization of our products. Our ability to generate revenue from these arrangements will depend in part on our collaborators’ abilitiesto successfully perform the functions assigned to them in these arrangements.Collaborations involving our products are subject to numerous risks, which may include the following: •collaborators have significant discretion in determining the efforts and resources that they will apply to any such collaborations; •collaborators may not pursue development and commercialization of our products, or may elect not to continue or renew efforts based onclinical study results, changes in their strategic focus for a variety of reasons, potentially including the acquisition of competitive products,availability of funding, and mergers or acquisitions that divert resources or create competing priorities; •collaborators may delay clinical studies, provide insufficient funding for a clinical study program, stop a clinical study, abandon a product,repeat or conduct new clinical studies or require a new engineering iteration of a product for clinical testing; •collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products; •a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to their marketing anddistribution; •collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietaryinformation in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietaryinformation or expose us to potential liability; •disputes may arise between us and a collaborator that causes the delay or termination of the research, development or commercialization of ourproducts or that results in costly litigation or arbitration that diverts management attention and resources; •collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development orcommercialization of the applicable products; and •collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases,we would not have the exclusive right to commercialize such intellectual property.Any termination or disruption of collaborations could result in delays in the development of products, increases in our costs to develop the productsor the termination of development of a product.We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing ourgrowth, which could disrupt our operations.As of December 31, 2018, we had nine employees and fourteen full-time or part-time consultants. Over the next several years, we expect toexperience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, qualityassurance, engineering, product development, regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue toimplement and improve our managerial, operational and financial systems, expand our facilities and continue to31 recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing acompany with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualifiedpersonnel. 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: •managing our clinical trials effectively, which we anticipate being conducted at numerous clinical sites; •identifying, recruiting, maintaining, motivating and integrating additional employees with the expertise and experience we will require; •managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors andother third parties; •managing additional relationships with various strategic partners, suppliers and other third parties; •improving our managerial, development, operational and finance reporting systems and procedures; and •expanding our facilities.Our failure to accomplish any of these tasks could prevent us from successfully growing. Any inability to manage growth could delay the executionof our business plans or disrupt our operations.Because we intend to commercialize our 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: •different regulatory requirements for drug approvals in foreign countries; •reduced protection for intellectual property rights; •unexpected changes in tariffs, trade barriers and regulatory requirements; •economic weakness, including inflation or political instability in particular foreign economies and markets; •compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; •foreign taxes, including withholding of payroll taxes; •foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doingbusiness in another country; •workforce uncertainty in countries where labor unrest is more common than in the U.S.; •production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and •business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons,floods and fires.We rely on third parties to conduct certain components of our clinical studies, and those third parties may not perform satisfactorily, including failing tomeet deadlines for the completion of such studies.We rely on third parties, such as contract research organizations, or CROs, 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 clinicaldevelopment activities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that eachof our clinical studies is conducted in accordance with the general investigational plan and protocols for the study. Moreover, the FDA requires us and thirdparties involved in the set-up, conduct, analysis and reporting of the clinical studies to comply with regulations and with standards, commonly referred to asgood clinical practices, or GCP, to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of patientsin clinical studies are protected. Our clinical investigators are also required to comply with32 GCPs. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do notsuccessfully carry out their contractual duties, meet expected deadlines or conduct our clinical studies in accordance with regulatory requirements or ourstated 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 maybe 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 accidentalcontamination 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 exceed our resources or any applicable insurance coverage we may have.Additionally, we are subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of thesematerials and specified waste products. These are particularly stringent in California, including for purposes of our joint venture with OAHL, where theCosense manufacturing facility and several suppliers are located. The cost of compliance with these laws and regulations may become significant and couldhave a material adverse effect on our financial condition, results of operations and cash flows. In the event of an accident or if we otherwise fail to complywith applicable regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.Risks related to intellectual propertyThird parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would beuncertain and could have a material adverse effect on the success of our business.Patent litigation is prevalent in our sectors. Our commercial success depends upon our ability and the ability of our distributors, contractmanufacturers, 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, futureadversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology. Third parties may assert infringementclaims 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 berequired 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 alicense in order to settle pending or threatened litigation. However, we may not be able to obtain any required license on commercially reasonable terms or atall. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us andcould 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 liablefor monetary damages. A finding of infringement could prevent us from commercializing our planned products or force us to cease some of our businessoperations, which could materially harm our business. Many of our employees were previously employed at universities or other biotechnology orpharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietaryinformation or know-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 theconfidential 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 usto incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be publicannouncements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these resultsto be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase ouroperating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conductsuch litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we canbecause of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectualproperty related proceedings could have a material adverse effect on our ability to compete in the marketplace.33 If we fail to comply with our obligations in our intellectual property agreements, we could lose intellectual property rights that are important to ourbusiness.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, inwhich 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 anyfailure 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 maintaineffective intellectual property rights for our technologies and planned products, or if the scope of the intellectual property protection is not sufficientlybroad.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 othercountries with respect to our proprietary technology and products.The patent position of pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legalprinciples 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 patentsbeing 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 ornarrow 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 ofdiscoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically notpublished 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 ourpatents 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, preventcompetitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents bydeveloping similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity orenforceability, 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 patentclaims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using orcommercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given theamount of time required for the development, testing and regulatory review of new planned products, patents protecting such products might expire before orshortly after such products are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others fromcommercializing 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, orunsuccessful.Competitors may infringe or otherwise violate the patents we rely on, or our other intellectual property rights. To counter infringement orunauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims that we assert against perceivedinfringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. In addition, in aninfringement 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 thetechnology at issue on the grounds that the patents we are asserting do not cover the technology in question. An adverse result in any litigation proceedingcould put one or more patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required inconnection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this typeof litigation.34 Interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office, or USPTO, or any foreign patentauthority may be necessary to determine the priority of inventions or other matters of inventorship with respect to patents and patent applications. We maybecome involved in proceedings, including oppositions, interferences, derivation proceedings interparty reviews, patent nullification proceedings, or re-examinations, challenging our patent rights or the patent rights of others, and the outcome of any such proceedings are highly uncertain. An adversedetermination in any such proceeding could reduce the scope of, or invalidate, important patent rights, allow third parties to commercialize our technologyor 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 isoffered at all. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management and otheremployees. We may also become involved in disputes with others regarding the ownership of intellectual property rights. If we are unable to resolve thesedisputes, 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 expensesand could distract our technical or management personnel from their normal responsibilities. In addition, there could be public announcements of the resultsof hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have asubstantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating losses andreduce the resources available for development activities or any future sales, marketing or distribution activities. Uncertainties resulting from the initiationand continuation of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, harming our businessand competitive position.In addition to our patented technology and products, we rely upon confidential proprietary information, including trade secrets, unpatented know-how, technology and other proprietary information, to develop and maintain our competitive position. Any disclosure to or misappropriation by third partiesof our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding ourcompetitive position in the market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements with our employeesand our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions tous. These agreements are designed to protect our proprietary information; however, we cannot be certain that our trade secrets and other confidentialinformation 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 beindependently developed by a person that is not a party to such an agreement. Furthermore, if the employees, consultants or collaborators that are parties tothese 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 ourtrade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated or otherwise become known or beindependently discovered by our competitors. In addition, intellectual property laws in foreign countries may not protect trade secrets and confidentialinformation to the same extent as the laws of the U.S. If we are unable to prevent disclosure of the intellectual property related to our technologies to thirdparties, we may not be able to establish or maintain a competitive advantage in our market, which would harm our ability to protect our rights and have amaterial adverse effect on our business.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. Competitorsmay use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwiseinfringing 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 ourproducts in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficientto prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual property rights inforeign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and otherintellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patentsor marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions couldresult in substantial cost and divert our efforts and attention from other aspects of our business.35 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 maynot adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative: •Others may be able to make products that are similar to our current and planned products, but that are not covered by claims in our patents; •The original filers of our patents that we developed or purchased might not have been the first to make the inventions covered by the claimscontained in such patents; •We might not have been the first to file patent applications covering an invention; •Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectualproperty rights; •Pending patent applications may not lead to issued patents; •Issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges byour competitors; •Our competitors might conduct research and development activities in countries where we do not have patent rights and then use theinformation learned from such activities to develop competitive products for sale in our major commercial markets; •We may not develop or in-license additional proprietary technologies that are patentable; and •The patents of others may have an adverse effect on our business.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 requirementsimposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-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 tothe United States Patent and Trademark Office, or USPTO, and various governmental patent agencies outside of the U.S. in several stages over the lifetime ofthe patents or applications. The USPTO and various non-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 orby other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of thepatent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be ableto use our technologies and this circumstance would have a material adverse effect on our businessRecent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement ordefense of our issued patents.In March 2013, under the America Invents Act, or AIA, the U.S. moved to a first-to-file system and made certain other changes to its patent laws. Theeffects of these changes are currently unclear as the USPTO must still implement various regulations, the courts have yet to address these provisions and theapplicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. Accordingly, it isnot yet clear what, if any, impact the AIA will have on the operation of our business. However, the AIA and its implementation could increase theuncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which could have amaterial adverse effect on our business and financial condition.36 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 potentiallyextending 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 anysuch 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-WaxmanAct allows a maximum of one patent to be extended per FDA approved product. Patent term extension also may be available in certain foreign countries uponregulatory approval of our planned products. Nevertheless, we may not be granted patent term extension either in the U.S. or in any foreign country becauseof, for example, our failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfyapplicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmentalauthority 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 wewill have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patentexpiration, and our revenue could be reduced, possibly materially. Risks related to government regulationThe regulatory approval process is expensive, time consuming and uncertain, and may prevent us from obtaining approvals for our planned products.The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of our products are subject to extensiveregulation by the FDA in the U.S. and other regulatory authorities in other countries, which regulations differ from country to country. We are not permittedto 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 orreceived marketing approval for any planned products. Obtaining approvals from the FDA can be a lengthy, expensive and uncertain process. In addition,failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions,including the following: •warning letters; •civil or criminal penalties and fines; •injunctions; •suspension or withdrawal of regulatory approval; •suspension of any ongoing clinical studies; •voluntary or mandatory product recalls and publicity requirements; •refusal to accept or approve applications for marketing approval of new drugs or biologics or supplements to approved applications filed by us; •restrictions on operations, including costly new manufacturing requirements; or •seizure or detention of our products or import bans.Prior to receiving approval to commercialize any of our planned products in the U.S. or abroad, we may be required to demonstrate with substantialevidence from well-controlled clinical studies, and to the satisfaction of the FDA and other regulatory authorities abroad, that such planned products are safeand effective for their intended uses. Results from preclinical studies and clinical studies can be interpreted in different ways. Even if we believe thepreclinical or clinical data for our planned products are promising, such data may not be sufficient to support approval by the FDA and other regulatoryauthorities. Administering any of our planned products to humans may produce undesirable side effects, which could interrupt, delay or cause suspension ofclinical studies of our planned products and result in the FDA or other regulatory authorities denying approval of our planned products for any or all targetedindications.37 Regulatory approval from the FDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantialdiscretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us toabandon or repeat clinical studies or perform additional preclinical studies and clinical studies. The number of preclinical studies and clinical studies thatwill be required for FDA approval varies depending on the planned product, the disease or condition that the planned product is designed to address and theregulations applicable to any particular planned product. The FDA can delay, limit or deny approval of a planned product for many reasons, including, butnot limited to, the following: •a planned product may not be deemed safe or effective; •FDA officials may not find the data from preclinical studies and clinical studies sufficient; •the FDA might not approve our or our third-party manufacturer’s processes or facilities; or •the FDA may change its approval policies or adopt new regulations.If any planned products fail to demonstrate safety and effectiveness in clinical studies or do not gain regulatory approval, our business and results ofoperations will be materially and adversely harmed.The research, development, conduct of clinical trials, manufacturing, labeling, approval, selling, import, export, marketing and distribution ofpharmaceutical 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 TestingBefore 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 drugcandidate’s potential benefits and safety. Additional nonclinical testing may be required during the clinical development process such as reproductivetoxicology and juvenile toxicology studies. Carcinogenicity studies in two 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 otherinformation, are submitted as part of an IND to the FDA. If FDA does not identify significant issues during the initial 30-day IND review, the drug candidatecan then be studied in human clinical trials to determine if the drug candidate is safe and effective. Each clinical trial protocol and/or amendment, newnonclinical 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 eachsubmission.Clinical TrialsThese clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which aresubject to considerable regulation, are as follows: •Phase I. The drug candidate is given to a small number of healthy human control subjects or patients suffering from the indicated disease, totest for safety, dose tolerance, pharmacokinetics, metabolism, distribution and excretion. •Phase II. The drug candidate is given to a limited patient population to determine the effect of the drug candidate in treating the disease, thebest dose of the drug candidate, and the possible side effects and safety risks of the drug candidate. It is not uncommon for a drug candidatethat appears promising in Phase I clinical trials to fail in the more rigorous Phase II clinical trials. •Phase III. If a drug candidate appears to be effective and safe in Phase II clinical trials, Phase III clinical trials are commenced to confirm thoseresults. Phase III clinical trials are conducted over a longer term, involve a significantly larger population, are conducted at numerous sites indifferent geographic regions and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drugcandidate. It is not uncommon for a drug candidate that appears promising in Phase II clinical trials to fail in the more rigorous and extensivePhase III clinical trials.38 For each clinical trial, an independent IRB or independent ethics committee, covering each site proposing to conduct a clinical trial must review andapprove the plan for any clinical trial and informed consent information for subjects before the trial commences at that site and it must monitor the studyuntil 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 orpatients 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 accordancewith GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in anyclinical trial. Sponsors of clinical trials generally must register and report, at the NIH-maintained website ClinicalTrials.gov, key parameters of certain clinicaltrials.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 oftreatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completedsuccessfully 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 thatthe patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.FDA Approval ProcessWhen 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 fora particular use, normally a New Drug Application (NDA) with FDA. FDA may hold a public hearing where an independent advisory committee of expertadvisors asks additional questions and makes recommendations regarding the drug candidate. This committee makes a recommendation to FDA that is notbinding 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 allowthe 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 believesthat 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 FDAmay 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 forapproval. CRLs generally outline the deficiencies in the submission and may require substantial additional testing or information in order for the FDA toreconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy theregulatory criteria for approval. If and when the deficiencies have been addressed to the FDA’s satisfaction, the FDA will typically issue an approval letter. Anapproval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.FDA may also require Phase IV non-registrational studies to explore scientific questions to further characterize safety and efficacy during commercialuse of our drug. FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures or facilities or mayrequire extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not contain adequate evidenceof 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 notbelieve 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 ourdrugs for us. All of these facilities are subject to periodic inspections by FDA. FDA must also approve foreign establishments that manufacture products to besold 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 theproduct reaches the market. In addition, the FDA may require post-approval testing, including Phase IV studies, and surveillance programs to monitor theeffect of approved products which have been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on theresults of these post-marketing programs. Drugs may be marketed only for the approved indications and in39 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 productor impose other conditions, including labeling or distribution restrictions or other risk-management mechanisms. Further, if there are any modifications to thedrug, including changes in indications, labeling, or manufacturing processes or facilities, the sponsor may be required to submit and obtain FDA approval ofa new or supplemental NDA, which may require the development of additional data or conduct of additional pre-clinical studies and clinical trials.Even if we receive marketing approval for a planned product, we will be subject to ongoing regulatory obligations and continued regulatory review, whichmay result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.Once marketing approval has been obtained, the approved product and its manufacturer are subject to continual review by the FDA or non-U.S.regulatory authorities. With respect to our joint venture, the current clearance for CoSense, as well as any additional regulatory approval that we receive forany of our other planned products may be subject to limitations on the indicated uses for which the product may be marketed. Future approvals may containrequirements for potentially costly post-marketing follow-up studies to monitor the safety and effectiveness of the approved product. In addition, we aresubject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the labeling, packaging, adverse eventreporting, storage, advertising, promotion and recordkeeping for our products.In addition, we are required to comply with cGMP regulations regarding the manufacture of our drugs, which include requirements related to qualitycontrol and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must approve thesemanufacturing facilities before they can be used to manufacture drug products, and these facilities are subject to continual review and periodic inspections bythe FDA and other regulatory authorities for compliance with cGMP regulations. If we or a third party discover previously unknown problems with a product,such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority mayimpose restrictions on that product, the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing.Once a pharmaceutical product is approved, a product will be subject to pervasive and continuing regulation by the FDA, EMA, and other healthauthorities, including, among other things, recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting ofadverse experiences with the product.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are subject to periodicunannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictlyregulated and generally require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviationsfrom 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 QSRcompliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market, though the FDA must provide an application holder with notice and an opportunity for a hearing inorder to withdraw its approval of an application. Later discovery of previously unknown problems with a product, including adverse events of unanticipatedseverity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; •fines, warning letters or holds on post-approval clinical trials; •refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of productapprovals; •product seizure or detention, or refusal to permit the import or export of products; and •injunctions or the imposition of civil or criminal penalties.40 The FDA strictly regulates the marketing, labeling, advertising and promotion of drug and device products that are placed on the market. Whilephysicians may prescribe drugs and devices for off label uses, manufacturers may only promote for the approved indications and in accordance with theprovisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off label uses, and acompany 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 thedevelopment program is designed to address the unmet medical need, may be designated as fast track and/or breakthrough candidates by FDA and may beeligible 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 lessthan 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 aregranted up to 7-year market exclusivity. In the E.U., products granted orphan designation are subject to reduced fees for protocol assistance, marketingauthorization applications, inspections before authorization, applications for changes to marketing authorizations, and annual fees, access to the centralizedauthorization 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 aproduct 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 onecountry 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 recognitionprocedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of theE.U. registration procedures, separate pricing and reimbursement approvals are also required in most countries. The E.U. also has requirements for approval ofmanufacturing facilities for all products that are approved for sale by the E.U. regulatory authorities.Failure to obtain marketing approvals in foreign jurisdictions will prevent us from marketing our products internationally.We intend to seek distribution and marketing partners for our current products outside the U.S. and may market planned products in internationalmarkets. Our joint venture has obtained a CE Mark certification for CoSense and it is therefore authorized for sale in the E.U.; however, in order to marketproducts 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 additionalclinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Moreover, clinical studies or manufacturingprocesses conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA and CE Mark certification doesnot ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval byregulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have anegative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDAapproval. 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 filewe may not receive necessary approvals to commercialize our products in any market.41 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 waysthat could affect our future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakersregularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain orreduce the costs of medical products and services. For example, one of the most significant healthcare reform measures in decades, the Patient Protection andAffordable Care Act of 2010, or PPACA, was enacted in 2010. The PPACA contains a number of provisions, including those governing enrollments in federalhealthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will resultin the development of new programs. The PPACA, among other things: •imposes a tax of 2.3% on the retail sales price of medical devices sold after December 31, 2012; •could result in the imposition of injunctions; •requires collection of rebates for drugs paid by Medicaid managed care organizations; and •requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer •50% point-of-sale discounts off negotiated prices of applicable branded drugs to eligible beneficiaries during their coverage gap period, as acondition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.While the U.S. Supreme Court upheld the constitutionality of most elements of the PPACA in June 2012, other legal challenges are still pending finaladjudication in several jurisdictions. The PPACA, among other things, imposed an excise tax of 2.3% on the sale of most medical devices, including ours,and any failure to pay this amount could result in the imposition of an injunction on the sale of our products, fines and penalties. Although this tax has beensuspended through 2019, it is expected to apply to sales of our products, including CoSense devices and may be applicable to CoSense consumables soldunder our joint venture and also Serenz devices, in 2020 and thereafter. The current presidential administration and Congress may continue to attempt broadsweeping changes to the current health care laws. We face uncertainties that might result from modifications or repeal of any of the provisions of the PPACA,including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medicaldevice industry as a whole is currently unknown. Any changes to the PPACA are likely to have an impact on our results of operations, and may have amaterial adverse effect on our results of operations. We cannot predict what other health care programs and regulations will ultimately be implemented at thefederal or state level or the effect of any future legislation or regulation in the United States may have on 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 SelectCommittee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, which triggered the legislation’s automaticreduction to several government programs, including aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. InJanuary 2013, former President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months thebudget cuts mandated by the sequestration provisions of the Budget Control Act of 2011. The ATRA, among other things, also reduced Medicare paymentsto several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from threeto five years. In March 2013, the President signed an executive order implementing sequestration, and in April 2013, the 2% Medicare reductions went intoeffect. 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 ofhealth care. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurancecompanies, managed care organizations and other payers of healthcare services to contain or reduce costs of health care may adversely affect: •our ability to set a price that we believe is fair for our products; •our ability to generate revenue and achieve or maintain profitability; and •the availability of capital.42 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 ofa clinical study. In light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, theGovernmental Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events haveresulted in the recall and withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of riskmanagement programs that may, for instance, restrict distribution of drug products or require safety surveillance or patient education. The increased attentionto 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 mayreceive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate or suspend clinical studiesbefore completion or require longer or additional clinical studies that may result in substantial additional expense and a delay or failure in obtainingapproval 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 ofapproval, costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhancedlabeling, special packaging or labeling, expedited reporting of certain adverse events, preapproval of promotional materials and restrictions on direct-to-consumer advertising.If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could beadversely affected.Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payers, certainfederal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could besubject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. Theregulations that may affect our ability to operate include, without limitation: •the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering,soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or thepurchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as theMedicare and Medicaid programs; •indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for whichpayment may be made under federal healthcare programs, such as the Medicare and Medicaid programs; •the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to bepresented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entitieslike us which provide coding and billing advice to customers; •federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating tohealthcare matters; •the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics and medicalsupplies to report to the HHS information related to physician payments and other transfers of value and physician ownership and investmentinterests; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certainelectronic healthcare transactions and protects the security and privacy of protected health information; and •state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payer, including commercial insurers.43 The PPACA, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A personor 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 mayassert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim forpurposes 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 besubject 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 usfor violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attentionfrom the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws mayprove costly.Risks related to ownership of our securitiesOur 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 devicecompanies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. During theperiod from January 1, 2018, through December 31, 2018, the reported high and low prices of our common stock ranged from $3.60 to $1.45. As a result ofthis volatility, investors may not be able to sell their common stock at or above the purchase price. The market price for our common stock may be influencedby many factors, including the following: •our ability to successfully commercialize, and realize significant revenues from sales of our products; •the success of competitive products or technologies; •the results of clinical studies of our products or those of our competitors; •regulatory or legal developments in the U.S. and other countries, especially changes in laws or regulations applicable to our products; •introductions and announcements of new products by us, our commercialization partners, or our competitors, and the timing of theseintroductions or announcements; •actions taken by regulatory agencies with respect to our products, clinical studies, manufacturing process or sales and marketing terms; •variations in our financial results or those of companies that are perceived to be similar to us; •the success of our efforts to acquire or in-license additional products or planned products; •developments concerning our collaborations, including but not limited to those with our sources of manufacturing supply and ourcommercialization partners; •developments concerning our ability to bring our manufacturing processes to scale in a cost-effective manner; •announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; •developments or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain patentprotection for our products; •our ability or inability to raise additional capital and the terms on which we raise it; •the recruitment or departure of key personnel; •changes in the structure of healthcare payment systems; •market conditions in the pharmaceutical and biotechnology sectors;44 •actual or anticipated changes in earnings estimates or changes in stock market analyst recommendations regarding our common stock, othercomparable companies or our industry generally; •trading volume of our common stock; •sales of our common stock by us or our stockholders; •general economic, industry and market conditions; and •the other risks described in this “Risk Factors” section.These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In thepast, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if institutedagainst 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, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if ourbusiness is doing well.Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could materially and adverselyaffect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. All of our shares of commonstock are freely tradable, without restriction, in the public market, except for any shares held by our affiliates.We issued 13,780 shares of Series B Convertible Preferred Stock in 2017. As of December 31, 2017, all of the shares of Series B Convertible PreferredStock have been converted into 2,556,000 shares of common stock. Under the terms of the Series B Convertible Preferred Stock, no shares of common stockhave been issued to Sabby Management, LLC, or “Sabby”, upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of sharesof common stock would have resulted in Sabby having ownership in excess of 4.99%.On March 7, 2017, we issued 1,666,666 shares of common stock for an investment of $8.0 million from the completion of the concurrent financingand issued 416,666 shares of common stock for an investment of $2.0 million from Aspire Capital pursuant to the 2017 Aspire Purchase Agreement. All theshares issued under the 2017 Aspire Purchase Agreement are eligible for future resale under a registration statement on Form S-1 on February 1, 2017 that wasdeclared effective by the SEC on February 15, 2017. We terminated the 2017 Aspire Purchase Agreement on December 15, 2017 in connection with theclosing of the 2017 PIPE Offering. On December 11, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 8,141,116immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of $15.0 million. Each unit consisted of one share of our common stockand 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 of common stock andcorresponding warrants to purchase an aggregate of 6,024,425 shares of common stock, together the shares of common stock are referred to as the 2017 Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registrationstatement with the SEC to register for resale the 2017 Resale Shares. The registration statement was declared effective in February 2018.On December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 10,272,375units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of our common stock and a warrant topurchase 0.05 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and correspondingwarrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018 Resale Shares. Wealso granted certain registration rights to these stockholders, pursuant to which, among other things, we will prepare and file with the SEC a registrationstatement to register for resale the 2018 Resale Shares prior to March 31, 2019.45 In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with afinancing, acquisition, litigation settlement, employee arrangement or otherwise. Any such issuance could result in substantial dilution to our existingstockholders and could cause our stock price to decline.We are an “emerging growth company,” and a “smaller reporting company” and we cannot be certain if the reduced reporting requirements applicable toemerging growth companies and smaller reporting companies will make our common 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, and as a “smaller reporting company” under the Exchange Act. For as long as we continue to be an emerging growth company, we may take advantage ofexemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not beingrequired to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosureobligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbindingadvisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. After we are no longer anemerging growth company and for as long as we remain a smaller reporting company, we will remain eligible for certain exemptions, including not beingrequired to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regardingexecutive compensation, but we will be required to hold a nonbinding advisory vote on executive compensation and obtain stockholder approval of goldenparachute payments.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 anemerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering,or IPO, which would be December 31, 2019, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the dateon which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-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 in non-convertible debt securities during the priorthree-year period. We will remain a smaller reporting company until we have a public float, or value attributable to stock held by non-affiliates, of at least$250 million, as measured on the prior June 30th.Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of theJOBS Act until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new orrevised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerginggrowth company or (ii) affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. We cannot predict if investors will find our common stock less attractive to the extent we rely on available exemptions. If some investors do find ourcommon stock less attractive, there may be a less active trading market for our common stock and our stock price may be more volatile or may decline.Our executive officers, directors and principal stockholders may continue to maintain the ability to control or significantly influence all matters submittedto stockholders for approval and under certain circumstances Abingworth LLP, Vivo Ventures, Oracle Investment Management and Jack W. Schuler andtheir affiliates may have control over key decision making.Our executive officers, directors and principal stockholders own a majority of our outstanding common stock. Entities associated with AbingworthLLP, Vivo Ventures, Oracle Investment Management and Jack W. Schuler, as of December 31, 2018, beneficially own approximately 46.2 percent of ourcommon stock. As a result, the foregoing group of stockholders are able to control all matters submitted to our stockholders for approval, as well as ourmanagement and affairs. For example, these stockholders will control the election of directors and the approval of any merger, consolidation or sale of all orsubstantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders maydesire.46 We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management has devotedand 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 reportingrequirements of the Securities Exchange Act of 1934, as amended, the other rules and regulations of the SEC, and the rules and regulations of The NASDAQCapital Market, or NASDAQ. The expenses of being a public company are material, and compliance with the various reporting and other requirementsapplicable to public companies requires considerable time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC andnational securities exchanges have imposed various requirements on public companies, including requiring establishment and maintenance of effectivedisclosure and financial controls. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Theserules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Forexample, these rules and regulations may make it difficult and expensive for us to obtain adequate director and officer liability insurance, and we may berequired to accept reduced policy limits on coverage or incur substantial costs to maintain the same or similar coverage. The impact of these events couldalso make it more difficult for us to attract and retain qualified personnel to serve on our Board of 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 andprocedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management toreport on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. In addition,we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reportingbeginning with our annual report on Form 10-K following the date on which we are no longer an emerging growth company or smaller reporting company.Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do nothave an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technicalaccounting knowledge.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 firmidentify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could declineand we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial andmanagement resources. Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely andaccurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, proceduresand controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, proceduresor controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtainan unqualified report on internal controls from our auditors as required under Section 404. This, in turn, could have an adverse impact on trading prices forour common stock, and could adversely affect our ability to access the capital markets.Our ability to use our net operating loss carry forwards and certain other tax attributes will be limited.Our ability to utilize our federal net operating loss, carryforwards and federal tax credit will be limited under Sections 382 and 383 of the InternalRevenue Code of 1986, as amended, or the Code. The limitations apply if an “ownership change,” as defined by Section 382, occurs. Generally, an ownershipchange 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 than50% over their lowest ownership percentage at any time during the applicable testing period (typically three years). During the year ended December 31,2016, we experienced an “ownership change”, and in the year ended December 31, 2017 our acquisition of Essentialis resulted in an ownership change, ofwhich both changes will limit our ability to utilize our existing and acquired net operating losses and other tax attributes to offset taxable income. As a result,if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards and other tax attributes to offset U.S. federal taxable incomewill be subject to limitations, which could potentially result in increased future tax liability to us.47 As our warrant holders exercise their warrants into shares of our common stock, our stockholders will be diluted.The exercise of some or all of our warrants results in issuance of common stock that dilute the ownership interests of existing stockholders. Any salesof the common 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 stock in the market, such sales could cause the price ofour common stock to decline, and the potential for such downward pressure on the price of our common stock may encourage short selling of our commonstock by holders of our warrants or other parties.If there is significant downward pressure on the price of our common stock, it may encourage holders of our warrants, or other parties, to sell shares bymeans of short sales or otherwise. Short sales involve the sale, usually with a future delivery date, of common stock the seller does not own. Covered shortsales are sales made in an amount not greater than the number of shares subject to the short seller’s right to acquire common stock, such as upon exercise ofwarrants. 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 openmarket. 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 ofcommon 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 salesgenerally causes the price of common stock to decline, in part because it indicates that a number of market participants are taking a position that will beprofitable only if the price of the common stock declines.Under certain circumstances we may be required to settle the value of the Series A, Series C, 2017 PIPE Warrants and 2018 PIPE Warrants in cash.If, at any time while the Series A, Series C, 2017 PIPE Warrants and 2018 PIPE Warrants, or the Warrants, are outstanding, we enter into a“Fundamental Transaction” (as defined in the Warrants), which includes, but is not limited to, a purchase offer, tender offer or exchange offer, a stock or sharepurchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or other scheme of arrangement),then each registered holder of outstanding Warrants as at any time prior to the consummation of the Fundamental Transaction, may elect and require us topurchase the Warrants held by such person immediately prior to the consummation of such Fundamental Transaction by making a cash payment in anamount equal to the Black Scholes Value of the remaining unexercised portion of such registered holder’s Warrants.We might not be able to maintain the listing of our securities on The NASDAQ Capital Market.We have listed our common stock and Series A Warrants on 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, market capitalization abovecertain specified levels and minimum bid requirement of $1.00 per common share. We do not expect to become profitable for some time and there is a riskthat our shareholders’ equity could fall below the $2.5 million level required by NASDAQ. If we do not regain compliance with the minimum bid requirementor our shareholders’ equity falls below $2.5 million, it will cause us to fail to conform to the NASDAQ listing requirements on an ongoing basis, which in turncould cause our common stock to cease to trade on the NASDAQ exchange, and be required to move to the Over the Counter Bulletin Board or the “pinksheets” exchange maintained by OTC Markets Group, Inc. The OTC Bulletin Board and the “pink sheets” are generally considered to be markets that are lessefficient, and to provide less liquidity in the shares, than the NASDAQ market.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 stock ownership on their holders, such as voting rights or the rightto receive dividends, but rather merely represent the right to acquire shares of common stock at a fixed price for a limited period of time. Specifically, holdersof Series A Warrants may exercise their right to acquire the common stock and pay an exercise price of $32.50 per share prior to the expiration of the five-yearterm on November 12, 2019, after which date any unexercised Series A Warrants will expire and48 have no further value. Holders of Series C Warrants may exercise their right to acquire common stock and pay an exercise price of $31.25 per share prior tothe 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 anexercise 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 inPrader-Willi syndrome. Holders of the 2018 PIPE Warrants are entitled to purchase one share of our common stock at an exercise price equal to $2.00 pershare prior to the expiration of the five-year term on December 21, 2023.Following the amendment of the Series D Common Stock Purchase Warrants, the holders may exercise their right to acquire common stock and payan amended exercise price of $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 stock willever equal or exceed the exercise price of the warrants, and, consequently, whether it will ever be profitable for holders of the warrants to exercise thewarrants.If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and tradingvolume could decline.The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or ourbusiness. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock pricewould 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 theseanalysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stockprice 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 ourstockholders 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 thatstockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisionscould also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of ourcommon stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management bymaking it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing themembers 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: •our Board of Directors is divided into three classes with staggered three-year terms which may delay or prevent a change of our management ora change in control; •our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of our Board of Directors or the resignation,death or removal of a director, which will prevent stockholders from being able to fill vacancies on our Board of Directors; •our stockholders are not able to act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling amajority of our capital stock cannot take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings calledby our Board of Directors, the chairman of our board, the chief executive officer or the president; •our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders toelect director candidates; •amendments of our certificate of incorporation and bylaws require the approval of 66 2/3% of our outstanding voting securities;49 •our stockholders are required to provide advance notice and additional disclosures in order to nominate individuals for election to our Boardof Directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer fromconducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and •our Board of Directors are able to issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for ourBoard of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.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 thedate 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 aprescribed manner.Our employment agreements with our executive officers may require us to pay severance benefits to any of those persons who are terminated in connectionwith 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 foraggregate cash payments for severance and other benefits and acceleration of stock options vesting in the event of a termination of employment inconnection with a change in control of us. The accelerated vesting of options could result in dilution to our existing stockholders and harm the market priceof our common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severancepayments 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 stock in the foreseeable future, capital appreciation, if any, will be ourstockholders’ sole source of gain.We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance thegrowth 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 stock will be our stockholders’ sole source of gain for the foreseeable future.The sale of our common stock to investors in the 2018 PIPE Offering may cause substantial dilution to our existing stockholders and the sale of commonstock by these investors could cause the price of our common stock to decline.On December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of our common stock and a warrant topurchase 0.05 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and correspondingwarrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018 Resale Shares. Wealso granted certain registration rights to these stockholders, pursuant to which, among other things, we will prepare and file with the SEC a registrationstatement to register for resale the 2018 Resale Shares prior to March 31, 2019.ITEM 1B. UNRESOLVED STAFF COMMENTSNot applicable.50 ITEM 2. PROPERTIESFacilitiesOur principal facilities consist of office space in Redwood City, California, which also contains space for Capnia’s final assembly and calibrationfacility for CoSense. We currently occupy 8,171 square feet of office space under a non-cancelable operating lease that terminates in August 2019.We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additionalspace can be leased on commercially reasonable terms to accommodate any future growth.ITEM 3. LEGAL PROCEEDINGSWe may, from time to time, be party to litigation 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 nothave a material adverse effect on our business; however, the results of litigation and 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 factors.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.51 PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket InformationOur common stock is quoted on NASDAQ under the symbol “SLNO” and our Series A warrants are quoted on NSADAQ under the symbol “SLNOW.”Our Series C Warrants, Series D Warrants, 2017 PIPE Warrants and 2018 PIPE Warrants are not traded on a national securities exchange.As of March 6, 2019, there were 80 shareholders of record for our common stock. A substantially greater number of stockholders may be “streetname” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.Dividend PolicyWe have never declared or paid cash dividends on our common stock, and currently do not plan to declare dividends on shares of our common stockin 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 cashdividends 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 SecuritiesDuring the year ended December 31, 2018, we issued the following unregistered securities: •On December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million and net proceeds of $16.3 million. Each unitconsisted of one share of our common stock and a warrant to purchase 0.05 shares of our common stock at an exercise price of $2.00 per share,for an aggregate of 10,272,375 shares of common stock and corresponding warrants to purchase an aggregate of 513,617 shares of commonstock, together with the shares of common stock are referred to as the 2018 Resale Shares. We also granted certain registration rights to thesestockholders, pursuant to which, among other things, we will prepare and file with the SEC a registration statement to register for resale the2018 Resale Shares prior to March 31, 2019. •On December 11, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued8,141,116 immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of $15.0 million and net proceeds of $13.8million. 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 priceof $2.00 per share, for an aggregate of 8,141,116 shares of common stock and corresponding warrants to purchase an aggregate of 6,024,425shares of common stock, together the shares of common stock are referred to as the 2017 Resale Shares. We also granted certain registrationrights to these stockholders, pursuant to which, among other things, we prepared and filed a registration statement with the SEC to register forresale the 2017 Resale Shares. The registration statement was declared effective in February 2018.52 Except as outlined above, none of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any publicoffering. We believe that these transactions were exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act astransactions by an issuer not involving any public offering. The recipients of securities in each of these transactions represented their intention to acquire thesecurities 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 stockcertificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. •For the year ended December 31, 2018, we granted to officers, directors, employees, consultants and other service providers options to purchasean aggregate of 756,086 shares of common stock under our 2014 Equity Incentive Plan. •For the year ended December 31, 2017, we granted to officers, directors, employees, consultants and other service providers options to purchasean aggregate of 622,755 shares of common stock under our 2014 Equity Incentive Plan.None of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering. We believe that thesetransactions were exempt from the registration requirements of the Securities Act under Rule 701 promulgated under the Securities Act as offers and sales ofsecurities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. The recipients of securities inthese transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with anydistribution thereof and appropriate legends were affixed to the stock certificates and instruments issued in such transactions. All recipients had adequateaccess, through their relationships with us, to information about us.(b) Use of ProceedsThere has been no material change in the planned use of proceeds from the 2017 PIPE Offering or 2018 PIPE Offering as described in our finalprospectus filed with the SEC pursuant to Rule 424(b) for such transaction.ITEM 6. SELECTED FINANCIAL INFORMATIONPursuant to Item 301(c) of Regulation S-K.as a smaller reporting company, we not required to provide the information required by this item.53 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes thatappear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning ofSection 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 todiffer materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differencesinclude, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of this Annual Report on Form 10-K andelsewhere in this report. The forward-looking statements in this Annual Report on Form 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 on Form 10-K.Business OverviewWe were initially established as a diversified healthcare company that developed and commercialized innovative diagnostics, devices andtherapeutics 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 conditionin which red blood cells degrade rapidly and which can lead to adverse neurological outcomes; and, products that included temperature probes, scales,surgical tables, and patient surfaces.On December 22, 2016, we entered into the Merger Agreement with Essentialis. Essentialis’s efforts prior to the Merger were focused primarily ondeveloping and testing product candidates that target the ATP-sensitive potassium channel, a metabolically regulated membrane protein whose modulationhas the potential to impact a wide range of rare metabolic, cardiovascular, and CNS diseases. Essentialis had tested DCCR as a treatment for PWS, a complexmetabolic/neurobehavioral disorder. DCCR has orphan designation for the treatment of PWS in the U.S. as well as in the E.U. Consummation of the Mergerwas subject to various closing conditions, including our consummation of a financing of at least $8.0 million at, or substantially contemporaneous with, theclosing of the Merger, which occurred on March 7, 2017 and the receipt of stockholder approval of the Merger at a special meeting of our stockholders,which was held on March 6, 2017. As a result, we now primarily focus on the development and commercialization of novel therapeutics for the treatment ofrare diseases. 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.Subsequent to March 7, 2017, we explored opportunities, and made a decision to divest, sell or otherwise dispose of the CoSense, NFI and Serenzbusinesses. Accordingly, and pursuant to ASC 205-20-45-10, the assets and liabilities related to the discontinued activities of CoSense, NFI and Serenzbusinesses are presented separately in the balance sheet as held for sale items, and the related operations reported herein for the CoSense, NFI and Serenzactivities are reported as discontinued operations in the statements of operations until the time that the assets were disposed of. Our remaining ownership inCapnia is recorded as an investment and initially measured at fair value.Our previously wholly-owned subsidiary NFI also marketed innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatalmarkets. We sold NFI in a stock transaction that was completed on July 18, 2017, pursuant to the NFI Purchase Agreement with Neoforce Holdings, a wholly-owned subsidiary of Flexicare Medical Limited, a privately-held United Kingdom company, for $720,000 and adjustments for inventory and the current cashbalances held at NFI (see Note 5).On December 4, 2017, we and our then wholly-owned subsidiary Capnia, entered into a joint venture with OAHL with the purpose of developing andcommercializing CoSense with the intent to transfer ownership of Capnia to OAHL. During October 2018, Capnia issued 1,690,322 shares of its commonstock to OAHL, representing 53% of its outstanding shares, after which we no longer hold a controlling interest in Capnia. Accordingly, we deconsolidateCapnia’s financial statements from ours and our remaining minority interest in Capnia is reported as a Minority interest investment in our consolidatedbalance sheet.54 We continue to separately evaluate alternatives for our Serenz portfolio.On July 27, 2018 the FDA has granted Fast Track designation to DCCR for the treatment of PWS. We are currently conducting a Phase III clinicaltrial of DCCR for the treatment of PWS.We have continued to focus on expense control, including reducing our workforce, reducing outside consultants, reducing legal fees andimplementing a policy providing for Board members to receive common stock in lieu of cash payments as compensation for Board service.As of December 31, 2018, we had an accumulated deficit of $127.0 million, primarily as a result of research and development and general andadministrative 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 potentialfuture strategic partnerships, we have, to date, generated approximately $2,000 of revenue only from the 2013 license agreement pertaining to Serenz,approximately $2.7 million in revenue from our neonatology products and approximately $0.2 million in government grants; these activities are reported asdiscontinued operations in our accompanying consolidated financial statements. We may never be successful in commercializing our novel therapeutic andin divesting, selling or otherwise disposing of our existing neonatology products or related therapeutic products. Accordingly, we expect to incur significantlosses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.FinancingsSabby 2016 Stock PurchaseWe issued a total of 13,780 780 shares of Series B Convertible Preferred Stock under the Securities Purchase Agreement entered into on June 29,2016 with Sabby Healthcare Master Fund Ltd and Sabby Volatility Warrant Fund Ltd, which are funds managed by Sabby Management, LLC, collectivelyreferred to as Sabby, as amended by Amendment No. 1 dated September 2016, referred to as the 2016 Sabby Purchase Agreement. These shares had a parvalue of $0.001 and a stated value of $1,000 per share. The aggregate purchase price of the Series B Convertible Preferred shares was $13.8 million, and wereconvertible to common stock at a rate of 200 shares of common stock for each converted share of Series B Convertible Preferred Stock, for a total of 2,756,000 shares of our common stock, based on a fixed conversion price of $5.00 per share on an as-converted basis. Under the terms of the Series BConvertible Preferred Stock, in no event shall shares of common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to theextent such issuance of shares of common stock would result in Sabby having ownership in excess of 4.99%. The Series B Convertible Preferred Stock didnot have an expiration date and were not redeemable at the option of the holders. In addition, on the effect date of the 2016 Sabby Purchase Agreement theexercise price of the existing Series D Warrants originally issued in conjunction with the 2015 Sabby Purchase Agreement was reduced from $12.30 to $8.75per share. In connection with the 2016 Sabby Purchase Agreement, we also were obligated to repurchased the remaining 7,780 outstanding Series AConvertible Preferred Stock held by Sabby for an aggregate amount of $7.8 million, which shares were originally purchased by Sabby under the 2015 SabbyPurchase Agreement and which shares represent 841,081 shares of common stock on an as-converted basis. The sale of the Series B Convertible PreferredStock occurred in two separate closings. The first closing was on July 5, 2016 and the second closing was on September 29, 2016. Between the two closings,after the repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, we received $5.6 million of net proceeds. During 2016,2017 and 2018 Sabby converted 1,000, 8,209 and 4,571 shares of Series B Convertible Preferred stock into 200,000, 1,641,800 and 914,200 shares ofcommon stock, respectively. As of December 31, 2018, there were no shares of Series B Convertible Preferred Stock outstanding. Aspire Stock PurchaseOn January 27, 2017, we 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 topurchase up to an aggregate of $17.0 million in value of shares of our common stock over the 30-month term of the 2017 Aspire Purchase Agreement. Weissued Aspire Capital 141,666 shares of common stock as commitment shares under the 2017 Aspire Purchase Agreement. The 2017 Aspire PurchaseAgreement was terminated upon the closing of the 2017 PIPE Offering.55 2017 PIPE OfferingOn December 11, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 8,141,116immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of $15.0 million. Each unit consisted of one share of our common stockand 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 of common stock andcorresponding warrants to purchase an aggregate of 6,024,425 shares of common stock, together the shares of common stock are referred to as the 2017 Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registrationstatement with the SEC to register for resale the 2017 Resale Shares. The registration statement was declared effective in February 2018.2018 PIPE OfferingOn December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 10,272,375units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of our common stock and a warrant topurchase 0.05 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and correspondingwarrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018 Resale Shares. Wealso granted certain registration rights to these stockholders, pursuant to which, among other things, we will prepare and file with the SEC a registrationstatement to register for resale the 2018 Resale Shares prior to March 31, 2019.Financial overviewSummaryWe have not generated net income from operations to date, and, at December 31, 2018 and December 31, 2017, we had an accumulated deficit of$127.0 million and $113.7 million, respectively, primarily as a result of research and development and general and administrative expenses. We may neverbe successful in commercializing our novel therapeutics products for the treatment of rare diseases. Accordingly, we expect to incur significant losses fromoperations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.Revenue recognitionTo date, we have earned no revenue from the commercial development and sale of novel therapeutic products and the revenue resulting fromcommercialization and sale of the CoSense, Neo Force, Inc. and Serenz products is reported in discontinued operations.Research and development expensesResearch and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits, professionalconsultant fees, prototype expenses, certain facility costs and other costs associated with clinical trials, net of reimbursed amounts. Costs to acquiretechnologies to be used in research and development that have not reached technological feasibility, and have no alternative future use, are expensed toresearch and development costs when incurred. Research and development expenses resulting from the development of novel therapeutic products arereported in continuing operations, and research and development expenses resulting from the development of the CoSense, Neo Force, Inc. and Serenzproducts are reported in discontinued operations.Sales and marketing expensesSales and marketing expenses consist principally of salaries and benefits, professional consulting fees, and other expenses associated withcommercial activities. We anticipate these expenses will increase significantly in future periods, reflecting the increased level of sales and marketing activitynecessary for the commercial launch of a successful future therapeutic drug candidate. We have to date incurred no sales and marketing expenses related tothe sale and commercialization of novel therapeutic products, and the sales and marketing expenses related to the CoSense, Neo Force, Inc. and Serenzproducts are reported in discontinued operations.56 General and administrative expensesGeneral and administrative expenses consist principally of salaries and benefits, 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 administrativeexpenses will increase in future periods, reflecting an expanding infrastructure, other administrative expenses and increased professional fees associated withbeing a public reporting company. General and administrative expenses incurred in operating all components of our business are classified as continuingoperations and are not allocated to specific research and development or sales and marketing activities that have been discontinued. General andadministrative expenses, such as rent, that are incurred specifically to directly support research and development and sales and marketing activities for theCoSense, Neo Force, Inc. and Serenz products are reported in discontinued operations.Change in fair value of contingent considerationChange in fair value of contingent consideration represents the change in the fair value of the additional consideration that we expect to payEssentialis stockholders based on our assessment of the expected likelihood of achieving commercial sales milestones of $100.0 million and $200.0 millionin future years.Other income (expense)Other income (expense) is primarily comprised of the gain recognized from the transfer of the majority ownership and resulting deconsolidation ofCapnia and changes in the fair value of the Series A, Series C and the 2017 and 2018 PIPE common stock warrant liabilities.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of financial condition and results of operations are based upon our audited financial statements, whichhave been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base ourestimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from theseestimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 3 to our audited financialstatements contained herein.Series A, Series C, 2017 PIPE Warrants, and the 2018 PIPE WarrantsWe account for the Series A, Series C, 2017 PIPE warrants, and 2018 PIPE warrants, collectively referred to as the Warrants, in accordance with theguidance in ASC 815 Derivatives 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 incash 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 hostiletakeovers, which are not within our sole control as the issuer of these warrants. Accordingly, the warrants are considered to have a cash settlement feature thatprecludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would be computed using theBlack Scholes Option Pricing Model, which approximates the binomial lattice model.We classified the Warrants as liabilities at their fair value and re-measure the warrants at each balance sheet date until they are exercised or expire.Any change in the fair value is recognized as other income (expense) in the statements of operations.57 Research and development expenseResearch 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 futureuse are expensed to research and development costs when incurred.Certain Research and Development expenses are reported as Discontinued Operations.Stock-based compensation expenseStock-based compensation costs related to stock options granted to employees and directors are measured at the date of grant based on the estimatedfair value of the award. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricingmodel. 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 vestingperiod of the award. Stock options we grant to employees generally vest over four years.The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If we hadmade 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 the volatilities of common stock of comparable companies in ourindustry. •Expected term: We do not believe we are able to rely on our historical exercise and post-vesting termination activity to provide accurate datafor 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 toliquidity. •Expected dividend yield: We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in theforeseeable future. Consequently, we used an expected dividend yield of zero.Business combinationsBusiness combinations are recorded in accordance with ASC 805. Business combinations are considered, pursuant to ASC 805, to be a purchase of abusiness entity or a purchase of assets. The guidance established by ASU 2017-01 provides additional guidance in assessing the purchase by providing aninitial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets; if thesubstance of this test is met, the acquisition is treated as a purchase of assets and not the acquisition of a business entity.Our acquisition of Essentialis was determined to be an asset acquisition, and the total value of the purchase consideration was allocated to the assetacquired. 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 valueof the shares to be issued under the holdback and milestone stock payment provisions in the future, the estimated fair value of the contingent considerationto be paid for achieving certain commercial milestones in the future, and the value equivalent to the increase in the liability for deferred taxes resulting fromthe tax effect of the net assets and liabilities acquired.Contingent considerationContingent consideration elements of a business combination are recorded in accordance with ASC 805 which provides that, when contingentconsideration terms provide for future payment obligations, the obligation is measured at its fair value on the acquisition date, and the subsequent increase ordecrease of the value of the58 estimated amounts of contingent consideration to be paid is be recognized as expense or income, respectively, in the statements of operations.Our agreement to pay the selling shareholders of Essentialis for achieving certain commercial milestones resulted in the recognition of a contingentconsideration, which was recorded at the inception of the transaction, and subsequent changes to estimate of the amounts of contingent consideration to bepaid will be recognized as expenses or income in the statements of operations. The fair value of the contingent consideration is based on our analysis of thelikelihood of the drug indication moving from Phase II through approval in the Federal Drug Administration approval process and then reaching thecumulative revenue milestones.Common Stock Purchase Warrants and Other Derivative Financial InstrumentsWe account for the warrants in accordance with the guidance in ASC 815 Derivatives and Hedging. We classify common stock purchase warrants andother free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give the us a choiceof net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). We classify any contracts that (i) require net-cashsettlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control), (ii) give the counterparty achoice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or aliability. We assess classification of freestanding derivatives at each reporting date to determine whether a change in classification between equity andliabilities is required. We determined that certain freestanding derivatives, which principally consist of Series A, Series C, the 2017 PIPE Warrants and 2018PIPE Warrants, do not satisfy the criteria for classification as equity instruments due to the existence of certain cash settlement features that are not within oursole control or variable settlement provision that cause them to not be indexed to our stock.Income TaxesWe use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balancesheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. We have provided a valuationallowance 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 occurin the calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timingof recognition of revenues and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decreaseto our tax provision in a subsequent period.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 taxasset 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 foruncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appealsor 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 realizedupon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possibleoutcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may notaccurately 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 certainsituations where changes occur in the stock ownership of a company. In the event59 that we have had a change in ownership, utilization of the carryforwards could be restricted. For more information, see the section titled “Risk Factors—Ourability to use our net operating loss carry forwards and certain other tax attributes will be limited.”Continuing operations are reported net of the related tax effects and discontinued operations are reported net of related tax effects in the statements ofoperations.Results of Continuing OperationsComparison of the Years Ended December 31, 2018 and 2017 from continuing operations Year EndedDecember 31, Increase (decrease) 2018 2017 Amount Percentage (in thousands) Operating expenses: Research and development $7,178 $3,069 $4,109 134%Sales and marketing — 26 (26) 100%General and administrative 6,556 6,584 (28) 0%Change in fair value of contingent consideration 567 2,492 (1,925) 77%Total operating expenses 14,301 12,171 2,130 18%Operating loss (14,301) (12,171) (2,130) 18%Other income (expense) Cease-use income 6 4 2 50%Change in fair value of warrants liabilities 522 (685) 1,207 176%Gain on deconsolidation of former subsidiary 1,994 — 1,994 n/a Interest and other expense, net (62) (590) 528 89%Total other income (expense) 2,460 (1,271) 3,731 294%Loss from continuing operations before provision for tax benefit (11,841) (13,442) 1,601 12%Provision for tax benefit — 1,650 (1,650) 100%Loss from continuing operations (11,841) (11,792) (49) 0%Loss from discontinued operations (1,494) (3,593) 2,099 58%Net loss $(13,335) $(15,385) $2,050 13% RevenueWe have not commenced commercialization of DCCR, our current sole novel therapeutic product, and accordingly, through December 31, 2018,have generated no revenue in continuing operations.Research and development expenseResearch and development expense of $7.2 million for the year ended December 31, 2018 increased by $4.1 million over 2017 resulting primarilyfrom efforts directed toward development and commencement, during the quarter ended June 30, 2018, of the Phase III trial of DCCR which we acquired withthe Essentialis acquisition on March 7, 2017.Sales and marketing expenseSales and marketing expense of approximately $26,000 during 2017 consisted of expense incurred to revise our website. We have not yetcommenced commercialization of DCCR, our current sole novel therapeutic product, and accordingly, during 2018 have incurred no sales and marketingactivities in continuing operations.60 General and administrative expenseGeneral and administrative expense of $6.6 million during 2018 decreased by approximately $28,000 from 2017. The decrease was primarily due toplanned spending reductions in 2018, specifically including a decrease in employee and consultant-related expenses of approximately $329,000,approximately $275,000 of general cost savings including the sublease of excess facility space, and an approximate $71,000 reduction in legal costs relatedto our intellectual property. These decreases were largely offset by approximately $355,000 of additional amortization expense of the intangible patent assetacquired in the March 7, 2017 acquisition of Essentialis, as 2017 had amortization for a portion of the year compared to the entire period in 2018, and anincrease of approximately $288,000 for professional fees and investor communication expenses, primarily related to financing activities and regulatoryfilings required in 2018Change in fair value of contingent considerationWe are obligated to make cash payments of up to a maximum of $30 million to Essentialis stockholders upon the achievement of certain futurecommercial milestones associated with the sale of Essentialis’ product in accordance with the terms of the Essentialis merger agreement. The fair value of theliability for the contingent consideration payable by us achieving the commercial sales milestones of $100 million and $200 million was estimated to be$5.6 million as of December 31, 2018, an approximate $567,000 increase from the estimate as of December 31, 2017. During 2017 the estimate increased$2.5 million from the initial liability of $2.6 million estimated at the time of the merger.Other income (expense)Other income of approximately $2.5 million in 2018 increased $3.7 million from other expense of $1.3 million during 2017. The increase in otherincome was primarily due to a $2.0 million gain recognized on the deconsolidation of Capnia upon the issuance of majority shares to OAHL and a netdecrease in the fair value of warrants liabilities during 2018 compared to a net increase in 2017, resulting in a net increase of $1.2 million. In addition, therewas an approximate $528,000 decrease in interest and other expense due primarily to the fact that during 2017 there were commitment shares issued to AspireCapital with a value of approximately $600,000.61 Results of Discontinued OperationsDiscontinued operations consist of our activities previously dedicated to the development and commercialization of innovative diagnostics, devicesand therapeutics addressing unmet medical needs, which consisted of: precision metering of gas flow technology marketed as Serenz® Allergy Relief, orSerenz; CoSense® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which measures ETCO and aids in the detection of excessive hemolysis, acondition in which red blood cells degrade rapidly; and, products that included temperature probes, scales, surgical tables and patient surfaces. In March2017, we determined to divest, sell or otherwise dispose of the CoSense, Neo Force, Inc., and Serenz businesses in order to focus on the development andcommercialization of novel therapeutics for the treatment of rare diseases. The discontinued operations for the development and commercialization ofinnovative diagnostic devices and therapeutics are summarized below. Year EndedDecember 31, Increase (decrease) 2018 2017 Amount Percentage (in thousands) Product revenue $62 $735 $(673) 92%Cost of product revenue 32 820 (788) 96%Gross profit (loss) 30 (85) 115 135%Expenses: Research and development 1,106 2,427 (1,321) 54%Sales and marketing 25 218 (193) 89%General and administrative 393 669 (276) 41%Total expenses 1,524 3,314 (1,790) 54%Operating loss (1,494) (3,399) 1,905 56%Other expense Loss on sale of assets — (186) 186 100%Other expense — (8) 8 100%Total other expense — (194) 194 100%Net loss from discontinued operations $(1,494) $(3,593) $2,099 58% Product revenueRevenue related to our discontinued operations was approximately $62,000 during 2018, an approximate $673,000 decrease from the discontinuedoperations revenue during 2017. The decrease resulted primarily from the sale of the NFI business in July 2017 and a decrease in Capnia revenue.Cost of product revenueCost of product revenue related to our discontinued operations has declined in relation to the decrease in sales activity.Research and development expenseResearch and development expense related to our discontinued operations decreased by $1.3 million from 2017 to 2018. The decrease primarilyresulted from the sale of NFI in July 2017, and the curtailment of spending towards the development of the Serenz product during 2017.Sales and marketing expenseSales and marketing expense during 2018 was approximately $25,000, representing an approximate $193,000 decrease from 2017. The decrease islargely attributed to our stopping the promotion and sales of the Serenz product in the second quarter of 2017. The sales and marketing expenses relating toour discontinued operations during 2018 relate only to Capnia’s marketing of its CoSense products.62 General and administrative expenseGeneral and administrative expense associated with our discontinued operations was approximately $393,000 during 2018, a decrease ofapproximately $276,000 from 2017. The decrease was primarily due to the sale of NFI in July 2017.Other expenseDuring 2017 we recorded other expense of approximately $194,000, consisting primarily of the loss recorded on the sale of our wholly-ownedsubsidiary, NFI.Liquidity and Capital ResourcesWe had a net loss of $13.3 million during 2018 and an accumulated deficit of $127.0 million at December 31, 2018 from having incurred losses sinceour inception. We had $22.8 million of working capital at December 31, 2018 and used $11.7 million of cash in operating activities during 2018. We havefinanced our operations principally through issuances of equity securities.We have continued to focus on expense control, including reducing our workforce, eliminating outside consultants, reducing legal fees andimplementing a plan to allow Board members to receive common stock, in lieu of cash payments.The accompanying consolidated financial statements have been prepared under the assumption we 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 notinclude any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result fromuncertainty related to our ability to continue as a going concern.We expect to continue incurring losses for the foreseeable future and may be required to raise additional capital to complete our clinical trials, pursueproduct development initiatives and penetrate markets for the sale of our products. We believe that we will continue to have access to capital resourcesthrough possible public or private equity offerings, debt financings, corporate collaborations or other means, but the access to such capital resources isuncertain and is not assured. If we are unable to secure additional capital, we may be required to curtail our clinical trials and development of new productsand take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. Thesemeasures could cause significant delays in our efforts to complete clinical trials and commercialize our products, which is critical to the realization of ourbusiness plan and our future operations. These matters raise substantial doubt about our ability to continue as a going concern within one year from the dateof filing this annual report. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assetamounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern.63 Cash FlowsThe following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below: Year EndedDecember 31, 2018 2017 (in thousands) Net cash used in continuing operating activities $(10,322) $(6,919)Net cash used in discontinued operating activities (1,361) (3,031)Net cash used in operating activities (11,683) (9,950)Net cash used in continuing investing activities (8) (562)Net cash (used in) provided by discontinued investing activities (172) 716 Net cash (used in) provided by investing activities (180) 154 Net cash provided by continuing financing activities 16,302 23,945 Net cash provided by discontinued financing activities 1,525 225 Net cash provided by financing activities 17,827 24,170 Net increase (decrease) in cash, cash equivalents and restricted cash Continuing operations 5,972 16,464 Discontinued operations (8) (2,090)Net increase in cash, cash equivalents and restricted cash $5,964 $14,374 Continuing OperationsCash used in operating activitiesDuring 2018 operating activities used net cash of $10.3 million, which was primarily due to the loss from continuing operations of $11.8 million,adjusted for non-cash expenses of $2.0 million for depreciation and amortization, $1.3 million of expenses paid with common stock or equity awards,$160,000 operating loss on minority interest investment and approximately $45,000 for the net change in fair value of common stock warrants andcontingent consideration, all of which were partially offset by the non-cash gain of $2.0 million recognized on the deconsolidation of Capnia upon theissuance of majority shares to OAHL.During the year ended December 31, 2017, we used net cash of $6.9 million for continuing operating activities, resulting primarily from the loss fromcontinuing operations of $11.8 million, adjusted for the non-cash items consisting primarily of $1.6 million of depreciation and amortization, $2.5 million ofexpense for the change in the fair value of contingent consideration for the acquisition of Essentialis, $1.2 million of expenses paid with common stock orequity awards, approximately $602,000 for issuing shares to Aspire Capital, and approximately $685,000 for the change in fair value of the liability forwarrants, all of which were partially offset by the non-cash provision for income tax benefit in the amount of $1.7 million.Cash used in investing activitiesMinimal cash was used for investing activities during 2018 and 2017 for the costs of acquiring property and equipment. During 2017 the net cashused in investing activities was primarily a result of approximately $573,000 for the payment of costs associated with the acquisition of Essentialis.64 Cash provided by financing activitiesDuring 2018 we obtained $16.5 million of cash from the issuance of common stock and warrants in the 2018 PIPE offering, which proceeds werepartially offset by approximately $250,000 of costs. During 2017 we obtained net cash of $23.9 million resulting from the proceeds of $10.0 million from theissuance of common stock immediately upon closing the acquisition of Essentialis together with $15.0 million of proceeds from the issuance of commonstock and warrants on common stock resulting from the 2017 PIPE Offering, all of which proceeds were partially offset by $1.1 million of costs paid for theraising and issuance of the related securities offerings.As of December 31, 2018, we had cash, cash equivalents and restricted cash of $23.1 million.We do not believe that we have sufficient capital resources to sustain operations through at least the next twelve months from the date of this filing.We expect to continue incurring losses for the foreseeable future and may be required to raise additional capital to pursue our therapeutic productdevelopment initiatives. These conditions raise substantial doubt about our ability to continue as a going concern for a period of one year from the date ofthis report.Discontinued OperationsCash used in operating activitiesDuring 2018 we used net cash of $1.4 million for discontinued operating activities, compared to $3.0 million during 2017. The decrease wasprimarily due to the lower comparative level of operating activities for the discontinued operations, reflecting primarily the sale of NFI in July 2017, and to alesser extent the deconsolidation of Capnia, Inc. upon the transfer of the majority share ownership in October 2018.Cash provided by (used in) investing activitiesDuring 2018 we used approximately $172,000 of cash for discontinued investing activities, representing the net cash reduction for thedeconsolidation of Capnia, Inc. upon the transfer of the majority share ownership in October 2018. During 2017 net cash provided by investing activities wasapproximately $716,000, resulting primarily from the sale of the NFI operations in July 2017.Cash provided by financing activitiesNet cash provided by financing activities related to discontinued operations was $1.5 million during 2018 and approximately $225,000 during2017, representing the cash received during the respective periods from our joint venture partner.Contractual Obligations and CommitmentsAs of December 31, 2018, we had lease obligations totaling approximately $335,000, consisting of operating leases for our operating facilities inRedwood City, California. We signed a lease for our current operating facilities at 1235 Radio Road in Redwood City in July 2015, which expires in Augustof 2019. We are subleasing a portion of this unused space to two separate parties.The following table summarizes our contractual obligations as of December 31, 2018 (in thousands). Payments due by period Less than1 year 1 to 3years 4 to 5years After 5years Total Lease obligations $335 $— $— $— $335 Total $335 $— $— $— $335 65 We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties, and payments thatbecome due and payable on the achievement of certain development and commercialization milestones. As the amount and timing of sublicense fees and theachievement and timing of these milestones are not probable and estimable, such commitments have not been included on our balance sheet or in thecontractual obligations tables above. We are also obligated to make certain payments of deferred compensation to management upon completion of certaintypes of transactions. As the amount and timing of such payments are not probable and estimable, such commitments have not been included on our balancesheet or in the contractual obligations tables above.Off-Balance Sheet ArrangementsAs of December 31, 2018, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.Accounting Guidance UpdateRecently Issued Accounting GuidanceFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard settingbodies and adopted by us as of the specified effective date (see Note 3).ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate SensitivityWe had unrestricted cash and cash equivalents totaling $23.1 million at December 31, 2018. This balance was invested primarily in money marketfunds and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have materialexposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.66 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATASoleno Therapeutics, Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm68 Consolidated Balance Sheets69 Consolidated Statements of Operations70 Consolidated Statements of Stockholders’ Equity71 Consolidated Statements of Cash Flows72 Notes to Consolidated Financial Statements73 67 Report of Independent Registered Public Accounting FirmTo the Shareholders and Board of Directors ofSoleno Therapeutics, Inc. Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Soleno Therapeutics, Inc. (the “Company”) as of December 31, 2018 and 2017,the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, andthe related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in theperiod ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.Explanatory Paragraph – Going ConcernThe accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described inNote 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditionsraise 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 Note2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain anunderstanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Marcum LLPMarcum LLPWe have served as the Company’s auditor since 2014.San Francisco, CAMarch 19, 201968 Soleno Therapeutics, Inc.Consolidated Balance Sheets(in thousands except share and per share data) December 31,2018 December 31,2017 Assets Current assets Cash and cash equivalents $23,099 $17,100 Restricted cash — 35 Prepaid expenses and other current assets 529 343 Due from related party 64 — Minority interest investment in former subsidiary 978 — Current assets held for sale — 516 Total current assets 24,670 17,994 Long-term assets Property and equipment, net 12 23 Other assets — 126 Intangible assets, net 18,469 20,413 Long-term assets held for sale — 466 Total assets $43,151 $39,022 Liabilities and stockholders’ equity Current liabilities Accounts payable $934 $633 Accrued compensation and other current liabilities 943 973 Current liabilities held for sale — 127 Total current liabilities 1,877 1,733 Long-term liabilities Series A warrant liability 49 70 Series C warrant liability — 6 2017 PIPE Warrant liability 4,563 5,076 2018 PIPE Warrant liability 600 — Contingent liability for Essentialis purchase price 5,649 5,082 Other liabilities — 13 Long-term liabilities held for sale — 225 Total liabilities 12,738 12,205 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, 2018 and December 31, 2017; zero and 4,571 shares issued and outstanding at December 31, 2018 and at December 31, 2017, respectively. Liquidation value of zero. — — Common stock, $0.001 par value, 100,000,000 shares authorized, 31,755,169 and 19,238,972 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively. 32 19 Additional paid-in-capital 157,413 140,495 Accumulated deficit (127,032) (113,697)Total stockholders’ equity 30,413 26,817 Total liabilities and stockholders’ equity $43,151 $39,022 See accompanying notes to consolidated financial statements69 Soleno Therapeutics, Inc.Consolidated Statements of Operations(in thousands except share and per share data) For the Years EndedDecember 31, 2018 2017 Operating expenses Research and development $7,178 $3,069 Sales and marketing — 26 General and administrative 6,556 6,584 Change in fair value of contingent consideration 567 2,492 Total operating expenses 14,301 12,171 Operating loss (14,301) (12,171)Other income (expense) Cease-use income 6 4 Change in fair value of warrants liabilities 522 (685)Gain on deconsolidation of former subsidiary 1,994 — Interest and other expense, net (62) (590)Total other income (expense) 2,460 (1,271)Loss from continuing operations before provision for income tax benefit (11,841) (13,442)Provision for income tax benefit from continuing operations — 1,650 Loss from continuing operations (11,841) (11,792)Loss from discontinued operations: Operating loss (1,494) (3,399)Other expense — (194)Total (1,494) (3,593)Net loss $(13,335) $(15,385)Loss per common share from continuing operations, basic and diluted $(0.56) $(1.31)Loss per common share from discontinued operations, basic and diluted (0.07) (0.40)Net loss per common share, basic and diluted $(0.64) $(1.71)Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share 20,975,479 8,977,795 See accompanying notes to consolidated financial statements. 70 Soleno Therapeutics, Inc.Consolidated Statements of Stockholders’ Equity(in thousands except share data) Series B ConvertiblePreferred Stock Common Stock AdditionalPaid-In Accumulated TotalStockholders’ Shares Amount Shares Amount Capital Deficit Equity Balances at January 1, 2017 12,780 $— 3,357,387 $3 $101,744 $(98,312) $3,435 Stock-based compensation 1,000 1,000 Issuance of common stock on conversion of series B convertible preferred shares (8,209) (—) 1,641,800 2 (2) — Issuance of common stock to board members in lieu of cash payments for quarterly board fees 90,306 — 278 278 Issuance of common stock to acquire Essentialis 3,783,388 4 17,243 17,247 Sale of shares under the 2017 Aspire Purchase Agreement 2,083,333 2 9,998 10,000 Issuance of shares to Aspire Capital in lieu of commitment fees 141,666 — 602 602 Rounding adjustment resulting from 1 for 5 reverse split (24) — — — Sale of shares to investors in the 2017 PIPE, net of costs of $1,172 8,141,116 8 13,819 13,827 Fair value at transaction date of warrants to purchase common stock under the 2017 PIPE (4,187) (4,187)Net loss (15,385) (15,385)Balances at December 31, 2017 4,571 — 19,238,972 19 140,495 (113,697) 26,817 Stock-based compensation 829 829 Issuance of common stock on conversion of series B convertible preferred shares (4,571) (—) 914,200 1 (1) — Issuance of restricted common stock for bonuses 99,217 — 159 159 Issuance of common stock to board members in lieu of cash payments for quarterly board fees 146,371 — 275 275 Issuance of common stock held back on acquisition of Essentialis 1,084,034 1 (1) — Sale of shares to investors in the 2018 PIPE, net of costs of $250 10,272,375 11 16,239 16,250 Fair value at transaction date of warrants to purchase common stock under the 2018 PIPE (582) (582)Net loss (13,335) (13,335)Balances at December 31, 2018 — $— 31,755,169 $32 $157,413 $(127,032) $30,413 See accompanying notes to consolidated financial statements 71 Soleno Therapeutics, Inc.Consolidated Statements of Cash Flows(in thousands) For the Years Ended December 31, 2018 2017 Cash flows from operating activities: Net loss $(13,335) $(15,385)Loss from discontinued operations (1,494) (3,593)Loss from continuing operations (11,841) (11,792)Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation and amortization 1,963 1,611 Stock-based compensation expense 988 880 Income tax benefit — (1,651)Board fees paid with common stock 275 278 Change in fair value of stock warrants (522) 685 Change in fair value of contingent consideration 567 2,492 Non-cash expense of issuing shares to Aspire Capital — 602 Gain on deconsolidation of former subsidiary (1,994) — Operating loss of minority interest investment 160 — Change in operating assets and liabilities: Prepaid expenses, other current assets and other assets (60) (97)Due from related party (64) — Accounts payable 249 191 Accrued compensation and other current liabilities (43) (78)Other long-term liabilities — (40)Net cash used in continuing operating activities (10,322) (6,919)Net cash used in discontinued operating activities (1,361) (3,031)Net cash used in operating activities (11,683) (9,950)Cash flows from investing activities: Costs of Essentialis acquisition paid — (573)Security deposit on sublease — 13 Purchases of property and equipment (8) (2)Net cash used in continuing investing activities (8) (562)Net cash (used in) provided by discontinued investing activities (172) 716 Net cash (used in) provided by investing activities (180) 154 Cash flows from financing activities: Proceeds from issuance of common stock — 10,000 Proceeds from sale of common stock and common stock warrants 16,500 15,008 Cash paid for the issuance of common stock and common stock warrants (198) (1,063)Net cash provided by continuing financing activities 16,302 23,945 Net cash provided by discontinued financing activities 1,525 225 Net cash provided by financing activities 17,827 24,170 Net increase in cash, cash equivalents and restricted cash from continuing operations 5,972 16,464 Net decrease in cash, cash equivalents and restricted cash from discontinued operations (8) (2,090)Net increase in cash, cash equivalents and restricted cash 5,964 14,374 Net increase in cash and cash equivalents included in current assets held for sale — — Cash, cash equivalents and restricted cash, beginning of period 17,135 2,761 Cash, cash equivalents and restricted cash, end of period $23,099 $17,135 Supplemental disclosures of non-cash investing and financing information Issuance of common stock in Essentialis acquisition $— $17,246 Contingent consideration of Essentialis acquisition $— $2,590 Accrued liability for cost of issuing common stock $52 $— Warrants issued in connection with sale of common stock $582 $4,187 See accompanying notes to consolidated financial statements. 72 Soleno Therapeutics, Inc.December 31, 2018Notes to Consolidated Financial StatementsNote 1. OverviewSoleno Therapeutics, Inc. (the “Company” or “Soleno”) was incorporated in the State of Delaware on August 25, 1999, and is located in RedwoodCity, California. On May 8, 2017, Soleno received stockholder approval to amend its Amended and Restated Certificate of Incorporation to change its namefrom “Capnia, Inc.” to “Soleno Therapeutics, Inc.” The Company was initially established as a diversified healthcare company that developed andcommercialized innovative diagnostics, devices and therapeutics addressing unmet medical needs, which consisted of: precision metering of gas flowtechnology marketed as Serenz ® Allergy Relief, or Serenz; CoSense ® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which measures ETCOand aids in the detection of excessive hemolysis, a condition in which red blood cells degrade rapidly and which can lead to adverse neurological outcomes;and, products that included temperature probes, scales, surgical tables, and patient surfaces.The Company’s previously wholly-owned subsidiary, NeoForce, Inc. or NFI, through which the Company acquired substantially all of the assets ofan unrelated privately-held company, NeoForce Group, Inc., or NeoForce, also marketed innovative pulmonary resuscitation solutions for the inpatient andambulatory neonatal markets.The Company acquired Essentialis, Inc., or Essentialis, through a merger, or the Merger, on March 7, 2017, pursuant to Agreement and Plan of Mergerdated December 22, 2016. Essentialis’s efforts prior to the Merger were focused primarily on developing and testing product candidates that target the ATP-sensitive potassium channel, a metabolically regulated membrane protein whose modulation has the potential to impact a wide range of rare metabolic,cardiovascular, and CNS diseases. Essentialis has tested Diazoxide Choline Controlled Release Tablet, or DCCR, as a treatment for Prader-Willi Syndrome, orPWS, 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 theEuropean Union, or E.U. Consummation of the Merger was subject to various closing conditions, including the Company’s consummation of a financing ofat least $8.0 million at, or substantially contemporaneous with, the closing of the Merger, which occurred on March 7, 2017 and the receipt of stockholderapproval of the Merger at a special meeting of its stockholders, which was held on March 6, 2017.Subsequent to the acquisition of Essentialis, the Company determined to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses.Accordingly, and pursuant to ASC 205-20-45-10, any assets and liabilities related to the discontinued activities of CoSense, NFI and Serenz have beenpresented separately in the balance sheet as held for sale items, and the related operations reported herein for the CoSense, NFI and Serenz activities arereported as discontinued operations in the statements of operations.The Company determined to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses in order to focus on the development andcommercialization of novel therapeutics for the treatment of rare diseases. The Company’s current research and development efforts are primarily focused onadvancing its lead candidate, DCCR tablets for the treatment of PWS, into late-stage clinical development.The Company sold its entire interest in NFI in a stock transaction that was completed on July 18, 2017, pursuant to a Stock Purchase Agreementdated July 18, 2017, or the NFI Purchase Agreement, entered into with Neoforce Holdings, Inc., a wholly-owned subsidiary of Flexicare Medical Limited, aprivately-held United Kingdom company, for $720,000 and adjustments for inventory and the current cash balances held at NFI.On December 4, 2017, Soleno, and Capnia, Inc., a Delaware corporation, or Capnia, entered into a joint venture with OptAsia Healthcare Limited, orOAHL. The purpose of the joint venture is to develop and commercialize medical monitors, including CoSense, that measure end-tidal carbon monoxide inbreath to assist in the detection of excessive hemolysis in neonates, a condition in which red blood cells degrade rapidly and which can lead to adverseneurological outcomes.The Company continues to separately evaluate alternatives for its Serenz portfolio.73 Restatement of prior periodsDuring the preparation of the condensed consolidated financial statements as of September 30, 2018 and for the related three and nine months thenended, the Company determined that an error had been made in certain previously reported consolidated balance sheets and statements of operations for thevaluation and resultant reporting of fair value for the Company’s Series A Warrants, resulting in the value of the warrant liability being overstated. TheCompany adjusted the prior period information reported in the September 30, 2018 interim condensed consolidated financial statements. The Companydetermined that the error was not material to any of the previously reported periods in which the error occurred and has not amended any previously issuedconsolidated financial statements.The following table (in thousands, except share and per share amounts) sets forth the effects of the restatement on affected items within theCompany’s previously reported consolidated balance sheets and statements of operations for the periods ended December 31, 2017, March 31, 2018, andJune 30, 2018, had the adjustments been made in the corresponding quarters. As of December 31, 2017 As of March 31, 2018 As of June 30, 2018 As of June 30, 2018 AsPreviouslyReported Correctionof error AsRestated AsPreviouslyReported Correctionof error AsRestated AsPreviouslyReported Correctionof error AsRestated AsPreviouslyReported Correctionof error AsRestated Series A Warrant liability $352 $(282) $70 $291 $(233) $58 $1,015 $(812) $203 $1,015 $(812) $203 Total liabilities 12,487 (282) 12,205 13,312 (233) 13,079 17,507 (812) 16,695 17,507 (812) 16,695 Accumulated deficit (113,979) 282 (113,697) (117,734) 233 (117,501) (125,371) 812 (124,559) (125,371) 812 (124,559) Year Ended December 31, 2017 Quarter Ended March 31, 2018 Quarter Ended June 30, 2018 Six Months Ended June 30, 2018 AsPreviouslyReported Correctionof error AsRestated AsPreviouslyReported Correctionof error AsRestated AsPreviouslyReported Correctionof error AsRestated AsPreviouslyReported Correctionof error AsRestated Change in fair value of warrant liabilities (967) 282 (685) 212 (49) 163 (3,834) 579 (3,255) (3,622) 530 (3,092)Total other income (expense) (1,553) 282 (1,271) 234 (49) 185 (3,801) 579 (3,222) (3,567) 530 (3,037)Pro Forma net loss per common share $(1.75) $(0.04) $(1.71) $(0.19) $— $(0.19) $(0.38) $0.03 $(0.35) $(0.57) $0.03 $(0.54) Note 2. Going Concern and Management’s PlansThe Company had a net loss of $13.3 million during 2018 and has an accumulated deficit of $127.0 million at December 31, 2018 resulting fromhaving incurred losses since its inception. The Company had $22.8 million of working capital at December 31, 2018 and used $11.7 million of cash in itsoperating activities during 2018. The Company has financed its operations principally through issuances of equity securities.The Company has continued to focus on expense control, including reducing its workforce, reducing outside consultants, reducing legal fees andimplementing a policy providing for Board members to receive common stock in lieu of cash payments for Board service compensation. On December 19, 2018, the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company sold andissued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of common stock and awarrant to purchase 0.05 shares of common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock andcorresponding warrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018Resale Shares.74 The accompanying consolidated financial statements have been prepared under the assumption the Company will continue to operate as a goingconcern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statementsdo not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that mayresult from uncertainty related to the Company’s ability to continue as a going concern.The Company expects to continue incurring losses for the foreseeable future and may be required to raise additional capital to complete its clinicaltrials, pursue product development initiatives and penetrate markets for the sale of its products. Management believes that the Company will continue tohave access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means, but theCompany’s access to such capital resources is uncertain and is not assured. If the Company is unable to secure additional capital, it may be required to curtailits clinical trials and development of new products and take additional measures to reduce expenses in order to conserve its cash in amounts sufficient tosustain operations and meet its obligations. These measures could cause significant delays in the Company’s efforts to complete its clinical trials andcommercialize its products, which is critical to the realization of its business plan and the future operations of the Company. The consolidated financialstatements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might benecessary should it be unable to continue as a going concern.Management believes that the Company does not have sufficient capital resources to sustain operations through at least the next twelve months fromthe 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 raiseadditional 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 yearfrom the date of filing these financial statements.Note 3. Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the UnitedStates of America, or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or SEC.The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions andbalances have been eliminated in consolidation.Certain amounts from prior periods have been reclassified to conform to the current period presentation, consisting of certain line items within theConsolidated Statements of Cash Flows.Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of expenses in the financial statements andaccompanying notes. Actual results could differ from those estimates. Key estimates included in the financial statements include the valuation of deferredincome tax assets, the valuation of financial instruments, stock-based compensation, value and life of acquired intangibles, and the valuation of contingentliabilities for the purchase price of assets obtained through acquisition.Concentration of Credit RiskFinancial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents at one U.S.commercial bank that management believes is of high credit quality. Cash and cash equivalents deposited with these commercial banks exceeded the FederalDeposit Insurance Corporation insurable limit at December 31, 2018 and 2017. The Company expects the maintenance of balances in excess of insurablelimits will continue.75 SegmentsThe 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 EquivalentsThe Company considers all highly liquid investments, including its money market fund, purchased with an original maturity of three months or lessto 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 marketfund which was unrestricted as to withdrawal or use. Restricted cash was security of the Company credit card.Accounts ReceivableAccounts receivable as of December 31, 2017 consist of balances due from customers in the normal course of business and are classified as AssetsHeld for Sale (See Note 9). The Company did not record an allowance for doubtful accounts as this balance was deemed fully collectible. There were noaccounts receivable as of December 31, 2018.Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of payments primarily related to insurance and short-term deposits. Prepaid expenses are initiallyrecorded upon payment and are expensed as goods or services are received.InventoryInventory consists of raw materials to be used in the assembly of the Company’s products, work-in-progress and finished goods. Inventory is stated atthe lower of cost or net realizable value under the first-in, first-out (FIFO) method. As of December 31, 2017, the Company’s inventory includedapproximately $213,000 of raw materials, approximately $30,000 of work-in-progress, and approximately $177,000 of finished goods and was classified asAssets Held for Sale (See Note 9). There was no inventory balance as of December 31, 2018.PatentOn May 11, 2010, the Company entered into an Asset Purchase Agreement with BioMedical Drug Development, Inc., or BDDI, pursuant to whichBDDI agreed to sell certain technology to us and BDDI received and was entitled to receive, among other consideration, certain royalty payments related tothe technology. In June 2015, the Company and BDDI amended the BDDI Asset Purchase Agreement, pursuant to which the Company committed to payaggregate cash payments of $450,000 and issued 8,000 shares of common stock to an affiliate of BDDI. Under the original Asset Purchase Agreement datedJune 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 capitalized the fair value of the patent purchased as an intangible asset on its consolidated balance sheet and amortized the fair value over theremaining useful life of the patent.The BDDI patent is reported as an Intangible Asset and classified as Assets Held for Sale as of December 31, 2017. (See Note 9.)In March 2017, the Company completed the acquisition of Essentialis, Inc., a Delaware corporation, or Essentialis in accordance with the MergerAgreement by and between Soleno Therapeutics and Essentialis dated December 22, 2016. The merger transaction has been accounted for as an assetacquisition under the acquisition method of accounting and accordingly, the value of asset acquired in the amount of $22.0 million was assigned to theidentifiable intangible asset relating to the patent for DCCR, which patent expires in June 2028.76 Business CombinationsFor 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 theirrespective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies. Acquisition costsare 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 ismeasured as the excess of consideration transferred and the acquisition date fair values of the assets acquired, and liabilities assumed. While the Companyuses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at theacquisition date, the Company’s estimates are subject to refinement. As a result, during the measurement period, which may be up to one year from theacquisition date, the Company may retroactively record adjustments to the fair value of the assets acquired and liabilities assumed, with the correspondingoffset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichevercomes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.Property and Equipment, NetProperty and equipment are stated at cost net of accumulated depreciation and amortization calculated using the straight-line method over theestimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser oftheir useful life or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. Whenassets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss isreflected in operations in the period realized.Certain property and equipment were classified as Assets Held for Sale as of December 31, 2017. (See Note 9.)Equity Method InvestmentEquity method investments are equity securities in investees not controlled by the Company, but over which the Company has the ability to exercisesignificant influence. The Company’s equity method investment is measured at fair value minus impairment, if any, plus or minus the Company’s share ofequity method investee income or loss.The Company’s equity method investment in Capnia, Inc. is classified as Minority interest investment in former subsidiary in the consolidatedbalance sheet as of December 31, 2018 and was initially measured at fair value. (See Note 9.) The Company expects to divest of its investment within oneyear of the balance sheet date.Long-Lived AssetsThe Company reviews its long-lived assets for impairment annually and whenever events or changes in circumstances indicate that the carryingamount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted netcash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment ismeasured based on the difference between the carrying amount and the fair value of the assets.Intangible AssetsIntangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives of 11 years. The useful life of the intangibleasset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life.77 Intangible Assets in the amount of approximately $447,000 consisting of the patent acquired in the BDDI acquisition were classified as Assets Heldfor Sale as of December 31, 2017. (See Note 9.)Intangible assets consist of the following at December 31, 2018 (in thousands). Amount AccumulatedAmortization NetAmount UsefulLives(years) Patents and merger costs $22,003 $(3,534) $18,469 11 Total $22,003 $(3,534) $18,469 Future amortization expense for intangible assets over their remaining useful lives is as follows (in thousands). Year ending December 31 Patents andtrademarks 2019 $1,944 2020 1,944 2021 1,944 2022 1,944 2023 1,944 2024 and thereafter 8,749 Total $18,469 Amortization expense for the years ended December 31, 2018 and 2017, was $1.9 million and $1.7 million, respectively.Research and DevelopmentResearch 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 futureuse are expensed to research and development costs when incurred.Certain Research and Development expenses are reported as Discontinued Operations. (See Note 9.)Change in fair value of contingent considerationThe Company recorded the value of contingent future consideration to be paid for the acquisition of Essentialis as a liability in March 2017 at thedate of the acquisition. The changes in value of the liability for the contingent consideration since the acquisition date are recorded as operating expense inthe consolidated statements of operations.Income TaxesThe Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities arerecorded based on the estimated future tax effects of differences between the amounts at which assets and liabilities are recorded for financial reportingpurposes and the amounts recorded for income tax purposes. A valuation allowance is provided against the Company’s deferred income tax assets when theirrealization is not reasonably assured.78 The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are stillsubject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’ssustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of eachbalance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying thesustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefitsrequires 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 statements of operations.Convertible Preferred Stock and other Hybrid InstrumentsThe Company’s convertible preferred stock was classified as permanent equity on its consolidated balance sheet in accordance with authoritativeguidance for the classification and measurement of hybrid securities and distinguishing liability from equity instruments. The preferred stock is notredeemable 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 ASC815, Derivatives and Hedging. In making this determination, the Company’s analysis followed the whole instrument approach which compares an individualfeature against the entire preferred stock instrument which includes that feature. The Company’s analysis was based on a consideration of the economiccharacteristics and risks of each series of preferred stock. More specifically, the Company evaluated all of the stated and implied substantive terms andfeatures, including (i) whether the preferred stock included redemption features, (ii) how and when any redemption features could be exercised, (iii) whetherthe 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 of the Company’s conclusion that the preferred stock represents an equity host, the conversion feature of all series of preferred stock is consideredto be clearly and closely related to the associated preferred stock host instrument. Accordingly, the conversion feature in the preferred stock is not consideredan embedded derivative that requires bifurcation.Common Stock Purchase Warrants and Other Derivative Financial InstrumentsThe Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) requirephysical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an eventoccurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physicalsettlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestandingderivatives at each reporting date to determine whether a change in classification between equity and liabilities is required. The Company determined thatcertain freestanding derivatives, which principally consist of Series A, Series C, the 2017 PIPE Warrants and 2018 PIPE Warrants, do not satisfy the criteria forclassification as equity instruments due to the existence of certain cash settlement features that are not within the sole control of the Company or variablesettlement provision that cause them to not be indexed to the Company’s own stock.Stock-Based CompensationStock-based compensation costs related to stock options granted to employees and directors are measured at the date of grant based on the estimatedfair value of the award. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricingmodel. 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 vestingperiod of the award. Stock options we grant to employees generally vest over four years.79 The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If we hadmade 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: The Company calculates the estimated volatility rate based on the volatilities of common stock of comparable companiesin its industry. •Expected term: The Company does not believe it is able to rely on its historical exercise and post-vesting termination activity to provideaccurate data for estimating the expected term for use in estimating the fair value-based measurement of our options. Therefore, the Companyhas 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 toliquidity. •Expected divided yield: The Company has never declared or paid any cash dividends and do not presently plan to pay cash dividends in theforeseeable future. Consequently, it used an expected dividend yield of zero.The Company accounts for forfeitures as they occur.Recent Accounting StandardsRecently Adopted Accounting StandardsIn November 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or the ASU 2016-18, “Statement ofCash Flows: Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents andamounts generally described as restricted cash or restricted cash equivalents. These standards are effective for financial statements issued for fiscal yearsbeginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted these standards in the first quarter of 2018utilizing the retrospective transition method. There was no material impact on the Company’s consolidated financial statements resulting from the adoptionof this guidance. In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, whichclarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard iseffective beginning after December 15, 2017 and early adoption is permitted. The Company adopted the standard in the first quarter of 2018. The adoptiondid not have a material impact on the Company’s consolidated financial position and results of operations.In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”, to addvarious SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118, or SAB 118, to ASC 740 “Income Taxes”. SAB 118 was issuedby the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. tax reform under the “Tax Cuts and Jobs Act”, or the TaxAct, which became effective for the Company on January 1, 2018. The Company has adopted ASU 2018-09, and adoption of this ASU has no significantimpact on its consolidated financial statements.Recently Issued Accounting StandardsIn February 2016, the FASB issued ASU 2016-02: “Leases (Topic 842)”. ASU 2016-02 provides new comprehensive lease accounting guidance thatsupersedes existing lease guidance. Upon adoption of ASU 2016-02, the Company will be required to recognize most leases on its balance sheet at thebeginning of the earliest comparative period presented with a corresponding adjustment to stockholders’ equity. ASU 2016-02 requires the Company tocapitalize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating leaseobligations. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital leases andoperating leases in existing lease guidance. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. Topic 842includes a number of optional practical expedients that the Company may elect to apply. Expanded disclosures with additional qualitative and quantitativeinformation will also be required. The adoption will include80 updates as provided under ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, CodificationImprovements to Topic 842, Leases and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. Topic 842 is effective for public entitieswith fiscal years beginning after December 15, 2018 and for all other entities for fiscal years beginning after December 15, 2019, and interim periods withinfiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected to use the extended transition period forcomplying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act, Topic 842 will be effective forthe Company beginning in fiscal 2020, although early adoption is permitted. The Company is currently evaluating the potential impact of adoption of thisstandard on its consolidated financial statements and the additional transition method under ASU 2018-11, which allows the Company to recognize Topic842’s cumulative effect within retained earnings in the period of adoption.In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480); Derivatives andHedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a ScopeException”, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Downround features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricingof future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants andconvertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this updateaddresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASBAccounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemablefinancial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update donot have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginningafter December 15, 2018. For all other entities, the amendments in Part I are effective for fiscal years beginning after December 15, 2019, and interim periodswithin fiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected to use the extended transition period forcomplying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act, this ASU 2017-11 will beeffective for the Company beginning in fiscal 2020, although early adoption is permitted. The Company is currently assessing the potential impact ofadopting ASU 2017-11 on its consolidated financial statements and related disclosures.In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of CertainTax Effects from Accumulated Other Comprehensive Income”, or ASU 2018-02, which allows a reclassification from accumulated other comprehensiveincome to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects. ASU 2018-02 iseffective for the Company beginning in 2019, with early adoption permitted, and shall be applied either in the period of adoption or retrospectively to eachperiod (or periods) in which the effect of the change in the corporate income tax rate in the Tax Act is recognized. The adoption of this ASU is not expectedto have a material impact on the Company’s consolidated financial statements.In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-BasedPayment Accounting”, to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments toemployees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which maylower their cost and reduce volatility in the income statement. This ASU is effective for public business entities for fiscal years beginning after December 15,2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019,and interim periods within fiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected to use the extendedtransition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act, thisASU 2018-07 will be effective for the Company beginning in fiscal 2020. Early adoption is permitted, including in an interim period. The adoption of thisASU is not expected to have a material impact on the Company’s consolidated financial statements.81 In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the DisclosureRequirements for Fair Value Measurement”. The ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or addingcertain disclosures. This ASU is effective for the Company beginning in 2020. Early adoption is permitted. An entity is permitted to early adopt any removedor modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has notyet evaluated the impact of adoption of this ASU on its consolidated financial statements disclosures.In August 2018, SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosurerequirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements onthe analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equitypresented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to theending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. TheCompany plans to apply the new guidance to its consolidated financial statements during the first quarter of 2019.In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities”,which modifies the guidance related to indirect interests held through related parties under common control for determining whether fees paid to decisionmakers and service providers are variable interest. This ASU is effective for public business entities for fiscal years beginning after December 15, 2019,including interim periods within that fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on theCompany’s consolidated financial statements. Note 4. Fair Value of Financial InstrumentsThe carrying value of the Company’s cash, restricted cash, cash equivalents and accounts payable, approximate fair value due to the short-termnature of these items.Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used tomeasure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows: •Level I — Unadjusted quoted prices in active markets for identical assets or liabilities; •Level II — Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are notactive, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assetsor liabilities; and •Level III — Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.82 The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement.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 valuehierarchy (in thousands). Fair Value Measurements at December 31, 2018 Total Level 1 Level 2 Level 3 Liabilities Series A warrant liability $49 $49 $— $— Series C warrant liability — — — — 2017 PIPE warrant liability 4,563 — — 4,563 2018 PIPE warrant liability 600 — — 600 Essentialis purchase price contingency liability 5,649 — — 5,649 Total common stock warrant and contingent consideration liability $10,861 $49 $- $10,812 Fair Value Measurements at December 31, 2017 Total Level 1 Level 2 Level 3 Liabilities Series A warrant liability $70 $70 $— $— Series C warrant liability 6 — — 6 2017 PIPE warrant liability 5,076 — — 5,076 Essentialis purchase price contingency liability 5,082 — — 5,082 Total common stock warrant and contingent consideration liability $10,234 $70 $- $10,164 The Series A Warrant is a registered security that trades on the open market and the fair value of the Series A Warrant liability is based on the publiclyquoted trading price of the warrants which is listed on and obtained from NASDAQ. Accordingly, the fair value of Series A Warrants is a Level 1measurement. The fair value measurement of the Series C Warrants is based on significant inputs that are unobservable and thus represent Level 3measurements. The Company’s estimated fair value of the Series C Warrant liability is calculated using the Black-Scholes valuation model, which isequivalent to fair value computed using the Binomial Lattice Option Model. Key assumptions include the volatility of the Company’s stock, the expectedwarrant term, expected dividend yield and risk-free interest rates. The Company’s estimated fair value of the 2017 PIPE Warrants and the 2018 PIPE Warrantswas calculated using a Monte Carlo simulation of a geometric Brownian motion model. The Monte Carlo simulation pricing model requires the input ofhighly subjective assumptions including the expected stock price volatility, the expected term, the expected dividend yield and the risk-free interest rate.The fair value of the Essentialis purchase price contingent liability is estimated using scenario-based methods based upon the Company’s analysis of thelikelihood of obtaining specified approvals from the Federal Drug Administration as well as reaching cumulative revenue milestones (see Note 8). TheLevel 3 estimates are based, in part, on subjective assumptions.83 During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within thehierarchy during the periods presented.The following table sets forth a summary of the changes in the fair value of the Company’s Level 1 and Level 3 warrants, which are treated asliabilities (dollars in thousands). Series A Warrant Series C Warrant 2017 PIPE Warrants 2018 PIPE Warrants Purchase Price Number ofWarrants Liability Number ofWarrants Liability Number ofWarrants Liability Number ofWarrants Liability ContingentLiability Balance at January 1, 2018 485,121 $70 118,083 $6 6,024,425 $5,076 — $— $5,082 Change in value of Series A Warrants — (21) — — — — — — — Change in value of Series C Warrants — — — (6) — — — — — Change in value of 2017 PIPE Warrants — — — — — (513) — — — Issuance of 2018 PIPE Warrants — — — — — — 513,617 582 — Change in value of 2018 PIPE Warrants — — — — — — — 18 — Change in value of contingent liability — — — — — — — — 567 Balance at December 31, 2018 485,121 $49 118,083 $— 6,024,425 $4,563 513,617 $600 $5,649 Note 5. Property and Equipment, NetProperty and equipment are summarized in the following table (in thousands). December 31,2018 December 31,2017 Computer hardware $67 $61 Computer software 2 — Furniture and fixtures 23 23 Leasehold improvements 13 13 105 97 Less accumulated depreciation and amortization (93) (74)Total $12 $23 Depreciation expense was approximately $19,000 and $44,000 for the years ended December 31, 2018 and December 31, 2017, respectivelyNote 6. Warrant LiabilitiesThe Company has issued multiple warrant series, of which the Series A Warrants, Series C Warrants, the 2017 PIPE Warrants and the 2018 PIPEWarrants (the “Warrants”) are considered liabilities pursuant to the guidance established by ASC 815 Derivatives and Hedging.84 Accounting TreatmentThe Company accounts for the Warrants in accordance with the guidance in ASC 815. As indicated above, the Company may be obligated to settleWarrants in cash in the case of a Fundamental Transaction.The Company classified the Warrants, with a term greater than one year, as long-term liabilities at their fair value and will re-measure the warrants ateach balance sheet date until they are exercised or expire. Any change in the fair value is recognized as other income (expense) in the Company’sconsolidated statements of operations.Series A WarrantsThe Company has issued 489,921 Series A Warrants to purchase shares of its common stock at an exercise price of $32.50 per share in connectionwith the unit offering offered in the Company’s initial public offering, or the IPO, in November 2014. The Series A Warrants are exercisable at any time priorto the expiration of the five-year term on November 12, 2019.Upon the completion of the IPO, the Series A Warrants started trading on the NASDAQ under the symbol SLNOW. As the Series A Warrants arepublicly traded, the Company uses the closing price on the measurement date to determine the fair value of the Series A Warrants. The Series A Warrantscontract further provide for the payment of liquidated damages at an amount per month equal to 1% of the aggregate volume weighted average price, orVWAP, of the shares into which each Warrant is convertible into in the event that the Company is unable to maintain the effectiveness of a registrationstatement as described herein. The Company evaluated the registration payment arrangement stipulated in the terms of these securities and determined that itis probable that the Company will maintain an effective registration statement and has therefore not allocated any portion of the proceeds related to thewarrant financings to the registration payment arrangement. The Warrants also contain a fundamental transactions provision that permits their settlement incash 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 hostiletakeovers, which are not within the sole control of the Company as the issuer of these warrants. Accordingly, the Warrants are considered to have a cashsettlement feature that precludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would becomputed using the Black Scholes Option Pricing Model, which approximates the binomial lattice model.Since their issuance, a total of 4,800 Series A Warrants have been exercised. As of December 31, 2018, the fair value of the 485,121 outstandingSeries A Warrants was approximately $49,000, and the decrease of approximately $21,000 in fair value during the year ended December 31, 2018 wasrecorded as other income (expense) in the consolidated statements of operations.Series C WarrantsOn March 5, 2015, the Company entered into separate agreements with certain Series B Warrant holders, who agreed to exercise their Series BWarrants to purchase an aggregate of 117,902 shares of the Company’s common stock at an exercise price of $32.50 per share, resulting in the de-recognitionof $6.7 million of the previously issued Series B Warrant liability and gross proceeds to the Company of $3.8 million based on the exercise price of the SeriesB Warrants. In connection with this exercise of the Series B Warrants, the Company issued to each investor who exercised Series B Warrants, new Series CWarrants for the number of shares of the Company’s common stock underlying the Series B Warrants that were exercised. Each Series C Warrant is exercisableat $31.25 per share and will expire on March 5, 2020. The Series C Warrants contract further provide for the payment of liquidated damages at an amount permonth equal to 1% of the aggregate volume weighted average price, or VWAP, of the shares into which each Warrant is convertible into in the event that theCompany is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registration paymentarrangement stipulated in the terms of these securities and determined that it is probable that the Company will maintain an effective registration statementand has therefore not allocated any portion of the proceeds related to the warrant financings to the registration payment arrangement. The Warrants alsocontain 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 incontrol. 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 thesewarrants. Accordingly, the Warrants are considered to have a cash settlement feature that precludes their classification as equity instruments. Settlement at fairvalue upon the occurrence of a85 fundamental transaction would be computed using the Black Scholes Option Pricing Model, which approximates the binomial lattice model.In April 2015, the Company issued a tender offer to the remaining holders of Series B Warrants to induce the holders to cash exercise the outstandingSeries 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 wasextended to Series B Warrant holders under a registration statement filed with the SEC on Form S-4, which was declared effective on June 25, 2015 andexpired 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 theissuance of 181 shares of the Company’s common stock, the issuance of 181 Series C Warrants and proceeds to the Company of approximately $6,000.The Series C Warrants are exercisable into 118,083 shares of the Company’s common stock. As of December 31, 2018, the fair value of the Series CWarrants was determined to be zero. The decline in the fair value of the liability for the Series C Warrants of approximately $6,000 during the year endedDecember 31, 2018 was recorded as other income (expense) in the consolidated statements of operations.The Company has calculated the fair value of the Series C Warrants using a Black-Scholes pricing model. The Black-Scholes pricing model requiresthe input of highly subjective assumptions including the expected stock price volatility. The Company used the following inputs. December 31,2018 December 31,2017 Volatility 90% 90%Contractual term (years) 1.17 2.17 Expected dividend yield —% —%Risk-free rate 2.60% 1.57% Warrants Issued as Part of the Units in the 2017 PIPE OfferingThe 2017 PIPE Warrants were issued on December 15, 2017 in the 2017 PIPE Offering, pursuant to a Warrant Agreement with each of the investors inthe 2017 PIPE Offering, and entitle the holder to purchase one share of the Company’s common stock at an exercise price equal to $2.00 per share, subject toadjustment as discussed below, at any time commencing upon issuance of the 2017 PIPE Warrants and terminating at the earlier of December 15, 2020 or 30days following positive Phase III results for the DCCR tablet in PWS.The exercise price and number of shares of common stock issuable upon exercise of the 2017 PIPE Warrants may be adjusted in certaincircumstances, including in the event of a stock split, stock dividend, extraordinary dividend, or recapitalization, reorganization, merger or consolidation.However, the exercise price of the 2017 PIPE Warrants will not be reduced below $1.72.In the event of a change of control of the Company, the holders of unexercised warrants may present their unexercised warrants to the Company, or itssuccessor, to be purchased by the Company, or its successor, in an amount equal to the per share value determined by the Black Scholes methodology.As of December 31, 2018, the fair value of the 2017 PIPE Warrants was estimated at $4.6 million. The decrease in the fair value of the liability for the2017 PIPE Warrants of approximately $513,000 during the year ended December 31, 2018 was recorded as other income (expense) in the consolidatedstatements of operations. 86 The Company has calculated the fair value of the 2017 PIPE Warrants using a Monte Carlo simulation of a geometric Brownian motion model. TheMonte Carlo simulation pricing model requires the input of highly subjective assumptions including the expected stock price volatility. The followingsummarizes certain key assumptions used in estimating the fair values. December 31,2018 December 31,2017 Volatility 75% 67%Contractual term (years) 0.8 0.8 Expected dividend yield —% —%Risk-free rate 2.51% 1.76% Warrants Issued as Part of the Units in the 2018 PIPE OfferingThe 2018 PIPE Warrants were issued on December 19, 2018 in the 2018 PIPE Offering, pursuant to a Warrant Agreement with each of the investors inthe 2018 PIPE Offering, and entitle the holders of each of the 10,272,375 units to purchase 0.05 shares of the Company’s common stock at an exercise priceequal to $2.00 per share, subject to adjustment as discussed below, at any time commencing upon issuance of the 2018 PIPE Warrants and terminating onDecember 21, 2023. The exercise price and number of shares of common stock issuable upon exercise of the 2018 PIPE Warrants may be adjusted in certaincircumstances, including in the event of a stock split, stock dividend, extraordinary dividend, or recapitalization, reorganization, merger or consolidation.However, the exercise price of the 2018 PIPE Warrants will not be reduced below $2.00.In the event of a change of control of the Company, the holders of unexercised warrants may present their unexercised warrants to the Company, or itssuccessor, to be purchased by the Company, or its successor, in an amount equal to the per share value determined by the Black Scholes methodology.As of December 31, 2018, the fair value of the 2018 PIPE Warrants was estimated at approximately $600,000. The approximate $18,000 increase inthe fair value of the liability for the 2018 PIPE Warrants since they were issued was recorded as other income (expense) in the consolidated statements ofoperations. The Company has calculated the fair value of the 2018 PIPE Warrants using a Monte Carlo simulation of a geometric Brownian motion model. TheMonte 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 31,2018 December 19,2018(date of issue) Volatility 75% 75%Contractual term (years) 5.0 5.0 Expected dividend yield —% —%Risk-free rate 2.51% 2.62% The Monte Carlo simulation of a geometric Brownian motion model requires the use of highly subjective assumptions to estimate the fair value ofstock-based awards. These assumptions include the following estimates. •Volatility: The Company calculates the estimated volatility rate based on the volatilities of common stock of comparable companies in itsindustry. •Contractual term: The expected life of the warrants, which is based on the contractual term of the warrants.87 •Expected dividend yield: The Company has never declared or paid any cash dividends and does not currently plan to pay cash dividends in theforeseeable future. Consequently, the Company used an expected dividend yield of zero. •Risk-free rate: The risk-free interest rate is based on the U.S. Treasury rate for similar periods as those of expected volatility. Note 7. Commitments and ContingenciesFacility LeasesOn July 1, 2015 the Company executed a new four-year non-cancelable operating lease agreement for 8,171 square feet of office space for itsheadquarters facility. The lease agreement provides for monthly lease payments of approximately $23,000 beginning in September 2015, with increases inthe following three years. An additional 5,265 square feet of office space became part of the new lease agreement on March 1, 2016, and in December 2017the Company subleased this additional space to a third party through the end of the lease term. The lease and the sublease both expire in August 2019.The Company also leased office space under a non-cancelable operating lease agreement that was set to expire in May 2015, and in February 2015the Company signed an amendment to its lease agreement, extending the lease through June 2018. The amendment provided for monthly lease payments ofapproximately $22,000 beginning in June 2015, with increases in the following two years. The Company subleased this facility in January 2016.Minimum rental commitments under all noncancelable leases with an initial term in excess of one year as of December 31, 2018 were approximately$344,000 during 2019 and none thereafter, not including the impact of sublease payments the Company will receive under its existing sublease. Rent expense was approximately $323,000 and $514,000 during the years ended December 31, 2018 and 2017, respectively.ContingenciesIn the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties andprovide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against theCompany 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 bemade, and such expenditures can be reasonably estimated.Note 8. 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., aDelaware corporation (“Merger Sub”), whereby Merger Sub merged into Essentialis, with Essentialis surviving the merger as a wholly owned subsidiary ofthe Company.88 The transaction was accounted for as an asset acquisition under the acquisition method of accounting. The amendments in ASU 2017-01 provide ascreen 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 assetsacquired (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. Pursuant to the terms ofthe Merger Agreement, the Company held back shares of common stock as partial recourse to satisfy indemnification claims. Effective March 7, 2018, on theone-year anniversary of the closing of the merger, the Company issued 180,667 shares for the previously held back amount. In the second quarter of 2018there were 903,367 additional shares of common stock issued upon the achievement of a development milestone. In total, 4,867,422 shares of common stockwere issued to Essentialis stockholders. Additionally, upon the achievement of certain commercial milestones associated with the sale of Essentialis’ productin accordance with the terms of the Merger Agreement, the Company is obligated to make cash earnout payments of up to a maximum of $30.0 million toEssentialis stockholders. The merger consideration described above will be reduced by any such shares of common stock issuable, or cash earnout paymentspayable, to Essentialis’ management carve-out plan participants and other service providers of Essentialis, in each case, in accordance with the terms of theMerger Agreement.Since the acquisition was determined to be an asset acquisition, the total value of the purchase consideration was allocated to the asset acquired. Thefair 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 theCompany on the date of completion of the merger. In addition, the trading history of the Company was reviewed to assess the reliability of the impliedconsideration 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 ofthe 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 calendardays 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 ofthe contingent shares to be issued in the future are based on this stock price.The agreement to pay cash upon the achievement of the commercial milestones results in the recognition of a contingent consideration. The fairvalue of the contingent cash consideration is based on the Company’s analysis of the likelihood of the drug indication moving from Phase II throughapproval in the Federal Drug Administration approval process and then reaching the cumulative revenue milestones. In determining the likelihood of thisoccurring, the analysis relied on 2016 research published by BIO, Biomedtraker, & Amplion titles “Clinical Development Success Rates 2006-2015.” Basedon management’s assessment, a 56% probability of achieving each milestone was determined to be reasonable. Additionally, the Company anticipated at thetime of the merger that it could reach the commercial milestones of $100.0 million and $200.0 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 tocomplete acquisition-date measurements may be obtainable or known at the time of closing the acquisition and in time for issuance of interim or annualfinancial statements. Therefore, ASC 805 provides for a “measurement period” during which adjustments to the provisional valuation amounts initiallyrecorded can be made in order to reflect information, existing at the acquisition date, but of which management subsequently obtains or becomes aware. ASC805 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 contingent stock and cash considerationas of March 7 and December 31, 2017. During the process of determining the fair value of the contingent consideration at December 31, 2017, the Companybecame aware that certain of the subjective assumptions made at the time of the initial valuation should be modified based upon management’s increasedunderstanding of the commercial capabilities of the DCCR drug of which it became aware subsequent to the acquisition. Accordingly, the Companydetermined that it was appropriate to adjust the provisional valuation amounts recorded for the contingent stock and cash consideration made at theinception in March 2017. As a result, the value of the contingent cash consideration to be paid upon completing successive sales milestones increased andthe value of the contingent stock consideration payable upon timing milestones was reduced; the resulting combined89 change to the total contingent consideration was not material. The initial valuation of the contingent consideration determined the fair value of thecontingent stock consideration to be $4.2 million and the fair value of the contingent cash consideration to be $1.1 million, for the combined value of $5.3million for the total of the stock and cash contingent consideration. The revision of the initial valuation of the contingent consideration, made within themeasurement period, determined the fair value of the contingent stock consideration to be $2.7 million and the fair value of the contingent cashconsideration to be $2.6 million, for the combined value of $5.3 million 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 thenended, the Company completed its assessment of the tax effect on the net assets acquired by obtaining the independent study and report regarding the changein control in the previously outstanding stock of Essentialis. As a result of completing the study, the Company determined that, pursuant to Section 382 ofthe Internal Revenue Code, the utilization of Essentialis’s federal and state operating loss carryforwards were limited, which required the Company to recorda net deferred tax liability in the amount of $1.7 million, deferred to future periods, as an element of the assets acquired. As a consequence of recording thenet deferred tax liability, the Company’s valuation allowance was reduced by $1.7 million, which resulted in the provision for income tax benefit and anincrease in the value of the intangible asset acquired.The probability weighted milestone payments were discounted to determine the present value of future cash payments. The analysis utilized theweighted 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 (in thousands). Fair value of stock consideration $17,246 Fair value of contingent consideration 2,590 Total purchase price consideration $19,836 The fair value of the asset acquired is as follows (in thousands). Patents $19,836 Net assets acquired $19,836 As an asset acquisition, the Company also capitalized approximately $573,000 of total costs incurred to complete the acquisition consisting of legalfees of approximately $469,000, printing fees of approximately $75,000 and accounting and other fees of approximately $29,000. Additionally, theCompany recorded as part of the purchase price consideration the value equivalent to the deferred tax liability that resulted from acquiring the assets in theamount of $1.7 million. The total intangible asset of $22.0 million was recorded on the balance sheet and is being amortized ratably over the life of thepatents 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 uponconsideration paid at closing and an estimate of the future contingent consideration to be paid. Subsequent to the acquisition date and prior to reporting thebalance 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 fairvalue of consideration paid and of the tax effect on the net assets acquired resulting from the change in control in the previously outstanding stock ofEssentialis. 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 atclosing and of the future contingent consideration to be paid; accordingly, the initial purchase cost of the asset acquired was adjusted as of March 2017 andthe 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, theCompany 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 wasrecorded 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 inamortization of the related intangible asset was recorded in the fourth quarter of 2017.90 The fair value of the liability for the contingent consideration payable by the Company achieving the commercial sales milestones of $100.0 millionand $200.0 million was initially established as $2.6 million at the time of the merger. The fair value of the contingent consideration payable increased to$5.1 million at December 31, 2017 and to $5.6 million at December 31, 2018, based on the Company’s assessment that it could reach the commercial salesmilestones of in 2024 and 2026, respectively. The changes in fair value of the contingent consideration payable after the time of the merger are recognized asincome or expense in the line titled Change in fair value of contingent consideration in the Company’s consolidated statements of operations.Note 9. Discontinued Operations and Assets Held for Sale(i) Assets held for sale and discontinued operationsSubsequent to the merger with Essentialis described above, the Company explored opportunities divest, sell or dispose of the CoSense, Neo Force,Inc. and Serenz businesses.Under ASC 205-20-45-10, during the period in which a component meets the assets held for sale and discontinued operations criteria, an entity mustpresent the assets and liabilities of the discontinued operation separately in the asset and liability sections of the balance sheet for the comparative reportingperiods. The prior period balance sheet should be reclassified for the held for sale items. For income statements, the current and prior periods should report theresults of operations of the component in discontinued operations when comparative income statements are presented.The components of the Consolidated Balance Sheet accounts presented as assets and liabilities held for sale as of December 31, 2017 follow (inthousands). There were no assets or liabilities held for sale as of December 31, 2018 after the deconsolidation of Capnia. December 31,2017 Current assets Accounts receivable $50 Inventory 420 Prepaid expenses and other current assets 46 Total current assets held for sale $516 Long-term assets Property and equipment, net $20 Other intangible assets 446 Total long-term assets held for sale $466 Current liabilities Accounts payable $51 Accrued compensation and other current liabilities 76 Total current liabilities for sale $127 Long-term liabilities Other long-term liabilities $225 Total long-term liabilities held for sale $225 91 The components of the Consolidated Statements of Operations presented as discontinued operations follow (in thousands). Year Ended December 31, 2018 2017 Product revenue $62 $735 Cost of product revenue 32 820 Gross profit (loss) 30 (85)Expenses Research and development 1,106 2,427 Sales and marketing 25 218 General and administrative 393 669 Total expenses 1,524 3,314 Operating loss (1,494) (3,399)Other expense Loss on sale of assets — (186)Other expense — (8)Total other expense — (194)Net loss from discontinued operations $(1,494) $(3,593) Stock-based compensation expense of approximately $76,000 and $120,000 was classified in discontinued operations for the years endedDecember 31, 2018 and 2017, respectively.(ii) NFI SaleOn September 2, 2015, the Company established NeoForce, Inc. (“NFI”), a wholly owned subsidiary of the Company and through NFI, acquiredsubstantially all of the assets of an unrelated privately held company NeoForce Group, Inc.(“NeoForce”).On July 18, 2017, the Company completed the sale of stock of its 100% wholly-owned subsidiary, NFI, primarily related to the Company’s portfolioof neonatology resuscitation business pursuant to a Stock Purchase Agreement (the “Purchase Agreement”), dated as of July 18, 2017, with NeoForceHoldings, Inc. (“Holdings”), a 100% owned subsidiary of Flexicare Medical Limited, a privately held United Kingdom company, for $720,000 andadjustments for inventory and the current cash balances held at NFI. The Company also received the total outstanding accounts receivable and inventoryheld by NFI at the date of sale, as it was collected or sold, respectively. The transactions contemplated by the Purchase Agreement are a continuation of aprocess previously disclosed by the Company of evaluating strategic alternatives and focusing on the Company’s rare disease therapeutic business. ThePurchase Agreement includes customary terms and conditions, including an adjustment to the purchase price based on inventory and accounts receivables,and provisions that require the Company to indemnify Holdings, to the maximum of $250,000, for certain losses that it incurs as a result of a breach by theCompany of its representations and warranties in the Purchase Agreement and certain other matters, which indemnification obligation terminates once thestatute of limitations expires. 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 ofinventory as it is sold following July 18, 2017, payable on a monthly basis. The Purchase Agreement contains customary representations and warranties ofeach of the parties.(iii) CoSense Joint Venture AgreementIn December 2017, the Company entered into a joint venture with OAHL with respect to its CoSense product by agreeing to sell shares of Capnia, itswholly-owned subsidiary, to OAHL. CoSense was Soleno’s first Sensalyze Technology Platform product to receive 510(k) clearances from the FDA and CEMark certification. CoSense measures CO, which can be elevated due to endogenous causes such as excessive breakdown of red blood cells, or hemolysis, orexogenous 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 ofhemolysis in neonates, a disorder in which CO and92 bilirubin are produced in excess as byproducts of the breakdown of red blood cells. The Company’s entry into the joint venture results from a comprehensivereview of strategic alternatives for its legacy products and product candidates following its transition to a primarily therapeutic drug product company. Theterms of the Joint Venture Agreement provide that OAHL will invest up to a total of $2.2 million in Capnia’s common shares on an incremental quarterlybasis commencing in December 2017. Going forward, OAHL will be responsible for funding a portion of the Capnia operations. The Joint Venture Agreementprovided that Capnia would issue shares of common shares to OAHL based on a negotiated price of $1.00 per share when the cumulative investment made byOAHL equaled or exceeded $1.2 million. For financial reporting purposes, Capnia’s assets, liabilities and results of operations have historically beenconsolidated with those of the Company.During October 2018, the Company and OAHL determined and agreed that the cumulative investment made by OAHL exceeded $1.2 million duringthe quarter ended September 30, 2018. Accordingly, on October 16, 2018, Capnia issued 1,690,322 shares of its common stock to OAHL, representing 53%of its outstanding shares. After the share issuance the Company no longer holds a controlling interest in Capnia and resulted in the deconsolidation ofCapnia’s financial statements with those of the Company and a $2.0 million gain was recognized in the fourth quarter of 2018 as a result of thedeconsolidation. Of this amount, $1.2 million relates to the remeasurement of the Company's retained interest in the joint venture to fair value which wasmeasured based on the negotiated price of $1.00 per share for Soleno’s remaining ownership of 1,480,000 shares less a 23% discount for lack of control overCapnia. The total gain is included in other income from continuing operations on the Company's consolidated statements of operations. The remaining 47%investment in Capnia is classified as an equity method investment and presented as a Minority interest investment in former subsidiary in the consolidatedbalance sheet.Note 10. Stockholders’ EquityConvertible Preferred StockThe Company is authorized to issue 10,000,000 shares of Preferred Stock.The Company had issued a total of 13,780 shares of Series B Convertible Preferred Stock pursuant to the Securities Purchase Agreement entered intoon June 29, 2016 with Sabby Management, LLC. As of December 31, 2018, there were no shares of Series B Convertible Preferred Stock outstanding as allsuch previously issued shares had been converted to common shares.Common StockOn December 22, 2016, the Company entered into the Merger Agreement with Essentialis. Consummation of the Merger was subject to variousclosing conditions, including the Company’s consummation of a financing of at least $8.0 million at, or substantially contemporaneous with, the closing ofthe Merger, which occurred on March 7, 2017 and the receipt of stockholder approval of the Merger at a special meeting of stockholders, which the Companyreceived 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.Pursuant to the terms of the Merger Agreement, the Company held back shares of common stock as partial recourse to satisfy indemnification claims.Effective March 7, 2018, on the one-year anniversary of the closing of the merger, the Company issued 180,667 shares for the previously held back amount.In the second quarter of 2018 there were 903,367 additional shares of common stock issued upon the achievement of a development milestone. In total,4,867,422 shares of common stock were issued to Essentialis stockholders. Additionally, upon the achievement of certain commercial milestones associatedwith 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 toa maximum of $30.0 million to Essentialis stockholders. The merger consideration described above will be reduced by any such shares of common stockissuable, or cash earnout payments payable, to Essentialis’ management carve-out plan participants and other service providers of Essentialis, in each case, inaccordance with the terms of the Merger Agreement.93 On January 27, 2017, the Company entered into the 2017 Aspire Purchase Agreement with Aspire Capital, which provided that, upon the terms andsubject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $17.0 million in value of shares ofthe Company’s common stock over the 30-month term of the purchase agreement. Additionally, on the date of the closing of the financing, as defined in theMerger Agreement, the Company issued to Aspire Capital, and Aspire Capital purchased from the Company an aggregate of $2.0 million of the Company’scommon stock.On December 11, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company sold andissued 8,141,116 immediately separable units at a price per unit of $1.84 for aggregate gross proceeds of $15.0 million. Each unit consisted of one share ofthe 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 per share, for an aggregateof 8,141,116 shares of common stock and corresponding warrants to purchase an aggregate of 6,024,425 shares of common stock, together the shares ofcommon stock are referred to as the 2017 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 2017 Resale Shares. The registrationstatement was declared effective in February 2018.On December 19, 2018, the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company sold andissued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of the Company’scommon stock and a warrant to purchase 0.05 shares of the Company’s common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375shares of common stock and corresponding warrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stockare referred to as the 2018 Resale Shares. The Company also granted certain registration rights to these stockholders, pursuant to which, among other things,the Company will prepare and file with the SEC a registration statement to register for resale the 2018 Resale Shares prior to March 31, 2019.Equity Incentive PlansThe Company has adopted the 1999 Incentive Stock Plan, the 2010 Equity Incentive Plan, and the 2014 Equity Incentive Plan, or the 2014 Plan, andtogether, the Plans. The 1999 Incentive Stock Plan expired in 2009, and the 2010 Equity Incentive Plan has been closed to new issuances. Under the 2014Plan the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance units or performance shares toemployees, directors, advisors, and consultants. Options granted under the 2014 Plan may be incentive stock options (“ISOs”) or nonqualified stock options(“NSOs”). ISOs may be granted only to Company employees, including officers and directors.The Board of Directors has the authority to determine to whom stock options will be granted, the number of options, the term, and the exercise price.Options are to be granted at an exercise price not less than fair value. For individuals holding more than 10% of the voting rights of all classes of stock, theexercise 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 stockand no longer than ten years for all other options. The terms and conditions governing restricted stock units is at the sole discretion of the Board. As ofDecember 31, 2018, a total of 1,150,961 shares are available for future grant under the 2014 Plan.The Company recognized stock-based compensation expense related to options and restricted stock units granted to employees, directors andconsultants for the years ended December 31, 2018 and 2017 of approximately $988,000 and $1.0 million, respectively, of which approximately $76,000and $120,000 and was recorded in discontinued operations in 2018 and 2017, 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 compensationarrangements during the year ended December 31, 2018 and December 31, 2017.94 Stock compensation expense was allocated between departments in continuing operations as follows (in thousands). Year ended December 31,2018 December 31,2017 Research and development $205 $93 General and administrative 707 787 Total $912 $880 Stock OptionsThe Company granted options to purchase 756,086 and 622,755 of the Company’s common stock in 2018 and 2017, respectively. The fair value ofeach award granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions. Year Ended December 31,2018 December 31,2017Expected life (years) 5.5-6.0 5.5-6.1Risk-free interest rate 2.7%-2.8% 1.9%-2.2%Volatility 70%-71% 61%-69%Dividend rate — % — % The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. Theseassumptions include the following estimates: •Expected life: The expected life of stock options represents the average of the contractual term of the options and the weighted-average vestingperiod, as permitted under the simplified method. The Company does not believe it is able to rely on historical exercise and post-vestingtermination activity to provide accurate data for estimating the expected term for use in estimating the fair value-based measurement of stockoptions. Therefore, it has opted to use the “simplified method” for estimating the expected term of options. •Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time toliquidity. •Volatility: The estimated volatility rate based on the volatilities of common stock of comparable companies in the Company’s industry. •Dividend rate: The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in theforeseeable future. Consequently, the Company used an expected dividend yield of zero.95 The following table summarizes stock option transactions for the years ended December 31, 2018 and 2017 as issued under the Plans. SharesAvailable Number ofOptions Weighted-AverageExercisePrice per WeightedAverageRemainingContractualTerm for Grant Outstanding Share (in years) Balance at January 1, 2017 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 — Balance at December 31, 2017 1,666,602 1,026,987 $9.99 7.94 Additional shares authorized 223,742 Shares allocated to grants of restricted stock units (99,217) Options granted (756,086) 756,086 $1.68 Options exercised — — — — Options canceled/forfeited 115,920 (115,920) $12.72 — Balance at December 31, 2018 1,150,961 1,667,153 $6.03 8.27 Options vested at December 31, 2018 820,422 $9.85 7.64 Options vested and expected to vest at December 31, 2018 1,667,153 $6.03 8.27 The weighted-average grant date fair value of employee options granted was $1.08 and $1.88 per share for the year ended December 31, 2018 andDecember 31, 2017, respectively. At December 31, 2018 total unrecognized employee stock-based compensation was $1.2 million, which is expected to berecognized over the weighted-average remaining vesting period of 2.5 years. As of December 31, 2018, the outstanding stock options had an intrinsic valueof approximately $71,000.The fair value of an equity award granted to a nonemployee 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-basedcompensation related to its grant of options to non-employees has not been material to date.Restricted Stock UnitsThere were 99,217 restricted stock units granted by the Company during the year ended December 31, 2018 to employees and nonemployees. Theshares were 100% vested on the grant date and were valued based on the Company’s common stock price on the grant date, with approximately $159,000 ofthe related stock-based compensation expense recognized at that time.96 2014 Employee Stock Purchase PlanThe Company’s board of directors and stockholders have adopted the 2014 Employee Stock Purchase Plan, or the ESPP. The ESPP has becomeeffective, and the board of directors will implement commencement of offers thereunder in its discretion. A total of 27,967 shares of the Company’s commonstock has been made available for sale under the ESPP. In addition, the ESPP provides for annual increases in the number of shares available for issuanceunder the plan on the first day of each year beginning in the year following the initial date that the board of directors authorizes commencement, equal to theleast of: •1.0% of the outstanding shares of the Company’s common stock on the first day of such year; •55,936 shares; or •such amount as determined by the board of directors.As of December 31, 2018, there were no purchases by employees under this plan.Series D WarrantsThe Company issued 256,064 Series D Warrants in October 2015, which are exercisable into 586,182 shares of the Company’s common stock, withan exercise price of $12.30 and a term of five years expiring on October 15, 2020. The Company’s Series D Warrants contain standard anti-dilutionprovisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. They also contain a cashless exercisefeature that provides for their net share settlement at the option of the holder in the event that there is no effective registration statement covering thecontinuous offer and sale of the warrants and underlying shares. The Company is required to comply with certain requirements to cause or maintain theeffectiveness of a registration statement for the offer and sale of these securities. The Series D Warrant agreement further provides for the payment ofliquidated damages at an amount per month equal to 1% of the aggregate VWAP of the shares into which each Series D Warrant is convertible into in theevent that the Company is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registrationpayment arrangement stipulated in the terms of this securities agreement and determined that it is probable that the Company will maintain an effectiveregistration statement and has therefore not allocated any portion of the proceeds to the registration payment arrangement. The Series D Warrant agreementspecifically provides that under no circumstances will the Company be required to settle any Series D Warrant exercise for cash, whether by net settlement orotherwise.Accounting TreatmentThe Company accounts for the Series D Warrants in accordance with the guidance in ASC 815 Derivatives and Hedging. As indicated above, theCompany is not required under any circumstance to settle any Series D Warrant exercise for cash. The Company has therefore classified the value of the SeriesD Warrants as permanent equity.Other Common Stock WarrantsAs of December 31, 2018, the Company had 102,070 common stock warrants outstanding from the 2010/2012 convertible notes, with an exerciseprice of $24.35 and a term of 10 years expiring in November 2024. The Company also had outstanding 1,851 common stock warrants issued in 2009, with anexercise price of $108.00 and a term of 10 years, which expired in January 2019 and 16,500 common stock warrants issued to the underwriter in theCompany’s IPO, with an exercise price of $35.70 and a term of 10 years, expiring in November 2024.97 Note 11. Income TaxesThe geographical distribution of loss before income taxes are summarized below (in thousands). December 31, 2018 2017 United States $(11,830) $(13,707)Foreign (11) (17)Income (loss) before income taxes $(11,841) $(13,724)Income (loss) resulting from discontinued operations $(1,494) $(3,593)Taxes allocated to discontinued operations — — The components of the provision for income tax benefit follows (in thousands). December 31, 2018 2017 Current: Federal $— $— State — 1 Foreign — — — 1 Deferred Federal — (1,578)State — (73)Foreign — — — (1,651)Total provision for income taxes benefit $— $(1,650) The provision for income tax benefit differs from the amount estimated by applying the statutory federal income tax rate to the operating loss fromcontinuing operations due to the following (in thousands). December 31, 2018 2017 Tax on the loss before income tax expense computed at the federal statutory rate $(2,486) $(4,666)State tax (benefit) at statutory rate, net of federal benefit (187) (67)Tax reform — 10,613 Foreign rate differential 2 3 Change in valuation allowance 4,143 (8,485)Change in research and development credits (99) (121)Stock based compensation—ISOs 143 295 Change in fair value of warrants (110) 343 Change in fair value of contingent consideration 119 — Gain on deconsolidation (4) — Disallowance of loss on discontinued operations (426) — Acquisition costs — 203 Change in NOL true up (590) — Change in temporary difference true up (456) — Loss on sale of NFI — (677)Other (49) 909 Provision for income tax benefit $— $(1,650)98 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows atDecember 31, 2018 and 2017 (in thousands). December 31, 2018 2017 Non-Current Deferred Tax Assets: Federal and state net operating loss carryforwards $28,532 $25,486 Research and other credits 2,037 1,807 Reserves and accruals 52 145 Assets held for sale 15 17 Fixed assets 67 — Capital loss carryover 425 459 Stock based compensation 70 36 Other deferred tax assets 542 — Gross non-current deferred tax assets 31,740 27,950 Intangible Assets (4,062) (4,414)Fixed Assets — (3)Total non-current deferred tax liabilities (4,062) (4,417)Total deferred tax assets 27,678 23,533 Valuation allowance (27,678) (23,533)Net deferred tax assets $— $— The Company has recorded a full valuation allowance against its net deferred tax assets due to the uncertainty as to whether such assets will berealized. The valuation allowance increased by $4.1 million from December 31, 2017 to December 31, 2018 primarily due to the generation of current yearnet operating losses and research and development credits claimed.As of December 31, 2018, the Company had $129.8 million of federal, $51.4 million of state and approximately $264,000 of foreign net operatinglosses available to offset future taxable income. The federal net operating loss carryforwards begins to expire in 2019, the state net operating losscarryforwards will begin to expire in 2028 and the foreign net operating loss carryforward can be carried forward indefinitely, if not utilized. As ofDecember 31, 2018, the Company also had $1.2 million of federal and approximately $798,000 of state research and development credit carryforwards. Thefederal research and development credit carryforward begin to expire in 2024 and the state research and development credit can be carried forwardindefinitely.Utilization of the net operating loss and tax credit carry forwards are subject to an annual limitation due to the ownership percentage changelimitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the netoperating loss before utilization. The Company completed Section 382 analysis through December 2016 and determined that an ownership change, asdefined under Section 382 of the Internal Revenue Code, occurred in June 2016. The Company’s tax attributes are subject to an annual limitation of $0.5million per year for federal purposes. For years ended after December 31, 2016, the utilization of net operating losses and tax credit carryforwards are subjectto further limitation in the event an additional ownership change were to occur for tax purposes. The Company is in process of completing an analysis ofwhether there was an ownership change, as defined under Section 382 of the Internal Revenue Code, resulting from the issuance of new shares during 2018and, as such, is not able at this time to determine the impact on the NOL carryforwards, if any, as of the date of these consolidated financial statements asresult of the 2018 share issuances. Once the analysis is completed, the Company will make any appropriate adjustments to the balances of NOLs to be carriedforward and thus adjust the NOL deferred tax asset accordingly, if required.99 United States taxes and foreign withholding taxes have not been provided on undistributed earnings for certain non-United States subsidiaries as ofDecember 31, 2018, as the earnings, if any, are intended to be indefinitely reinvested.The following tables summarize the activities of gross unrecognized tax benefits (in thousands). December 31, 2018 2017 Beginning balance $854 $795 Increases (decreases) related to prior year tax positions 23 (4)Increase related to current year tax positions 87 63 Ending Balance $964 $854 There were no unrecognized tax benefits that would impact the effective tax rate as of December 31, 2018 and December 31, 2017. As ofDecember 31, 2018, unrecognized tax benefits of approximately $964,000 would be offset by a change in valuation allowance.The Company files income tax returns in the U.S. federal jurisdiction, certain state jurisdictions and United Kingdom. In the normal course ofbusiness, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. In the U.S federal jurisdiction, tax years1999 forward remain open to examination, in the state tax jurisdiction, years 2008 forward remain open to examination and in the foreign jurisdiction, years2015 forward remain open to examination. The Company is currently not under audit by any federal, state, local or foreign jurisdiction.In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Cuts andJobs Act (SAB 118), which allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As aresult, we previously provided provisional estimates of the effect of the Tax Act in our financial statements. In the fourth quarter of 2018, we completed ouranalysis to determine the effect of the Tax Act and determined that no further adjustments were needed.The Jobs Act also establishes global intangible low-taxed income, or “GILTI,” provisions that impose a tax on foreign income in excess of a deemedreturn on intangible assets of foreign corporations. The Company’s accounting policy for the income tax effects of GILTI will be to recognize those taxes asexpenses in the period incurred. In 2018, the Company’s foreign subsidiary realized a tested loss for the period and therefore, the Company did not have aGILTI inclusion for the year.The Company uses the “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions and to establish measurementcriteria for income tax benefits. The Company has determined it has no material unrecognized assets or liabilities related to uncertain tax positions as ofDecember 31, 2018. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. In the eventthe Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as a component of otherexpense.Note 12. Net loss per shareBasic 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 commonstock that would be issued upon the exercise of common stock warrants and options. For the years ended December 31, 2018 and 2017, the effect of issuingthe 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 pershare are the same in each of those periods.100 The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstandingbecause such securities have an antidilutive impact due to losses reported (in common stock equivalent shares). As of December 31, 2018 2017 Convertible preferred stock — 914,200 Warrants issued to 2010/2012 convertible note holders to purchase common stock 102,070 102,070 Options to purchase common stock 1,667,153 1,026,987 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 586,162 586,162 2017 PIPE warrants 6,024,425 6,024,425 2018 PIPE warrants 513,617 — Total 9,514,982 9,275,399 Note 13. Compensation Plan for Board MembersIn 2017, the Compensation Committee of the Board of Directors recommended, and the Board approved a revised compensation plan pursuant towhich all board fees are paid in common stock of the Company. Payment to the Board of Directors in shares of the Company’s common stock is made afterthe close of the quarter in which the compensation is earned. During 2018 and 2017, the Company issued 146,371 and 90,306 shares, respectively, ofcommon stock to its Board members for fees earned.Note 14. Defined Contribution PlanThe Company sponsors a 401(k) Plan, which stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certainlimitations of eligible compensation. The Company may match employee contributions in amounts to be determined at the Company’s sole discretion. Todate, the Company has not made any matching contributions.Note 15. Subsequent EventsOn February 4, 2019 the Company formed a new wholly owned subsidiary in Ireland named Soleno Therapeutics Europe Limited.101 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESNone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under theSecurities 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 management to allowtimely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that anycontrols 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 Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, basedon such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we fileor submit under the Exchange Act is recorded, processed, summarized and reported, with the time periods specified in the SEC’s rules and forms, and isaccumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer as appropriate to allow timelydecisions regarding required disclosure.Internal Control over Financial ReportingManagement’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) underthe Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal Executive Officer and PrincipalFinancial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including those policies and procedures that:(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and the disposition of our assets, (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP and thatreceipts and expenditures are being made only in accordance with authorizations of our management and board of directors, and (iii) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on theconsolidated financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with policies and procedures may deteriorate.Management conducted an evaluation of the effectiveness of our control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, managementconcluded that our internal control over financial reporting was effective as of December 31, 2018. Changes in Internal ControlsThere have been no changes to our internal control over financial reporting that occurred during our last fiscal quarter ended December 31, 2018 thathave materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone. 102 PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2019 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 thisAnnual Report on Form 10-K.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2019 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 thisAnnual Report on Form 10-K.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2019 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 thisAnnual Report on Form 10-K.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2019 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 thisAnnual Report on Form 10-K.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2019 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 thisAnnual Report on Form 10-K.103 PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES1.Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K2.Financial Schedules: All schedules have been omitted because the information called for is not required or is shown either in the financial statements orin 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 on Form 10-K.104 EXHIBIT INDEX Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith 2.1 Stock Purchase Agreement, dated as of July 18, 2017, and betweenSoleno Therapeutics, Inc., a Delaware corporation, and NeoForceHoldings, Inc. a Delaware corporation 8-K July 24, 2017 2.1 2.2 Joint Venture Agreement, dated as of December 4, 2017, by andamong Soleno Therapeutics, Inc., Capnia, Inc., and OptAsia HealthcareLimited 8-K December 8, 2017 2.1 2.3 PRC IP Purchase Agreement, dated as of December 4, 2017, by andbetween OptAsia Healthcare Limited and Capnia, Inc. 8-K December 8, 2017 2.2 2.4 Transition Services Agreement, dated as of December 4, 2017, by andamong Soleno Therapeutics, Inc., a Delaware corporation, Capnia, Inc.and OptAsia Healthcare, Ltd., a Hong Kong company 8-K December 8, 2017 2.3 3.1 Amended and Restated Certificate of Incorporation of SolenoTherapeutics, Inc. S-1/A August 7, 2014 3.2 3.2 Amended and Restated Bylaws of Soleno Therapeutics, Inc. S-1/A July 1, 2014 3.4 3.3 Certificate of Designation of Preferences, Rights and Limitations ofSeries A Convertible Preferred Stock. 8-K October 15, 2015 3.1 3.4 Certificate of Designation of Preferences, Rights and Limitations ofSeries B Convertible Preferred Stock 8-K July 6, 2016 3.1 3.5 Certificate of Amendment 8-K May 11, 2017 3.1 3.6 Certificate of Amendment to the Certificate of Incorporation 8-K October 6, 2017 3.1 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 Soleno Therapeutics, Inc. and certain holders ofthe Soleno Therapeutics, Inc.’s capital stock named therein. S-1/A July 1, 2014 4.2 4.3 Form of Series A Warrant Agreement. S-1/A August 5, 2014 4.3 4.4 Form of the Series A Warrant certificate. S-1/A August 5, 2014 4.4 4.5 Form of Underwriters’ Compensation Warrant. S-1/A August 5, 2014 4.5 4.6 Form of Convertible Promissory Note issued in February 2010 andMarch 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.6 105 Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith 4.7 Form of Warrant to Purchase Shares issued in February 2010 andMarch 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 inconnection 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 inconnection with the 2010 convertible note financing. S-1 June 10, 2014 4.9 4.10 Form of Convertible Promissory Note issued in January 2012 inconnection 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 inconnection with Soleno Therapeutics, Inc.’s 2012 convertible notefinancing. S-1 June 10, 2014 4.11 4.12 Form of Convertible Promissory Note issued in July 2012 and August2012 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 August2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.13 4.14 Form of Convertible Promissory Note issued in April, August andOctober 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 andOctober 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 August 5, 2014 4.16 4.17 Form of Series B Warrant Agreement. S-1/A November 4, 2014 4.17 4.18 Form of the Series B Warrant certificate. S-1/A November 4, 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 Series D Common Stock Purchase Warrant. 8-K October 15, 2015 4.1 4.22 Form of Placement Agent Warrant. 8-K October 15, 2015 4.2 4.23 Form of Series D common stock Warrant Certificate. 8-K October 15, 2015 4.3 106 Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith4.24 Form of Series A Convertible Preferred Stock Certificate. 8-K October 15, 2015 4.4 4.25 Form of Placement Agent Warrant. 8-K July 6, 2016 4.1 4.26 Form of Series B Convertible Preferred Stock Certificate. 8-K July 6, 2016 4.2 4.27 Form of Common Stock Purchase Warrant 8-K December 13, 2017 4.1 4.28 Form of Common Stock Purchase Warrant 8-K December 19, 2018 4.1 9.10 Form of Voting Agreement. 8-K October 15, 2015 9.1 9.20 Form of Voting Agreement. 8-K July 6, 2016 9.1 9.30 Form of Voting Agreement. 8-K December 27, 2016 10.1 10.1 Form of Indemnification Agreement between the Registrant and eachof 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 agreementsthereunder. S-1/A July 1, 2014 10.5 10.6 Offer Letter, dated June 22, 2007, by and between SolenoTherapeutics, Inc. and Ernest Mario, Ph.D. S-1 June 10, 2014 10.6 10.7 Employment Agreement, dated April 6, 2010, by and between SolenoTherapeutics, Inc. and Anish Bhatnagar. S-1 June 10, 2014 10.7 10.8 Offer Letter, dated May 29, 2013, between Soleno Therapeutics, Inc.and Anthony Wondka. S-1 June 10, 2014 10.8 10.9 Offer Letter, dated April 17, 2014, by and between SolenoTherapeutics, Inc. and Antoun Nabhan. S-1 June 10, 2014 10.9 10.10 Asset Purchase Agreement dated May 11, 2010, by and betweenSoleno Therapeutics, Inc. and BioMedical Drug Development Inc. S-1 June 10, 2014 10.10 107 Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith10.11 Convertible Note and Warrant Purchase Agreement, dated February 10, 2010, by and among Soleno Therapeutics, Inc. and the investorsnamed therein. S-1 June 10, 2014 10.11 10.12 Amendment No. 1 to Convertible Note and Warrant PurchaseAgreement, Convertible Promissory Notes and Warrants to PurchaseShares, dated November 10, 2010, by and among Soleno Therapeutics,Inc. and the investors named therein. S-1 June 10, 2014 10.12 10.13 Amendment No. 2 to Convertible Note and Warrant PurchaseAgreement, Convertible Promissory Notes and Warrants to PurchaseShares, dated January 17, 2012, by and among Soleno Therapeutics,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 Soleno Therapeutics, Inc. and the investorsnamed therein. S-1 June 10, 2014 10.14 10.15 Omnibus Amendment to Convertible Note and Warrant PurchaseAgreement, Convertible Promissory Notes and Warrants to PurchaseShares, dated July 31, 2012, by and among Soleno Therapeutics, Inc.and the investors named therein. S-1 June 10, 2014 10.15 10.16 Omnibus Amendment to Convertible Promissory Notes and Warrantsto Purchase Shares, dated April 28, 2014, by and among SolenoTherapeutics, Inc. and the investors named therein. S-1 June 10, 2014 10.16 10.17 Convertible Note and Warrant Purchase Agreement, datedApril 28, 2014, by and among Soleno Therapeutics, Inc. and theinvestors named therein. S-1 June 10, 2014 10.17 10.18 Omnibus Amendment to Convertible Note and Warrant PurchaseAgreement, Convertible Promissory Notes and Warrants to PurchaseShares, dated May 5, 2014, by and among Soleno Therapeutics, Inc.and the investors named therein. S-1 June 10, 2014 10.18 10.19 Sublease, dated May 20, 2014, by and among Soleno Therapeutics,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 SolenoTherapeutics, Inc. and David D. O’Toole. S-1/A July 22, 2014 10.20 10.21 Loan Agreement by and between Soleno Therapeutics, Inc. and theinvestors named therein, dated September 29, 2014. S-1/A September 29, 2014 10.21 108 Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith10.22 Revised Second Tranche Closing Notice and Letter Amendment datedAugust 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 Amendmentdated 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 March 5, 2015 10.1 10.25 Advisory Agreement by and between Soleno Therapeutics, Inc. andMaxim Group LLC, dated March 4, 2015. S-4 April 1, 2015 10.25 10.26 Agreement and First Amendment to Asset Purchase Agreementbetween the Company, BDDI and affiliate of BDDI, dated June 30,2015. 8-K July 7, 2015 10.1 10.27 Common Stock Purchase Agreement between the Company and anaffiliate of BDDI, dated June 30, 2015. 8-K July 7, 2015 10.2 10.28 Registration Rights Agreement between the Company and AspireCapital Fund, LLC, dated July 24, 2015. 8-K July 27, 2015 4.1 10.29 Common Stock Purchase Agreement between the Company and AspireCapital Fund, LLC, dated July 24, 2015. 8-K July 27, 2015 10.1 10.30 Engagement Letter dated September 17, 2015, between SolenoTherapeutics, Inc. and Maxim Group, LLC. 8-K October 15, 2015 1.1 10.31 Securities Purchase Agreement dated October 12, 2015. 8-K October 15, 2015 10.1 10.32 Form of Registration Rights Agreement. 8-K October 15, 2015 10.2 10.33 Form of Lock-Up Agreement. 8-K October 15, 2015 10.3 10.34 Amendment No. 1 to Securities Purchase Agreement dated October 29,2015. S-1/A December 22, 2015 10.33 10.35 Transfer and Distribution Agreement: United States: by and betweenSoleno Therapeutics, Inc. and Bemes, Inc. signed January 26, 2016. 8-K January 28, 2016 10.1 10.36 Engagement Letter dated June 26, 2016, between SolenoTherapeutics, Inc. and Maxim Group, LLC. 8-K July 6, 2016 1.1 10.37 Securities Purchase Agreement dated June 29, 2016. 8-K July 6, 2016 10.1 10.38 Form of Registration Rights Agreement dated June 29, 2016. 8-K July 6, 2016 10.2 109 Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith10.39 Amendment No. 1 to Securities Purchase Agreement datedSeptember 20, 2016. S-1/A September 20, 2016 10.39 10.40 Agreement and Plan of Merger and Reorganization, dated as ofDecember 22, 2016, by and among Soleno Therapeutics, Inc., aDelaware corporation, Essentialis, Inc., a Delaware corporation,Company E Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Soleno Therapeutics, and Neil Cowen as thestockholders’ representative. 8-K December 27, 2016 2.1 10.41 Registration Rights Agreement between the Company and AspireCapital Fund, LLC, dated January 27, 2017. S-1 February 1, 2017 10.51 10.42 Common Stock Purchase Agreement between the Company andAspire Capital Fund, LLC, dated January 27, 2017. S-1 February 1, 2017 10.52 10.43 Stock Purchase Agreement made by and between the Company andNeoForce Holdings, Inc. a Delaware corporation dated July 18, 2017 8-K July 24, 2017 2.1 10.44 Joint Venture Agreement dated as of December 4, 2017 by and amongSoleno Therapeutics, Inc., Capnia, Inc., and OptAsia HealthcareLimited 8-K December 8, 2017 2.1 10.45 Securities Purchase Agreement, dated as of December 11, 2017 8-K December 13, 2017 10.1 10.46 Confidential Consulting Agreement, dated September 5, 2017 by andbetween FLG Partners, LLC and the Company 8-K June 4, 2018 10.1 10.47 Securities Purchase Agreement, dated as of December 11, 2017 8-K December 19, 2018 10.1 21.1 Subsidiaries X 23.1 Consent of Marcum LLP X 31.1 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, asamended X 31.2 Certification of Principal Financial and Accounting Officer RequiredUnder Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Actof 1934, as amended X 32.1 Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18U.S.C. §1350 X 110 Incorporated by Reference fromExhibitNumber Description of Document Registrant’sForm Date Filedwith the SEC ExhibitNumber FiledHerewith32.2 Certification of Principal Financial and Accounting Officer RequiredUnder Rule 13a-14(b) of the Securities Exchange Act of 1934, asamended, and 18 U.S.C. §1350 X 101.INS XBRL Instance Document. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. X 111 SIGNATURESPursuant 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 onits behalf by the undersigned, thereunto duly authorized. Soleno Therapeutics, Inc. Date: March 19, 2019By:/S/ ANISH BHATNAGAR President and Chief Executive Officer POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Anish Bhatnagar, with full power of substitution andresubstitution and full power to act, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in thename 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 Form 10-Kand to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting untosaid attorneys-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 thatsaid attorneys-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.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date /S/ ANISH BHATNAGAR Anish Bhatnagar President, Chief Executive Officer and Director(Principal Executive Officer) March 19, 2019 /S/ JONATHAN WOLTER Jonathan Wolter Chief Financial Officer (Principal Financial andAccounting Officer) March 19, 2019 /S/ ERNEST MARIO Ernest Mario Chairman March 19, 2019 /S/ ANDREW SINCLAIR Andrew Sinclair Director March 19, 2019 /S/ WILLIAM G. HARRIS William G. Harris Director March 19, 2019 /S/ MAHENDRA SHAH Mahendra Shah Director March 19, 2019 /S/ STUART COLLINSON Stuart Collinson Director March 19, 2019 112Exhibit 21.1Subsidiaries of Soleno Therapeutics, Inc. Subsidiary JurisdictionSoleno Therapeutics UK Ltd. (formerly Capnia UK Limited), a wholly ownedforeign subsidiary in the United Kingdom United KingdomEssentialis, Inc. DelawareCapnia, Inc. Delaware Exhibit 23.1INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT We consent to the incorporation by reference in the Registration Statements of Soleno Therapeutics, Inc. (the “Company”) on Form S-8 (File Numbers 333-224070, 333-220056, 333-210563 and 333-200175) of our report which includes an explanatory paragraph as to the Company’s ability to continue as agoing concern, dated March 19, 2019, with respect to our audits of the consolidated financial statements of Soleno Therapeutics, Inc. as of December 31,2018 and 2017 and for each of the two years in the period ended December 31, 2018, which report is included in this Annual Report on Form 10-K of SolenoTherapeutics, Inc. for the year ended December 31, 2018. /s/ Marcum LLPMarcum LLPSan Francisco, CAMarch 19, 2019 Exhibit 31.1CERTIFICATION OF THE CHIEF EXECUTIVE OFFICERPURSUANT TOSECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)I, Anish Bhatnagar, M.D., certify that:1.I have reviewed this annual report on Form 10-K of Soleno Therapeutics, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 19, 2019 /S/ ANISH BHATNAGAR Anish BhatnagarPresident, Chief Executive Officer(principal executive officer) Exhibit 31.2CERTIFICATION OF THE CHIEF FINANCIAL OFFICERPURSUANT TOSECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)I, Jonathan Wolter, certify that:1.I have reviewed this annual report on Form 10-K of Soleno Therapeutics, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 19, 2019 /S/ JONATHAN WOLTERJonathan WolterChief Financial Officer(principal financial and accounting officer) Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Soleno Therapeutics, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2018, as filed withthe Securities and Exchange Commission (the “Report”), Anish Bhatnagar, President, Chief Executive Officer of the Company, do hereby certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: •The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and •The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 19, 2019 /S/ ANISH BHATNAGARAnish BhatnagarPresident, Chief Executive Officer(principal executive officer) Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Soleno Therapeutics, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2018, as filed withthe Securities and Exchange Commission (the “Report”), Jonathan Wolter, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: •The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and •The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 19, 2019 /S/ JONATHAN WOLTERJonathan WolterChief Financial Officer(principal financial and accounting officer) 

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