UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2023
For the transition period from to .
Commission File No.: 001-36593
Soleno Therapeutics, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
203 Redwood Shores Parkway, Suite 500
Redwood City, California
(Address of principal executive offices)
77-0523891
(I.R.S. Employer
Identification No.)
94065
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (650) 213-8444
Title of each class
Common Stock, $0.001 par value
Trading Symbol(s)
SLNO
Name of each exchange on which registered
NASDAQ
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 preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
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financial statements. ☐
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relevant recovery period pursuant to §240.10D-1(b). ☐
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 stock held by non-affiliates of the registrant on June 30, 2023, based on the closing price of $4.29 for shares of the registrant’s common stock as reported by the Nasdaq Capital
Market, was approximately $33.1 million. Shares of Common Stock held by each executive officer, director and beneficial holder of 5% or more of the outstanding Common Stock have been excluded in that such persons
may be deemed affiliates.
As of March 1, 2024, there were 32,460,579 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.
Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2024 Annual Meeting of Stockholders, to be filed subsequent
to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the
registrant’s fiscal year ended December 31, 2023. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Auditor Name: Marcum LLP
Auditor Location: San Francisco, CA
Auditor Firm ID: 688
Soleno Therapeutics, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2023
INDEX
PART I
PART II
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 1C
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
Item 9C
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
PART III
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accounting Fees and Services
Item 15
Exhibits, Financial Statement Schedules
Signatures
PART IV
2
15
52
53
54
54
54
55
55
56
62
63
89
89
90
90
91
91
91
91
91
92
102
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that
appear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, particularly in Part I, Item 1: “Business,” Part I, Item 1A: “Risk
Factors” and Part 2, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are often
identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” “plan” or “continue,” and
similar expressions or variations. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to: any
statements regarding the timing of any regulatory process or ultimate approvals and determining a path forward for DCCR (Diazoxide Choline) Extended-
Release tablets for the treatment of Prader-Willi syndrome; any projections of financial information; any statements about historical results that may
suggest trends for our business; any statements of the plans, strategies, and objectives of management for future operations; any statements of expectation
or belief regarding future events, technology developments, our products, product sales, expenses, liquidity, cash flow, market growth rates or
enforceability of our intellectual property rights and related litigation expenses; and any statements of assumptions underlying any of the foregoing. Such
forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ
materially from future results expressed or implied by such forward-looking statements. Accordingly, we caution you not to place undue reliance on these
statements. Particular uncertainties that could affect future results include: our ability to achieve or maintain profitability; our ability to obtain substantial
additional capital that may be necessary to maintain or expand our business; our ability to maintain internal control over financial reporting; our
dependence on, and need to attract and retain, key management and other personnel; our ability to obtain, protect and enforce our intellectual property
rights; potential advantages that our competitors and potential competitors may have in securing funding or developing products; business interruptions
such as earthquakes and other natural disasters; our ability to comply with laws and regulations; potential product liability claims; and our ability to use our
net operating loss carryforwards to offset future taxable income. For a discussion of some of the factors that could cause actual results to differ materially
from our forward-looking statements, see the discussion on risk factors that appear in Part I, Item 1A: “Risk Factors” of this Annual Report on Form 10-K
and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission, or SEC. The forward-
looking statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 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.
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PART I
ITEM 1. BUSINESS
Company Overview
We are focused on the development and commercialization of novel therapeutics for the treatment of rare diseases. Our lead candidate, DCCR
(Diazoxide Choline) Extended-Release tablets, is a potent ATP-sensitive potassium (KATP) channel activator. The KATP channel plays a central role in the
regulation of a number of physiological processes which may otherwise be dysregulated, contributing to the pathophysiology of several diseases. In the
context of the underlying genetic or structural defects in many forms of hyperphagic obesity, including Prader-Willi syndrome (PWS), these
pathophysiological processes may cumulatively contribute to increases in appetite and aggressive food seeking, lack of satiety, accumulation of excess
body fat and the establishment and perpetuation of the obese state.
DCCR’s unique mode of action with targets in the brain, pancreas and fat tissue has the potential to broadly impact complex diseases like PWS to
reduce appetite, reduce food seeking, improve satiety, improve insulin and leptin resistance and reduce body fat. It appears that many of the problematic
behaviors in conditions like PWS may have hyperphagic drive as a root cause and may therefore be improved by addressing hyperphagia. We have a Fast-
Track designation for DCCR in PWS and orphan designation for the drug in the United States (U.S.) and European Union (E.U.).
DCCR has been evaluated in a Phase 3 study (C601 or DESTINY PWS), a 13-week randomized, double-blind placebo-controlled study, which
completed enrollment in January 2020, with 127 randomized participants at 29 sites in the U.S. and United Kingdom (U.K.). Participants who completed
DESTINY PWS and sought continued treatment with DCCR were eligible to receive DCCR in a long-term open-label safety extension study (C602). Top
line results from DESTINY PWS were announced in June 2020. Although the trial did not meet its primary endpoint of change from baseline in
hyperphagia, significant improvements were observed in two of three key secondary endpoints.
In February 2021, we announced analysis limited to data collected before the onset of the COVID-19 pandemic. The analysis of the data through
March 1, 2020 showed statistical significance in the primary, all key secondary and several other efficacy endpoints. In September 2021, we announced
interim one-year data from C602 showing statistically significant reduction in hyperphagia and all other PWS behavioral parameters and statistically
significant improvements compared to natural history of PWS from the PATH for PWS Study (PATH) over a one-year treatment period. The PATH study is
an ongoing study sponsored by the Foundation for Prader-Willi Research (FPWR) to advance the understanding of the natural history in individuals with
PWS.
The U.S. Food and Drug Administration (FDA) provided official meeting minutes from a Type C meeting in January 2022 that recommended
additional controlled data be included in a New Drug Approval (NDA) submission.
In March 2022, we submitted an amended protocol that incorporated a randomized withdrawal (RW) period to Study C602 to obtain additional
controlled data requested by the FDA and the FDA has acknowledged that data from the study has the potential to support an NDA submission for DCCR.
The RW period of Study C602 was a multi-center, randomized, double-blind, placebo-controlled study of DCCR in 77 patients with PWS at 17 sites in the
U.S. and 5 sites in the U.K. This RW period consisted only of patients previously enrolled in Study C602 and did not enroll any new patients. We
announced the initiation of the RW period for Study C602 in October 2022, and completed enrollment in May 2023.
On September 26, 2023, we announced positive statistically significant top-line results from the RW period of Study C602. Subsequently, we
received preliminary comments from the FDA for our pre-NDA meeting, and as we decided not to proceed with the meeting, they are considered the
official record of the meeting. The FDA stated that the potential for data from the DCCR clinical program to provide substantial evidence of effectiveness
will be a matter of review following the submission of an NDA. We plan to submit our NDA for DCCR to the FDA in mid-2024.
Our current focus is the development of DCCR for PWS. However, other syndromes that may be similarly addressed include SH2B1 deficient
obesity, Fragile X Prader-Willi Phenotype, KSR2 deficient obesity and other hyperphagic conditions. Another type of disease where DCCR may be
efficacious is where hypoglycemia due to excess insulin secretion is a significant problem. Examples include hyperinsulinemic hypoglycemia and certain
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Glycogen Storage Diseases. We have orphan drug designation for the treatment of Glycogen Storage Disease Type 1a in the U.S.
Diazoxide Choline Extended-Release Tablets
DCCR tablets consist of the active ingredient diazoxide choline, a choline salt of diazoxide, which is a benzothiadiazine. Once solubilized from
the formulation, diazoxide choline is rapidly converted to diazoxide prior to absorption. Diazoxide acts by stimulating ion flux through KATP channels
and appears to act on signs and symptoms of PWS in a variety of ways. Activating the KATP channel in NPY/AgRP neurons in the hypothalamus may
reduce secretion of neuropeptide Y (NPY), Agouti-related peptile (AgRP) and likely gamma-amino butyric acid (GABA) contributing to a reduction in
hyperphagia. Activating the KATP channel in the dorsal motor nucleus of vagus may potentiate the effects of leptin, insulin and (cid:0)-melanocortin
stimulating hormone to reduce hyperinsulinemia and impact appetite and satiety. Activating the KATP in pancreatic ß-cells can reduce the secretion of
insulin, and further reduce the accumulation of excess body fat and the progression to insulin resistance. Activating the KATP channel in adipocytes has
the potential to decrease de-novo triglyceride synthesis and increase ß-oxidation of fat, reducing fat mass.
In the U.S., diazoxide was first approved in 1973 as an intravenous formulation for the emergency treatment of malignant hypertension. In
1976, immediate-release oral formulations including Proglycem® Oral Suspension and Capsules, or Proglycem, were approved, and there has been
nearly 40 years of use of the 2-3 times a day, orally-administered drug product in the approved ultra-rare indications related to hyperinsulinism. Both
the capsule and IV formulations have been withdrawn from the U.S. market for reasons other than safety. There is extensive data on short term and
chronic use of Proglycem in children with congenital hyperinsulinism, or CHI, and in adults with insulinoma. Insulinoma patients tend to be older,
with 50% of them over 70 years old. Published data have reported that the average duration of use of Proglycem in certain CHI and insulinoma
patients is 5 years and 7 years, respectively.
DCCR tablets were formulated with the goals of improving the safety and bioavailability of orally-administered diazoxide and reducing the
frequency of dosing required by current diazoxide formulations. Diazoxide choline is formulated into an extended-release tablet that provides lower peak
plasma concentration compared to diazoxide oral suspension and allows for the gradual release of diazoxide choline from DCCR, making it suitable for
once-a-day dosing. The gradual release and absorption of diazoxide achieved using DCCR results in consistent intraday circulating drug levels potentially
reducing the adverse events often associated with transiently high circulating drug levels and providing efficacy at lower diazoxide-equivalent doses.
Prader-Willi Syndrome (PWS)
PWS is a rare, complex neurobehavioral/metabolic disorder caused by the absence of normally active paternally expressed genes from the
chromosome 15q11-q13 region. PWS is an imprinted condition with 60-65% of the cases due to a de novo deletion in the paternally inherited chromosome
15 11-q13 region, 30-35% from maternal uniparental disomy 15, or UPD, where the affected individual inherited 2 copies of the chromosome from their
mother and no copy from their father, and the remaining 2-5% from either microdeletions or epimutations of the imprinting center (i.e., imprinting defects;
IDs). The Committee on Genetics of the American Academy of Pediatrics states PWS affects both genders equally and occurs in people from all
geographic regions; its estimated incidence is 1 in 15,000 live births. The mortality rate among PWS patients is 3% a year across all ages and 7% in those
over 30 years of age. The mean age of death reported from 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, obsessive
and compulsive behaviors, anxiety and mood fluctuations. The majority of older adolescent and adult PWS patients display some degree of aggressive or
threatening behaviors including being verbally aggressive, seeking to intimidate others, being physically aggressive including attacking others, destroying
property, throwing temper tantrums and directing rage or anger at others.
PWS is typically thought of as a genetic obesity. However, many PWS patients today may not be obese because of increasing awareness among
families and caregivers leading to significant control of access to food and its intake. However, patients remain hyperphagic and will typically have a
higher body fat and lower lean body
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mass content compared to similarly obese individuals. They are prone to cardiometabolic issues such as abnormal lipid profiles, diabetes and hypertension
associated with obesity once it is established. Other complications in PWS patients include greater risk for autistic symptomatology, psychosis, sleep
disorders, distress, food stealing, withdrawal, sulking, nail-biting, hoarding and overeating, and more pronounced attention-deficit hyperactivity disorder
symptoms, insistence on sameness, and their association with maladaptive conduct problems. Cognitively, most individuals with PWS function in the mild
intellectual disability range with a mean IQ in the 60s to low 70s. The combination of food-related preoccupations and numerous maladaptive behaviors
make it difficult for individuals with PWS to perform to their IQ potential. Some older adolescents and many adults reach a stage at which they can no
longer be effectively managed in the home and therefore transition to institutional care.
Unmet Medical Needs in PWS
The target indication for DCCR is the treatment of PWS. Currently, the only approved treatment related to PWS is growth hormone which addresses
the 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 a very important or the most
important symptom to be relieved by a new treatment - https://www.fpwr.org/pws-patient-voices. Physical function and body composition symptoms for
which a high percentage of respondents indicated were very important or most important included: 92.9% indicated improving metabolic health (reduces
fat / increases muscle) and 81.3% indicated the related symptom of improving activity and stamina. The behavioral and cognitive symptoms rated by
respondents as very or most important were: 85.2% indicated reduction of obsessive/compulsive behavior, 84.6% indicated improvements to
intellect/development, and 83.2% indicated reduction of temper outburst severity and frequency.
Therefore, there is a clear unmet need in the treatment of PWS to reduce hyperphagia and improve behaviors around food, and to reduce other
behavioral and cognitive impacts of this complex disease. In addition, improving metabolic health is also an important unmet need.
Clinical Trials of DCCR for PWS
A Phase 2 clinical trial was 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 between the
ages of 11 and 21. The first phase of the study was open-label during which subjects were initiated on a DCCR dose that was escalated every 14 days at the
discretion of the investigator. Any subject who showed any increase in resting energy expenditure and/or a reduction in hyperphagia from baseline at
certain study visits would be designated a responder, whereas all others would be designated non-responders. This 10-week open-label treatment phase was
followed by randomized double-blind, placebo-controlled, withdrawal phase.
Responders were randomized in a 1:1 ratio either to continue on active treatment at the dose they were treated with, or to the placebo equivalent of
that dose for an additional 4 weeks. Of the 13 subjects who enrolled, 11 completed the open-label phase and all were designated as responders; the
remaining two subjects had discontinued prematurely.
Key efficacy results included a statistically significant reduction in hyperphagia from baseline to the end of the open-label treatment phase. In
addition, greater improvement in hyperphagia from baseline was observed in those subjects with moderate to severe hyperphagia who received higher
DCCR doses. There was a significant improvement in the number of subjects reporting one or more aggressive and destructive behaviors. During the open-
label treatment phase, a mean decrease in body fat mass and increases in lean body mass and lean body mass / fat mass ratio were seen. These changes
were associated with a statistically significant reduction in waist circumference, consistent with the loss of visceral fat. Statistically significant reductions
from baseline in LDL cholesterol and non-HDL cholesterol were observed.
As described above in the Company Overview, a Phase 3 clinical trial, DESTINY PWS, was subsequently conducted to evaluate the efficacy and
safety of DCCR in patients with genetically-confirmed PWS. Top-line results were reported in June 2020. Although the trial did not meet its primary
endpoint of change from baseline in
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hyperphagia, significant improvements were observed in two of three key secondary endpoints. Subjects who complete the DESTINY PWS study were
allowed to enroll in a long-term, safety extension study (C602). In September 2021, we announced top-line results from the analysis of one-year data from
C602 showing statistically significant reduction in hyperphagia and all other PWS behavioral parameters and statistically significant improvements
compared to the natural history of PWS from the PATH for PWS Study (PATH) over a one-year treatment period. PATH is an ongoing study sponsored by
the Foundation for Prader Willi Research (FPWR) evaluating the natural history of subjects with PWS in more than 700 families. In October 2022 we
announced the initiation of the RW period of Study C602, which was a multi-center, randomized, double-blind, placebo-controlled study of DCCR in 77
patients with PWS at 17 sites in the U.S. and 5 sites in the U.K. This RW period consisted only of patients previously enrolled in Study C602 and did not
enroll any new patients. In May 2023, we completed enrollment and we announced positive statistically significant top-line results from the RW period of
Study C602 in September 2023.
Safety of DCCR in the Treatment of PWS
Across the combined C601 (DESTINY-PWS), and C602 long-term open-label extension (OLE) studies (which included DCCR treatment durations
of up to ~4.5 years), 98.4% of participants reported treatment emergent adverse events (TEAEs). Most were grade 1 or 2 (75.2%), with no grade 4 or higher
events. The most common TEAEs were hypertrichosis (68.8%), peripheral edema (34.4%), hirsutism (27.2%) and hyperglycemia (27.2%).
The majority of participants with hypertrichosis, hirsutism, or hyperglycemia experienced resolution or improvement of their symptoms with
continued DCCR dosing through the end of the study. Infrequently, DCCR dose adjustments or glucose-lowering agents (for hyperglycemia) and diuretics
(for peripheral edema) were prescribed to manage participants experiencing these TEAEs.
One participant with a known history of psychiatric illness reported a suspected unexpected serious adverse reaction (SUSAR) of aggression in the
ongoing C614 open label extension study.
Overall, the safety profile of DCCR in the Phase 3 PWS clinical development program was generally consistent with the known safety profile of
diazoxide and prior experience with DCCR.
Regulatory Status of DCCR for the Treatment of PWS
Diazoxide choline is being developed in the U.S. under a current Investigational New Drug Application (IND) and is designated as an Orphan
Drug for the treatment of PWS in the U.S. and Europe and granted Fast Track designation in the U.S. If certain criteria are met, DCCR may be eligible
for “Accelerated Approval” and “Priority Review” and also “Rolling Review”, which would allow us to submit to the FDA sections of our NDA as they
are finished instead of waiting for all sections to be completed before submitting the marketing application. The current status of our Phase 3 clinical
trial is described above in the Company Overview.
Market opportunity
An estimated 300,000 to 400,000 individuals worldwide have PWS with a birth incidence ranging from 1:15,000 to 1:25,000. In addition, according
to an abstract published in the Journal of Endocrine Society, a 2020 review of medical claims provided by IQVIA Health Plan and CMS Medicare fee-for-
service claim data, demonstrated a U.S. diagnosed PWS prevalence of approximately 9,000 patients in the United States in 2018. The numbers of identified
PWS patients is growing at a rate that is higher than the rate of general population because of improved rates of diagnosis. DCCR may be the first effective
treatment for hyperphagia in PWS patients to reach the market both in the U.S. and Europe and may therefore be likely to be used in a large proportion of
patients.
Sales and Marketing
Newly diagnosed PWS patients are typically treated by a multi-disciplinary team led by a pediatric endocrinologist. Many patients receive care at
larger clinics devoted to PWS in university-associated hospitals or at children’s hospitals. This concentration of care may allow us to market DCCR without
a partner by assembling a small, dedicated salesforce to target the limited number of major PWS treatment centers in the U.S. We believe
5
similar dynamics exist in Europe. In contrast, we will likely need to identify a marketing partner for DCCR in Japan, and the rest of the world. The final
decision on sales and marketing strategy will be made at a later date.
Pricing
We have not conducted a formal pricing analysis of DCCR in PWS. We anticipate that pricing at launch may be influenced by the product label
negotiated with the FDA, pharmacoeconomic data developed to support pricing and the potential for greater sales under negotiated government contracts.
Competition
Currently, the only approved products for PWS are Genotropin® (somatropin), and Omnitrope® (somatropin) which are approved only for growth
failure due to PWS. There are no approved products to address PWS-associated hyperphagia and behaviors, or for any other abnormalities associated with
the disease. However, to our knowledge, there are a number of therapeutic products at various stages of clinical development for the treatment of PWS,
including for hyperphagia, by Acadia Pharmaceuticals, Aardvark Therapeutics, Gedeon Richter, and Consynance.
Manufacturing
Pharmaceuticals
Our manufacturing strategy is to contract with third parties to manufacture our clinical and commercial API and drug product supplies.
The formulation and processes used to manufacture our products are proprietary, being covered by multiple issued U.S. patents and counterparts in
other regions of the world, and we have agreements with various third-party manufacturers that are intended to restrict these manufacturers from using or
revealing 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
which we 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
regulatory applications and submission.
Regulation of Pharmaceutical Manufacturing Processes
The manufacturing process for pharmaceutical products is highly regulated and regulators may shut down manufacturing facilities that they believe
do not comply with regulations, legislations, and/or guidelines. We and our third-party manufacturers are subject to current Good Manufacturing Practices,
which are extensive regulations governing manufacturing processes, stability testing, record keeping, and quality standards as defined by the FDA and the
EMA. Similar regulations and requirements are in effect in other countries.
Intellectual Property
DCCR Patent Portfolio
Our patent portfolio consists of issued U.S. patents and pending U.S. applications. The 20-year expiration dates of our issued U.S. patents are
between 2025 to 2035. We also have issued patents in Europe, Canada, Japan, China, India, Israel, Hong Kong, Australia, Malaysia, Mexico, New Zealand,
Singapore, Indonesia, Korea, and Eurasia. We are prosecuting numerous patent applications in major pharmaceutical markets around the world. The issued
patents and pending patent applications include protection of compositions, methods of manufacturing, pharmaceutical formulations, and methods of
treating aspects of PWS and Smith-Magenis syndrome (SMS).
Government Regulation - Pharmaceuticals
Our operations and activities are subject to extensive regulation by government authorities in the U.S. and in other countries in which we elect to
develop and/or commercialize our products. Our developmental drug products are subject to rigorous regulation. Federal and state statutes and regulations
govern the testing, manufacture, safety,
6
efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. As a result 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 U.S., or a region’s agency, such as the EMA for the E.U., must approve a drug before it can
be sold in the respective country or countries. The general process for drug approval in the U.S. is summarized below. Many other countries, including
countries in the E.U., U.K. and Japan, have very similar regulatory approval processes.
Nonclinical Testing
Before a drug candidate can be tested in humans, it must be studied in laboratory experiments and in animals to generate data to support the drug
candidate’s potential benefits and/or safety. Additional nonclinical testing may be required during the clinical development process such as reproductive
toxicology 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 other
information, 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 drug
candidate can then be studied in human clinical trials to determine if the drug candidate is safe and effective. Each clinical trial protocol and/or amendment,
new nonclinical data, and/or new or revised manufacturing information must be submitted to the IND, and the FDA has 30 days to complete its review of
each submission.
Clinical Trials
These clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which are
subject to considerable regulation, are as follows:
Phase 1 Studies. During Phase 1 studies, researchers test a new drug in healthy volunteers. In most cases, 20 to 80 healthy volunteers participate in
Phase 1. Phase 1 studies are closely monitored and gather information about how a drug interacts with the human body. Researchers adjust dosing schemes
based on animal data to find out how much of a drug the body can tolerate and what its acute side effects are. As a Phase 1 trial continues, researchers
answer research questions related to how it works in the body, the side effects associated with increased dosage, and early information about how effective
it is to determine how best to administer the drug to limit risks and maximize possible benefits. This is important to the design of Phase 2 studies.
Phase 2 Studies. In Phase 2 studies, researchers administer the drug to a group of people with the disease or condition for which the drug is being
developed. Typically involving up to a few hundred patients, these studies are not large enough to show whether the drug will be beneficial. The use of new
study designs, such as adaptive designs, can decrease the number of patients required. Instead, Phase 2 studies provide researchers with additional safety
data. Researchers use these data to refine research questions, develop research methods, identify target doses, and design new Phase 3 research protocols.
Phase 3 Studies. Researchers design Phase 3 studies to demonstrate whether or not a product offers a treatment benefit to a specific population.
Sometimes known as pivotal studies, these studies generally involve a larger number of participants than do Phase 2 studies. Phase 3 studies provide most
of the safety data. In Phase 3 studies, it is possible that less common side effects might have gone undetected. Because these studies are larger and longer in
duration, the results are more likely to show long-term or rare side effects.
For each clinical trial, an institutional review board (IRB) or independent ethics committee (IEC), covering each site proposing to conduct a clinical
trial must review and approve the plan for any clinical trial and written informed consent or assent information for subjects before the trial commences at
that site and it must monitor the 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, including a 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 may impose other conditions.
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Clinical trials involve the administration of an investigational drug to human subjects under the supervision of qualified investigators in accordance
with good clinical practices (GCP) requirements, which include the requirement that all research subjects provide their informed consent in writing for their
participation in any clinical trial. Sponsors of clinical trials generally must register and report, at the NIH-maintained website ClinicalTrials.gov, key
parameters of certain clinical trials.
At any point in this process, the development of a drug candidate can be stopped for a number of reasons including safety concerns and lack of
treatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completed
successfully or within any specified time period. We may choose, or FDA may require us, to delay or suspend our clinical trials at any time if it appears
that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.
FDA Approval Process
When we believe that the data from our clinical trials show an adequate level of safety and efficacy, we would intend to submit an application to
market 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
expert advisors asks additional questions and makes recommendations regarding the drug candidate. This committee makes recommendations to the FDA
that are not 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 U.S. and sold for that use. It is not unusual, however, for the FDA to reject an application
because it believes that the risks of the drug candidate outweigh the purported benefit or because it does not believe that the data submitted are reliable or
conclusive. The FDA may also issue a Complete Response Letter (CRL), to indicate that the review cycle for an application is complete and that the
application is not ready for approval. CRLs generally outline the deficiencies in the submission and may require substantial additional testing or
information in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that
the application does not satisfy the regulatory criteria for approval. If and when the deficiencies have been addressed to the FDA’s satisfaction, the FDA
will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific
indications.
The FDA may also require Phase 4 non-registrational studies to explore scientific questions to further characterize safety and efficacy during
commercial use of our drug. The FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures or
facilities or may require extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not contain
adequate evidence of the safety and benefits of the drug. In addition, even if the FDA approves a drug, it could limit the uses of the drug. The FDA can
withdraw approvals if it does not believe that we are complying with regulatory standards or if problems are uncovered or occur after approval.
In addition to obtaining FDA approval for our drug, the manufacturing facilities of the companies who manufacture our drugs for us must also be
approved. These facilities are subject to periodic inspections by the FDA. The FDA must also approve foreign establishments that manufacture products to
be sold in the U.S. and these facilities are subject to periodic regulatory inspection.
Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems are identified after the
product reaches the market. In addition, the FDA may require post-approval testing, including Phase 4 studies, and surveillance programs to monitor the
effect of approved products which have been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on the
results of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved
label, and, even if the FDA approves a product, it may limit the approved indications for use for the product or impose other conditions, including labeling
or distribution restrictions or other risk-management mechanisms. Further, if there are any modifications to the drug, including changes in indications,
labeling, or manufacturing processes or facilities, the sponsor may be required to submit and obtain FDA approval of a new or supplemental NDA, which
may require the development of additional data or conduct of additional pre-clinical studies and clinical trials.
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Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which the
development program is designed to address the unmet medical need, may be designated as fast track and/or breakthrough candidates by the FDA and may
be eligible for accelerated and priority review.
Drugs that are developed for rare diseases (i.e., in the U.S., the disease or condition has a prevalence of less than 200,000 persons; in the E.U., the
prevalence of the condition must be not more than 5 in 10,000) can be designated as “Orphan Drugs”. In the U.S., orphan-designated drugs are granted up
to 7-year market exclusivity. In response to the court decision in Catalyst Pharms., Inc. v. Becerra, 14 F.4th 1299 (11th Cir. 2021), in January 2023, the
FDA published a notice in the Federal Register to clarify that while the agency complies with the court’s order in Catalyst, the FDA intends to continue to
apply its longstanding interpretation of the regulations to matters outside of the scope of the Catalyst order – that is, the agency will continue tying the
scope of orphan-drug exclusivity to the uses or indications for which a drug is approved, which permits other sponsors to obtain approval of a drug for new
uses or indications within the same orphan designated disease or condition that have not yet been approved. It is unclear how future litigation, legislation,
agency decisions and administrative actions will impact the scope of the orphan drug exclusivity. In the E.U., products granted orphan designation are
subject to reduced fees for protocol assistance, marketing authorization applications, inspections before authorization, applications for changes to marketing
authorizations, and annual fees, access to the centralized authorization procedure, and 10 years of market exclusivity.
Ongoing Regulation
Once a pharmaceutical product is approved, a product will be subject to pervasive and continuing regulation by the FDA, EMA, and other health
authorities, including, among other things, recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of
adverse experiences with the product.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are subject to periodic
unannounced inspections by the FDA and state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly
regulated and generally require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations
from cGMP or QSR and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use.
Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if
problems occur after the product reaches the market, though the FDA must provide an application holder with notice and an opportunity for a hearing in
order to withdraw its approval of an application. Later discovery of previously unknown problems with a product, including adverse events of
unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
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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 product
approvals;
product seizure or detention, or refusal to permit the import or export of products; and
injunctions or the imposition of civil or criminal penalties.
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The FDA strictly regulates the marketing, labeling, advertising and promotion of drug and device products that are placed on the market. The
Federal Trade Commission (FTC) also regulates the promotion and advertising of consumer products. While physicians may prescribe drugs and devices
for off label uses, manufacturers may only promote for the approved indications and in accordance with the provisions of the approved label.
Manufacturers may not promote a drug that is still under development and has not been approved by the FDA. The FDA and other agencies actively
enforce the laws and regulations prohibiting the promotion of off label uses, and a company that is found to have improperly promoted off label uses may
be subject to significant liability.
Drugs are also subject to extensive regulation outside of the U.S. In the E.U., there is a centralized approval procedure that authorizes marketing of a
product in all countries of the E.U. through a single application and review process. If this centralized approval procedure is not used, approval in one
country of the E.U. can be used to obtain approval in another country of the E.U. under one of two simplified application processes: the mutual recognition
procedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of the
E.U. registration procedures, separate pricing and reimbursement approvals are also required in most countries. The E.U. also has requirements for
approval of manufacturing facilities for all products that are approved for sale by the European regulatory authorities.
Additional Government Regulations
HIPAA and Other Privacy Laws
HIPAA, established for the first-time comprehensive protection for the privacy and security of health information. The HIPAA standards apply to
three types of organizations, or “Covered Entities”: health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcare
transactions electronically. Covered Entities and their Business Associates must have in place administrative, physical, and technical standards to guard
against the misuse of individually identifiable health information. Because we are a healthcare provider and we conduct certain healthcare transactions
electronically, we are presently a Covered Entity, and we must have in place the administrative, physical, and technical safeguards required by HIPAA,
HITECH and their implementing regulations. Additionally, some state laws impose privacy protections more stringent than HIPAA. Most of the institutions
and physicians from which we obtain biological specimens that we use in our research and validation work are Covered Entities and must obtain proper
authorization from their patients for the subsequent use of those samples and associated clinical information. We may perform future activities that may
implicate HIPAA, such as providing clinical laboratory testing services or entering into specific kinds of relationships with a Covered Entity or a Business
Associate of a Covered Entity.
If we or our operations are found to be in violation of HIPAA, HITECH or their implementing regulations, we may be subject to penalties, including
civil and criminal penalties, fines, and exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our
operations. HITECH increased the civil and criminal penalties that may be imposed against Covered Entities, their Business Associates and possibly other
persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws
and seek attorney’s fees and costs associated with pursuing federal civil actions.
Our activities must also comply with other applicable privacy laws. For example, there are also international privacy laws that impose restrictions on
the access, use, and disclosure of health information. All of these laws may impact our business. Our failure to comply with these privacy laws or
significant changes in the laws restricting our ability to obtain tissue samples and associated patient information could significantly impact our business and
our future business plans.
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Federal and State Billing and Fraud and Abuse Laws
Antifraud Laws/Overpayments. As participants in federal and state healthcare programs, we are subject to numerous federal and state antifraud and
abuse laws. Many of these antifraud laws are broad in scope, and neither the courts nor government agencies have extensively interpreted these laws.
Prohibitions under some of these laws include:
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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 from
Medicare, Medicaid or other federal healthcare programs and exclusion from participation in the federal healthcare programs, as well as civil monetary and
criminal penalties and imprisonment. One of these statutes, the False Claims Act, is a key enforcement tool used by the government to combat healthcare
fraud. The False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent
claim for payment by a federal healthcare program. In addition, violations of the federal physician self-referral laws, such as the Stark laws discussed
below, may also violate false claims laws. Liability under the False Claims Act can result in treble damages and imposition of penalties. For example, we
could be subject to penalties of $13,508 to $27,018 per false claim, adjusted each year for inflation, and each use of our product could potentially be part of
a different claim submitted to the government. Separately, the HHS office of the Office of Inspector General, or OIG, can exclude providers found liable
under the False Claims Act from participating in federally funded healthcare programs, including Medicare and Medicaid. The steep penalties that may be
imposed on laboratories and other providers under this statute may be disproportionate to the relatively small dollar amounts of the claims made by these
providers for reimbursement. In addition, even the threat of being excluded from participation in federal healthcare programs can have significant financial
consequences on a provider.
Numerous federal and state agencies enforce the antifraud and abuse laws. In addition, private insurers may also bring private actions. In some
circumstances, private whistleblowers are authorized to bring fraud suits on behalf of the government against providers and are entitled to receive a portion
of any final recovery.
Federal and State “Self-Referral” and “Anti-Kickback” Restrictions
Self-Referral law. We are subject to a federal “self-referral” law, commonly referred to as the “Stark” law, which provides that physicians who,
personally or through a family member, have ownership interests in or compensation arrangements with a laboratory are prohibited from making a referral
to that laboratory for laboratory tests reimbursable by Medicare, and also prohibits laboratories from submitting a claim for Medicare payments for
laboratory tests referred by physicians who, personally or through a family member, have ownership interests in or compensation arrangements with the
testing laboratory. The Stark law contains a number of specific exceptions which, if met, permit physicians who have ownership or compensation
arrangements with a testing laboratory to make referrals to that laboratory and permit the laboratory to submit claims for Medicare payments for laboratory
tests performed pursuant to such referrals.
We are subject to comparable state laws, some of which apply to all payors regardless of source of payment, and do not contain identical exceptions
to the Stark law. For example, we are subject to a North Carolina self-referral law that prohibits a physician investor from referring to us any patients
covered by private, employer-funded or state and federal employee health plans. The North Carolina self-referral law contains few exceptions for physician
investors in securities that have not been acquired through public trading but will generally permit us to accept referrals from physician investors who buy
their shares in 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 to
identify requests for testing services from physician investors and we do not bill Medicare, or any other federal program, or seek reimbursement from other
third-party payors, for these tests.
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Providers are subject to sanctions for claims submitted for each service that is furnished based on a referral prohibited under the federal self-referral
laws. These sanctions include denial of payment and refunds, civil monetary payments and exclusion from participation in federal healthcare programs and
civil monetary penalties, and they may also include penalties for applicable violations of the False Claims Act, which may require payment of up to three
times the actual damages sustained by the government, plus civil penalties of $13,508 to $27,018 for each separate false claim. Similarly, sanctions for
violations under the North Carolina self-referral laws include refunds and monetary penalties.
Anti-Kickback Statute. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for
which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” is not defined in
the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of
supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market
value. The reach of the Anti-Kickback Statute was also broadened by the Patient Protection and Affordable Care Act of 2010 (PPACA), which, among
other things, amends the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes, effective March 23, 2010.
Pursuant to the statutory amendment, a person or entity does not 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 a claim including items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the False Claims Act or the civil monetary penalties statute, which imposes penalties against any
person who is determined to have presented or caused to be presented 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 or fraudulent. Sanctions for violations of the federal Anti-Kickback Statute may include
imprisonment and other criminal penalties, civil monetary penalties and exclusion from participation in federal healthcare programs.
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
healthcare programs may violate the Anti-Kickback Statute.
Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items
or services reimbursed by any source, not only the Medicare and Medicaid programs, and do not contain identical safe harbors. For example, North
Carolina has an anti-kickback statute that prohibits healthcare providers from paying any financial compensation for recommending or securing patient
referrals. Penalties for violations of this statute include license suspension or revocation or other disciplinary action. Other states have similar anti-kickback
prohibitions.
Both the federal Anti-Kickback Statute and the North Carolina anti-kickback law are broad in scope. The anti-kickback laws clearly prohibit
payments for patient referrals. Under a broad interpretation, these laws could also prohibit a broad array of practices involving remuneration where one
party is a potential source of referrals for the other.
If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we
may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care
programs, and the curtailment or restructuring of our operations. To the extent that any product we make is sold in a foreign country in the future, we may
be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance,
anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare
professionals. To reduce the risks associated with these various laws and governmental regulations, we have implemented a compliance plan. Although
compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action
against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our
management’s attention from the
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operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove
costly.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering or authorizing payment or offering of
anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign
entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the
U.S. to comply with accounting provisions requiring us to maintain books and records that accurately and fairly reflect all transactions of the corporation,
including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Other Corporate Transactions
Underwritten Public Offerings and Concurrent Private Placement
On March 31, 2022, we sold 2,666,666 shares of our common stock at a public offering price of $3.75 per share and, for certain investors, in lieu of
common stock, pre-funded warrants to purchase 1,333,333 shares of our common stock at a public offering price of $3.60 per pre-funded warrant, which
represents the per share public offering price for the common stock less the $0.15 per share exercise price for each pre-funded warrant. Each share of
common stock or pre-funded warrant was sold together with one, immediately exercisable, common warrant with a five-year term to purchase one share of
common stock at an exercise price of $4.50 per share. The net proceeds of the offering were $13.8 million, after deducting the underwriting discount and
other offering expenses.
On October 2, 2023, we announced the closing of the underwritten public offering of 3,450,000 shares of our common stock at a public offering of
$20.00 per share, which included the exercise in full by the underwriters of their option to purchase additional shares. The gross proceeds of the public
offering were $69.0 million, before deducting the underwriting discount and other estimated offering expenses. We also announced the closing of
approximately $60.0 million of shares of our common stock and pre-funded warrants in a concurrent private offering pursuant to a securities purchase
agreement with certain investors, including entities affiliated with existing stockholders, at a price per share of common stock equal to the public offering
price of $20.00 and a price per per-funded warrant of $19.99. In aggregate, we received $129.0 million of gross proceeds from the underwritten public
offering and concurrent private placement.
Securities Purchase Agreement
In December 2022, we entered into a securities purchase agreement providing for the sale of up to $60.0 million in warrants (divided into two
tranches, Tranche A and Tranche B) and the common stock issuable upon the exercise thereof. We issued both tranches of warrants in exchange for an
aggregate purchase price of $10.0 million in May 2023. The announcement of positive top-line data from the randomized withdrawal period of Study C602
in September 2023 triggered the mandatory exercise of the Tranche A warrants, and we received $15.0 million in gross proceeds. Between October 2023
and the end of 2023, several investors exercised their Tranche B warrants and we received $18.1 million in gross proceeds. The remaining Tranche B
warrants may be exercised for an additional $16.9 million in proceeds to us.
At the Market Offering
In 2022, we sold 104,773 shares of common stock and raised $0.3 million in net proceeds, and in 2023, we sold 1,772,397 shares of common stock
and raised $7.1 million in net proceeds pursuant to a Controlled Equity Offering Sales Agreement under which we could sell shares of our common stock
having an aggregate offering price of up to $25.0 million from time to time in any method permit by law deemed to be an “at the market” Rule 415 under
the Securities Act of 1933, as amended. The Controlled Equity Offering Sales Agreement was terminated in connection with the October 2, 2023 financing.
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Reverse Stock Split
On June 1, 2022, the stockholders of the Company approved a reverse stock split of our common stock at a ratio of one-for-fifteen, to be effected at
the sole discretion of the Company’s Board of Directors as described in the proxy statement filed with the SEC on April 21, 2022. The implementation of
the reverse stock split was approved by the Company’s Board of Directors on August 16, 2022.
On August 26, 2022, the Company filed a certificate of amendment to its amended and restated certificate of incorporation in order to effectuate a
reverse stock split of the Company’s issued and outstanding common stock on a one-for-fifteen basis. All common share and per share data are
retrospectively restated to give effect of the split for all periods presented herein. After giving effect to the reverse stock split, the total number of shares of
all classes of capital stock that the Corporation is authorized to issue is 110,000,000 shares, consisting of 100,000,000 shares of common stock, having a
par value of $0.001 and 10,000,000 shares of preferred stock, having a par value of $0.001.
Employees and Human Capital
As of December 31, 2023, we had 33 full-time employees and 9 full-time or part-time consultants providing services to us. None of our employees
is represented by a labor union or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new
employees, advisors and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the
granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such
individuals to perform to the best of their abilities and achieve our objectives.
Corporate and Available Information
Our principal corporate offices are located at 203 Redwood Shores Parkway, Suite 500, 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, our Annual 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 reasonably practicable after we electronically file such materials with, or furnish it to, the Securities Exchange and Commission. Our Securities
Exchange and Commission reports can be accessed through the Investor Relations section of our internet website. The information found on our internet
website is not part of this or any other report we file with or furnish to the Securities Exchange and Commission.
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An investment in our securities has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial
conditions and/or operating results. If any of these risks actually occur, our business, operating results and financial condition could be harmed, and the
value of our stock could go down. This means you could lose all or a part of your investment.
ITEM 1A. RISK FACTORS
Summary Risk Factor
Our business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described below. The
principal factors and uncertainties that make investing in our company risky include, among others:
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we are a clinical-stage company with no approved products, which makes assessment of our future viability difficult;
we are dependent upon the success of DCCR, our sole therapeutic product candidate;
if clinical studies of any of our planned products fail to demonstrate safety and effectiveness to the satisfaction of the FDA or similar
regulatory authorities outside the U.S. or do not otherwise produce positive results, we may incur additional costs, experience delays in
completing or ultimately fail in completing the development and commercialization of our planned products;
if we fail to obtain regulatory approval for DCCR in the U.S. and Europe, our business will be harmed;
we have a limited commercialization history and have incurred significant losses since our inception, and we anticipate that we will continue
to incur substantial losses for the foreseeable future. We transitioned to be primarily a research and development company, which, together
with our limited operating history, makes it difficult to evaluate our business and assess our future viability;
we may not be successful in commercializing our approved products;
our patent rights may prove to be an inadequate barrier to competition; and
we will need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which
would force us to delay, reduce or suspend our research and development programs and other operations or commercialization efforts.
Raising additional capital may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations, or require
us to relinquish rights to our planned products and technologies.
Risks related to our financial condition and capital requirements
We are a clinical-stage company with no approved products, which makes assessment of our future viability difficult.
We are primarily a clinical-stage company, with a relatively limited operating history and with no approved therapeutic products or revenues from the sale
of therapeutic products. As a result, there is limited information for investors to use when assessing our future viability as a company focused primarily on
therapeutic products and our potential to successfully develop product candidates, conduct clinical trials, manufacture our products on a commercial scale,
obtain regulatory approval and profitably commercialize any approved products.
We are dependent upon the success of DCCR, our sole therapeutic product candidate.
We invest a significant portion of our efforts and financial resources in the development of DCCR for the treatment of PWS, a rare complex genetic
neurobehavioral/metabolic disease. Our ability to generate product revenues, which may not occur for the foreseeable future, if ever, will depend heavily on
the successful development, regulatory approval, and commercialization of DCCR.
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Any delay or impediment in our ability to obtain regulatory approval to commercialize in any region, or, if approved, obtain coverage and adequate
reimbursement from third-parties, including government payors, for DCCR, may cause us to be unable to generate the revenues necessary to continue our
research and development pipeline activities, thereby adversely affecting our business and our prospects for future growth. Further, the success of DCCR
will depend on a number of factors, including the following:
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successful and timely completion of nonclinical and clinical development of DCCR or any future product candidates, as well as the
associated costs, including any unforeseen costs;
making any required post-marketing approval commitments to applicable regulatory authorities and then fulfilling those commitments;
obtain a sufficiently broad label that would not unduly restrict patient access;
receipt of marketing approvals for DCCR in the U.S. and Europe;
building an infrastructure capable of supporting product sales, marketing, and distribution of DCCR in territories where we pursue
commercialization 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 U.S.;
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.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully
commercialize DCCR, which would materially harm our business. We have been in discussions with the FDA regarding the clinical data necessary to
support the submission of a new drug application (NDA) seeking approval to market DCCR for the treatment of PWS, after our Phase 3 clinical trial,
DESTINY PWS (C601) trial failed to demonstrate statistical significance on the primary efficacy endpoints following which the FDA asked us to conduct a
new clinical trial. As part of the ongoing discussions with the FDA, we have provided the agency with data from the C601 clinical trial, the open-label
extension study (C602) as well as comparison to the natural history study (PATH for PWS) to allow the FDA to further assess if those data may provide
adequate evidence of safety and efficacy to permit us to submit an NDA for DCCR. As we previously disclosed, the FDA indicated that additional
controlled data would be necessary to support our planned NDA and we have completed a randomized withdrawal period to Study C602 to obtain
additional controlled data. Subsequently, we received preliminary comments from the FDA for our pre-NDA meeting, and as we decided not to proceed
with the meeting, they are considered the official record of the meeting. The FDA stated that the potential for data from the DCCR clinical program to
provide substantial evidence of effectiveness will be a matter of review following the submission of an NDA. The FDA's concerns regarding our data
include the C601 study not meeting its primary efficacy endpoint and the randomized withdrawal period of the C602 study including the same study
population as the C601 study.
If the FDA disagrees with our interpretation of the data, or requires us to conduct additional studies, or if we are unable to adequately address any concerns
or requests in a manner satisfactory to the FDA or other regulatory authorities in a timely manner, or at all, we would be significantly delayed or prevented
from receiving approval of DCCR for any intended use. Complying with any additional requests for information from the FDA or other
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regulatory authorities as well as any changes in the regulatory requirements will be time-consuming and expensive. We can provide no assurances
regarding the FDA’s review of any NDA we submit, whether the FDA will accept the NDA for substantive review, or if the FDA will ultimately approve
such NDA.
We will need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which would force
us to delay, reduce or suspend our research and development programs and other operations or commercialization efforts. Raising additional capital
may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations, or require us to relinquish rights to our
planned products and technologies.
We have not commenced commercialization of DCCR, our current sole novel therapeutic product, and accordingly, through December 31, 2023, have
generated no revenue from operations. We had a net loss of $39.0 million during the year ended December 31, 2023 and an accumulated deficit of $276.4
million at December 31, 2023 as a result of having incurred losses since our inception. We had $169.7 million in cash and cash equivalents and $159.9
million of working capital at December 31, 2023, used $24.9 million of cash in operating activities during the year ended December 31, 2023 and expect to
continue incurring losses for the foreseeable future.
We intend to raise additional capital, either through debt or equity financings to achieve our business plan objectives, including ongoing expenses related to
resources being deployed to manage participants in our current ongoing clinical trial of DCCR and other activities necessary to support the submission of
an NDA to the FDA.
Because of the numerous risks and uncertainties associated with our product development and planned commercialization efforts, we are unable to predict
the extent of our future losses or when, or if, we will generate meaningful revenue or become profitable, and it is possible we will never achieve these
goals. Our ability to obtain additional financing will depend on a number of factors, including, among others, our ability to generate positive data from our
clinical studies, our ability to obtain FDA clearance for DCCR, the condition of the capital markets and the other risks described in these risk factors. If any
one of these risks are realized, we may not be able to obtain additional funding, in which case, our business could be jeopardized and we may not be able to
continue our operations or pursue our strategic plans. If we are forced to scale down, limit or cease operations, our stockholders could lose all of their
investment. Even if we are successful at raising capital, there is no assurance that any funds raised will be sufficient to enable us to attain profitable
operations.
To the extent that we are unsuccessful raising sufficient capital, we may need to curtail or cease our operations and implement a plan to extend payables or
reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. If
adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds on unfavorable terms, through dilutive
financings or entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our product candidates
that we would not otherwise relinquish. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders will experience
further dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur
debt, our fixed payment obligations, liabilities and leverage relative to our equity capitalization would increase, which could increase the cost of future
capital. Further, the terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such
as limitations on our ability to incur additional debt or issue additional equity or other operating restrictions that could adversely affect our ability to
conduct our business, and any such debt could be secured by any or all of our assets pledged as collateral. Additionally, we may incur substantial costs in
pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other costs.
We maintain our cash at financial institutions, often in balances that exceed federally insured limits.
Our cash is held in accounts at U.S. banking institutions that we believe are of high quality. Cash held in non-interest-bearing and interest-bearing operating
accounts may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. If such banking institutions were to fail, we could lose all or a
portion of those amounts held in excess of such insurance limitations. We maintain our operating account at Silicon Valley Bank (SVB), a Division of First
Citizens Bank, and therefore those amounts held in excess of the FDIC insurance limit were at risk during the recent uncertainty about the viability of SVB.
However, with the FDIC taking control of SVB on March 10, 2023, and the Federal Reserve announcing that account holders would be made whole this
recent uncertainty has been resolved and we do not view the ongoing risk as material to our financial condition. However, as the FDIC continues to address
the situation with SVB, Signature Bank and other similarly situated banking institutions, the
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risk of loss in excess of insurance limitations has generally increased. Any material loss that we may experience in the future could have an adverse effect
on our ability to pay our operational expenses or make other payments and may require us to move our accounts to other banks, which could cause a
temporary delay in making payments to our vendors and employees and cause other operational inconveniences.
We have a limited commercialization history and have incurred significant losses since our inception, and we anticipate that we will continue to incur
substantial losses for the foreseeable future.
We are a developer of therapeutics with a limited commercialization history. Evaluating our performance, viability or future success will be more difficult
than if we had a longer operating history or approved products for sale on the market. We continue to incur significant research and development and
general and administrative expenses and will incur substantial commercial expenses related to our operations. Investment in product development is highly
speculative, because it entails substantial upfront capital expenditures and significant risk that any planned product may not receive marketing approval
from the FDA.
We expect that our future financial results will depend primarily on our success in developing, launching, selling and supporting our products. This will
require us to be successful in a range of activities, including clinical trials, manufacturing, marketing and selling our products. We are only in the
preliminary stages of some of these activities. We may not succeed in these activities and may never generate revenue that is sufficient to be profitable in
the future. Even if we are profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve sustained
profitability would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our planned products,
market our current and planned products, or continue our operations.
We currently have generated limited product revenue and may never become profitable.
To date, we have not generated significant revenues. Our ability to generate significant revenue from product sales and achieve profitability will depend
upon our ability, alone or with any future collaborators, to successfully commercialize products 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:
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develop a commercial organization capable of sales, marketing and distribution of any products for which we obtain marketing approval in
markets 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 compliant
manufacturing to maintain that supply;
obtain coverage and adequate reimbursement from third-party payors, including government and private payors;
find suitable 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 enforce our intellectual property rights and avoid third-party patent interference, intellectual property challenges or
intellectual property infringement claims; and
attract, hire and retain qualified personnel.
In addition, because of the numerous risks and uncertainties associated with product development and commercialization, including that our planned
products may not advance through development, achieve the endpoints of applicable clinical trials or obtain approval, we are unable to predict the timing or
amount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond
expectations if we decide, or are required by the FDA or foreign regulatory authorities, to perform studies or clinical trials in addition to those that we
currently anticipate.
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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 become
profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a
continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or shut down our operations.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to
fall below expectations or below our guidance.
Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results.
From time to time, we may enter into collaboration agreements with other companies that include development funding and significant upfront and
milestone payments or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend on development funding
and the achievement of development and clinical milestones under any potential future collaboration and license agreements and sales of our products, if
approved. These upfront and milestone payments may vary significantly from period to period, and any such variance could cause a significant fluctuation
in our 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
of the award, based on the fair value of the award as determined by our Board, and recognize the cost as an expense over the employee’s requisite service
period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, the
magnitude of the expense that we must recognize may vary significantly. Furthermore, our operating results may fluctuate due to a variety of other factors,
many of which are outside of our control and may be difficult to predict, including the following:
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our ability to enroll patients in clinical trials and the timing of enrollment;
the design, timing and outcomes of clinical studies;
any delays in regulatory review or approval in the U.S. or globally, of any of our planned products;
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 change
from time to time;
the cost of manufacturing our products may vary depending on FDA and other regulatory requirements, the quantity of production and the
terms of our agreements with manufacturers;
expenditures that we will or may incur to acquire or develop additional planned products and technologies;
changes in the competitive landscape of our industry, including consolidation among our competitors or potential partners;
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
drugs that 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;
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.
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The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result,
comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our
future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or
investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to
the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline
substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.
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 of products,
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 may require us to
incur non-recurring or other charges, may increase our near and long-term expenditures, could not result in perceived benefits that were contemplated upon
entering into the transaction, and may pose significant integration challenges or disrupt our management or business, which could adversely affect our
operations, solvency and financial results. For example, these transactions may entail numerous operational and financial risks, including:
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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 or
technologies;
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 described above
or that we will achieve an economic benefit that justifies such transactions, any additional transactions that we do complete could have a material adverse
effect on our business, results of operations, financial condition and prospects.
We may not be able to enter into strategic transactions on a timely basis or on acceptable terms, which may impact our development and
commercialization plans.
We have relied, and expect to continue to rely, on strategic transactions, which include in-licensing, out-licensing, purchases and sales of assets, and other
ventures. The terms of any additional strategic transaction that we may enter into may not be favorable to us, and the contracts governing such strategic
transaction may be subject to differing interpretations exposing us to potential litigation. We may also be restricted under existing collaboration or licensing
arrangements from entering into future agreements on certain terms with potential strategic partners. We may not be able to negotiate additional strategic
transactions on a timely basis, on acceptable terms, or at all. If we elect to increase our expenditures to fund development or commercialization activities on
our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds,
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we may not be able to further develop our products or bring them to market and generate product revenue. Furthermore, there is no assurance that any such
transaction will be successful or that we will derive an economic benefit as a result.
Risks related to the development and commercialization of our products
We may not be successful in commercializing our approved products.
Commercialization of products is subject to a variety of regulations regarding the manner in which potential customers may be engaged, the manner in
which products may be lawfully advertised, and the claims that can be made for the benefits of the product, among other things. Our lack of experience
with product launches may expose us to a higher than usual level of risk of non-compliance with these regulations, with consequences that may include
fines or the removal of our approved products from the marketplace by regulatory authorities.
Before obtaining regulatory approvals for the commercial sale of our product candidates, we must demonstrate through lengthy, complex and expensive
nonclinical studies and clinical trials that our product candidates are both safe and effective for each target indication. Nonclinical and clinical testing is
expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the nonclinical study and
clinical trial processes. The results of nonclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage
clinical trials. Although product candidates may demonstrate promising results in nonclinical studies and early clinical trials, they may not prove to be safe
or effective in subsequent clinical trials. For example, testing on animals occurs under different conditions than testing in humans and therefore, the results
of animal studies may not accurately predict safety and effectiveness in humans. There is typically an extremely high rate of attrition from the failure of
product candidates proceeding through nonclinical studies and clinical trials. Product candidates in later stages of clinical trials may fail to show the desired
safety and efficacy profile despite having progressed through nonclinical studies and initial clinical trials. Further, clinical trial disruptions or protocol
deviations during the COVID-19 pandemic may introduce bias or other factors that can impact the reliability of our clinical data collected at the peak of the
COVID-19 public health emergency.
Earlier conducted smaller-scale studies, biomarker analyses, and clinical trials with a single or relatively few clinical trial sites may not be predictive of
eventual safety and effectiveness in large-scale pivotal clinical trials across multiple clinical trial sites. Even if data from a pivotal clinical trial are positive,
regulators may not agree that such data are sufficient for approval and may require that we conduct additional clinical trials (including potential Phase 3
trials) or generate other forms of confirmatory evidence, which could materially delay our anticipated development timelines, require additional funding for
such additional clinical trials or confirmatory studies, and adversely impact our business.
If the results of our current and future clinical trials are inconclusive with respect to the efficacy of our product candidates, including DCCR, if we do not
meet the clinical endpoints with statistical and clinically meaningful significance, or if there are safety concerns associated with our product candidates, we
may:
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incur unplanned costs;
be delayed in or prevented from obtaining marketing approval for our product candidates;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings including boxed warnings;
be subject to changes in the way the product is administered;
be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;
have regulatory authorities withdraw their approval of the product or impose restrictions on its distribution in the form of a risk evaluation
and mitigation strategy (REMS);
be subject to the addition of labeling statements, such as warnings or contraindications;
become subject to litigation; or
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experience damage to our reputation.
Any “topline”, interim, initial, or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient
data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose preliminary or topline data from our nonclinical studies and clinical trials, which is based on a preliminary
analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the
data related to the particular study or clinical trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and
we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline or preliminary results that we report may
differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received
and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the
preliminary data we previously published. As a result, topline data should be viewed with caution until the final data become available.
Furthermore, regulatory agencies may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh
the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product
candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is
based on what is typically extensive information, and investors or regulatory authorities may not agree with what we determine is material or otherwise
appropriate information to include in our disclosure. If the interim, topline, or preliminary data that we report differ from actual results, or if others,
including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may
be harmed, which could harm our business, operating results, prospects or financial condition.
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 to
generate sufficient revenue to sustain our business.
Although we believe that DCCR represents a promising commercial opportunity, DCCR may never gain significant acceptance in the marketplace and
therefore may never generate substantial revenue or profits for us. We will need to establish a market for DCCR globally and build these markets through
physician education, awareness programs, and other marketing efforts. Gaining acceptance in medical communities depends on a variety of factors,
including clinical data published or reported in reputable contexts and word-of-mouth between physicians. The process of publication in leading medical
journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel or worthy of publication.
Failure to have our studies published in peer-reviewed journals may limit the adoption of our products. Our ability to successfully market our products will
depend on numerous factors, including:
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the outcomes of clinical utility studies of such products in collaboration with key thought leaders to demonstrate our products’ value in
informing important medical decisions such as treatment selection;
the success of our distribution partners;
whether healthcare providers believe DCCR provides clinical utility; and
whether health insurers, government health programs and other payers will cover and pay for DCCR and, if so, whether they will adequately
reimburse us.
We may rely, on third parties who we do not control, to distribute and sell DCCR. If these distributors are not committed to DCCR or otherwise run into
their own financial or other difficulties, it may result in failure to achieve widespread market acceptance of DCCR, 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 perform
these functions, we will not be able to effectively commercialize DCCR and may not reach profitability.
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We have a limited sales and marketing infrastructure and have no experience in the sale, marketing or distribution of therapeutic products. To achieve
commercial success for DCCR, if and when we obtain marketing approval, we will need to establish a robust 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 to establish collaborations
to market, distribute and support DCCR outside of the U.S. There are risks involved with establishing our own sales, marketing, distribution, training and
support capabilities. For example, recruiting and training sales and marketing personnel is expensive and time consuming and could delay any product
launch. If the commercial launch of DCCR is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these
commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales, marketing, training and
support personnel.
Factors that may inhibit our efforts to commercialize DCCR on our own include:
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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 companies
with 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 third parties
to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were to market, sell and distribute DCCR
ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute DCCR or may be unable to
do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources
and attention to commercialize DCCR effectively. If we do not establish sales, marketing, distribution, training and support capabilities successfully, either
on our own or in collaboration with third parties, we will not be successful in commercializing DCCR and achieving profitability, and our business would
be harmed.
If physicians decide not to order our 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 clinical utility,
benefits and value of the tests we provide through published papers, presentations at scientific conferences, educational programs and one-on-one education
sessions by members of our sales force. In addition, we will need support of physicians, hospital administrators, patients, healthcare payors and others in
the medical community that the clinical and economic utility of our products justifies payment for DCCR at adequate pricing levels. We need to hire
additional commercial, scientific, technical and other personnel to support this process.
If clinical studies of any of our planned products fail to demonstrate safety and effectiveness to the satisfaction of the FDA or similar regulatory
authorities outside the U.S. or do not otherwise produce positive results, we may incur additional costs, experience delays in completing or ultimately
fail in completing the development and commercialization of our planned products.
Before obtaining regulatory approval for the sale of any planned product we must conduct extensive clinical studies to demonstrate the safety and
effectiveness of our planned products in humans. Clinical studies are expensive, difficult to design and implement, can take many years to complete and are
uncertain as to outcome. A failure of one or more of our clinical studies could occur at any stage of testing.
Numerous unforeseen events during, or as a result of, clinical studies could occur, which would delay or prevent our ability to receive regulatory approval
or commercialize any of our planned products, including the following:
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clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical
studies 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
or slower 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; including due to inflationary
pressures outside of our control;
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 planned
products have unanticipated serious side effects or other unexpected characteristics or that the patients are being exposed to unacceptable
health risks;
regulators may not approve our proposed clinical development plans;
regulators or independent institutional review boards (IRBs), may not authorize us or our investigators to commence a clinical study or
conduct 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
noncompliance with regulatory requirements; and
the supply or quality of our planned products or other materials necessary to conduct clinical studies of our planned products may be
insufficient 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 that we
contemplate, if those clinical studies or other testing cannot be successfully completed, if the results of these studies or tests are not positive or are only
modestly positive or if there are safety concerns, we may:
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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 will begin as
planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical study delays also could shorten any periods during
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.
If we fail to obtain regulatory approval for DCCR in the U.S. and Europe, our business would be harmed.
We are required to obtain regulatory approval for each indication we are seeking before we can market and sell DCCR in a particular jurisdiction, for such
indication. Our ability to obtain regulatory approval of DCCR depends on, among other things, successful completion of clinical trials by demonstrating
efficacy with statistical significance and clinical meaning, and safety in humans. The results of our current and future clinical trials may not meet the FDA,
the European Medicines Agency (EMA), or other regulatory agencies’ requirements to approve DCCR for marketing under any specific indication, and
these regulatory agencies may otherwise determine that our third parties’ manufacturing processes, validation, and/ or facilities are insufficient to support
approval. As such, we may need to conduct more clinical trials than we currently anticipate and upgrade the manufacturing processes and facilities, which
may require significant additional time and expense, and may delay or prevent approval. If we fail
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to obtain regulatory approval in a timely manner, our commercialization of DCCR would be delayed and our business would be harmed.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be
predictive of future trial results, and our clinical trials may fail to adequately demonstrate 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 clinical trials can
occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive
of the results of later stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in later stages of
clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of
companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles,
notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trials are
completed, the results may not be sufficient to obtain regulatory approval for our product candidates.
We may experience delays in our clinical trials. We do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an
adequate number of patients in a timely manner or be completed on schedule, if at all. Clinical trials can be delayed, suspended or terminated for a variety
of reasons, including failure to:
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generate sufficient nonclinical, toxicology, or other in vivo or in vitro data, or clinical safety data to support the initiation or continuation of
clinical 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 (CROs), and clinical trial sites;
obtain and maintain 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.
Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient
population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and
clinicians’ and patients’ or caregivers’ perceptions as to the potential advantages of the drug candidate being studied in relation to other available therapies,
including any new drugs or treatments that may be approved for the indications we are investigating or any investigational new drugs or treatment under
development for the indications we are investigating.
We could also encounter delays if a clinical trial is suspended or terminated by us, by a data safety monitoring board for such trial or by the FDA or any
other regulatory authority, or if the IRBs of the institutions in which such trials are being conducted suspend or terminate the participation of their clinical
investigators and sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to
conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the
FDA or other regulatory authorities resulting in the imposition of a clinical
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hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations
or administrative actions or lack of adequate funding to continue the clinical trial.
If we experience delays in the completion of, or termination of, any clinical trial of our product candidates for any reason, the commercial prospects of our
product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any
delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our
ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects.
In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of
regulatory approval of our product candidates.
We may be unable to obtain regulatory approval for DCCR or other potential product candidates. The denial or delay of any such approval would delay
commercialization and have a material adverse effect on our potential to generate revenue, our business and our results of operations.
The research, development, testing, manufacturing, labeling, packaging, approval, promotion, advertising, storage, record keeping, marketing, distribution,
post-approval monitoring and reporting, and export and import of drug products are subject to extensive regulation by the FDA, and by foreign regulatory
authorities in other countries. The legislation and regulations differ from country to country. To gain approval to market our product candidates, we must
provide development, manufacturing and clinical data that adequately demonstrates the safety and efficacy of the product for the intended indication. We
have not yet obtained regulatory approval to market any of our product candidates in the U.S. or any other country. Our business depends upon obtaining
these regulatory approvals. The FDA can delay, limit or deny approval of our product candidates for many reasons, including:
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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 we
seek 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;
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 for
approval.
Even if we eventually complete clinical testing and receive approval of any regulatory filing for our product candidates, the FDA may grant approval
contingent on the performance of costly additional post-approval clinical trials. The FDA may also approve our product candidates for a more limited
indication or a narrower patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary or
desirable for the successful commercialization of our product candidates. To the extent we seek regulatory approval in foreign countries, we may face
challenges similar to those described above with regulatory authorities in applicable jurisdictions. Any delay in obtaining, or inability to obtain, applicable
regulatory approval for any of our product candidates would delay or prevent commercialization of our product candidates and would materially adversely
impact our business, results of operations and 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.
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If any planned products receive regulatory approval from the FDA or other regulatory agencies in jurisdictions in which they are not currently approved,
they may nonetheless fail to gain sufficient market acceptance by physicians, hospital administrators, patients, healthcare payors and others in the medical
community. The degree of market acceptance of our planned products, if approved for commercial sale, will depend on a number of factors, including the
following:
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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 who have
the potential to benefit from treatment with our product candidate, are based on estimates.
Currently, most reported estimates of the prevalence of PWS are based on studies of small subsets of the population of specific geographic areas, which are
then extrapolated to estimate the prevalence of the diseases in the broader world population. In addition, as new studies are performed the estimated
prevalence of these diseases may change. There can be no assurance that the prevalence of PWS in the study populations, particularly in these newer
studies, accurately reflects the prevalence of this disease in the broader world population. If our estimates of the prevalence of PWS, or of the number of
patients who may benefit from treatment with our product candidates prove to be incorrect, the market opportunities for our product candidate may be
smaller than we believe it is, our prospects for generating revenue may be adversely affected and our business may suffer.
DCCR is currently under development and we have no sales and distribution personnel, and limited marketing capabilities at the present time to
commercialize DCCR, if we receive regulatory approval. If we are unable to develop a sales and marketing and distribution capability on our own or
through collaborations or other marketing partners, we will not be successful in commercializing our 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 perform these
services. For example, recruiting and training a sales force is expensive and time-consuming, and could delay any product launch. If the commercial launch
of a planned product for which we recruit a sales force and establish marketing capabilities is delayed, or does not occur for any reason, we would have
prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or
reposition our sales and marketing personnel.
To achieve commercial success for any approved product, we must either develop a sales and marketing infrastructure or outsource these functions to third
parties. We also may not be successful entering into arrangements with third parties to sell and market our planned products or may be unable to do so on
terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and
attention to sell and market our products effectively and could damage our reputation. If we do not establish sales and marketing capabilities successfully,
either on our own or in collaboration with third parties, we will not be successful in commercializing our planned products.
We may attempt to form partnerships with respect to our products, but we may not be able to do so, which may cause us to alter our development and
commercialization plans and may cause us to terminate any such programs.
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We may form strategic alliances, create joint ventures or collaborations, or enter into licensing agreements with third parties that we believe will more
effectively provide resources to develop and commercialize our programs.
If we attempt to seek appropriate strategic partners, we may face significant competition, and the negotiation process to secure favorable terms is time-
consuming and complex. We may not be successful in our efforts to establish such a strategic partnership for any future products and programs on terms
that are acceptable to us, or at all.
Any delays in identifying suitable collaborators and entering into agreements to develop or commercialize our future products could negatively impact the
development or commercialization of our future products, particularly in geographic regions like the Europe, where we do not currently have development
and commercialization infrastructure. Absent a partner or collaborator, we would need to undertake development or commercialization activities at our own
expense. If we elect to fund and undertake development and commercialization activities on our own, we may need to obtain additional expertise and
additional capital, which may not be available to us on acceptable terms or at all. If we are unable to do so, we may not be able to develop our future
products or bring them to market, and our business may be materially and adversely affected.
Our product candidates may cause serious adverse side effects or have other properties that could delay or prevent their regulatory approval, limit the
commercial desirability of an approved label or result in significant negative consequences following any marketing approval.
The risk of failure of clinical development is high. It is impossible to predict when or if any planned product candidates will prove safe enough to receive
regulatory approval. Undesirable side effects caused by any of our product candidates could cause us or regulatory authorities to interrupt, delay or halt
clinical trials or could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory
authority. Additionally, if any of our planned products receives additional marketing approvals, and we or others later identify undesirable side effects
caused by such product, a number of potentially significant negative consequences could result, including:
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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
of such products;
the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications
containing warnings about such product;
the FDA may require the establishment or modification of Risk Evaluation Mitigation Strategies or a comparable foreign regulatory authority
may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose
burdensome 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 product candidates and we will likely face competition with respect to any planned products that we may seek to develop or
commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies, medical device companies, and biotechnology
companies worldwide. These companies may reduce prices for their competing drugs in an effort to gain or retain market share and undermine the value
our products might otherwise be able to offer to payers. Potential competitors also include academic
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institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish
collaborative arrangements for research, development, manufacturing and commercialization. Many of these competitors are attempting to develop
therapeutics for our target indications.
Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established
companies. These third parties compete with us in recruiting and retaining qualified technical and management personnel, establishing clinical study sites
and patient registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs.
There has recently been increased activity in the development of drugs to treat PWS. We are aware of eight other current or proposed clinical trials
evaluating PWS therapies.
Even if we are able to engage 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 countries require
approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing approval is granted. In
some foreign markets, pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain
regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product and
negatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to
recoup our investment in one or more planned products, even if our planned products obtain regulatory approval.
Our ability to commercialize our products successfully also will depend in part on the extent to which reimbursement for these products and related
treatments becomes available from government health administration authorities, private health insurers and other organizations. Government authorities
and third-party payers, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish
reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party
payers have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that
reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be.
Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our
products may be particularly difficult because of the higher prices often associated with products administered under the supervision of a physician. If
reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any planned product that we
successfully develop.
In the U.S., eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research,
development, manufacture, sale and distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may
not be made permanent. Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments
allowed for lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices for products may
be reduced by mandatory discounts or rebates required by government healthcare programs or private payers and by any future relaxation of laws that
presently restrict imports of products from countries where they may be sold at lower prices than in the U.S. Third-party payers often rely upon Medicare
coverage policy and payment limitations in setting their own reimbursement policies.
Our inability to promptly obtain coverage and profitable payment rates from both government funded and private payers for new products that we develop
could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial
condition. In some foreign countries, including major markets in Europe and Japan, the pricing of prescription pharmaceuticals is subject to governmental
control. In these countries, pricing negotiations with governmental authorities can take nine to twelve months or longer after the receipt of regulatory
marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that
compares 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.
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We may become exposed to costly and damaging liability claims, either when testing our product candidates in clinical trials or at the commercial stage
after regulatory approval, and our product liability insurance may not cover all damages arising from such claims. Product liability lawsuits against us
could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We are exposed to potential product liability and professional indemnity risks that are inherent in the research, development, manufacturing, marketing,
sale and use of pharmaceutical products, including maintaining consistent quality, safety and efficacy profiles for our products and product candidates. The
marketing, sale and use of our products could lead to the filing of product liability claims against us if someone alleges that our products or product
candidates failed to perform as intended. We may also be subject to liability for a misunderstanding of, or inappropriate reliance upon, the information we
provide. These claims might be made by patients that use the products or product candidates, healthcare providers, pharmaceutical companies, or others
selling such products. Any claims against us, regardless of their merit, could be costly to defend and could materially adversely affect the market for our
product candidates or any prospects for commercialization of our product candidates.
Although the clinical trial process is designed to identify and assess potential side effects, it is always possible that a drug, even after regulatory approval,
may exhibit unforeseen side effects. Physicians and patients may not comply with any warnings that identify known potential adverse effects and patients
who should not use our product candidates. If any of our product candidates were to cause adverse side effects during clinical trials or after approval, we
may be exposed to substantial liabilities.
If we cannot successfully defend ourselves against claims that our products caused injuries, we may incur substantial liabilities. Regardless of merit or
eventual outcome, liability claims may result in:
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decreased demand for any planned products that we may develop;
injury to our reputation and significant negative media attention;
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 satisfy any liability
that may arise.
The loss of key members of our executive management team could adversely affect our business.
Our success in implementing our business strategy depends largely on the skills, experience and performance of key members of our executive
management team and others in key management positions. The collective efforts of each of these persons, and others working with them as a team, are
critical to us as we continue to develop our technologies, tests and research and development and sales programs. As a result of the difficulty in locating
qualified new management, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we were
to lose one or more of these key employees, we could experience difficulties in finding qualified successors, competing effectively, developing our
technologies and implementing our business strategy. Our officers all have employment agreements; however, the existence of an employment agreement
does not guarantee retention of members of our executive management team and we may not be able to retain those individuals for the duration of or
beyond the end of their respective terms. We do not currently maintain “key person” life insurance on any of our employees.
In addition, we rely on collaborators, consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and
development and commercialization strategy. Our collaborators, consultants and advisors are generally employed by employers other than us and may have
commitments under agreements with other entities that may limit their availability to us.
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There is a scarcity of experienced professionals in our industry. If we are not able to retain and recruit personnel with the requisite technical skills, we
may be unable to successfully execute our business strategy.
The specialized nature of our industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon our ability to
attract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessary to
support our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientific
knowledge that we require and the competition for qualified personnel among biotechnology businesses, we may not succeed in attracting or retaining the
personnel we require to continue and grow our operations.
We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could harm our operating results,
dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions or licenses of assets or acquisitions of businesses. We also may pursue strategic alliances and
joint ventures that leverage our core technology and industry experience to expand our product offerings or sales and distribution resources. Our company
has limited experience with acquiring other companies, acquiring or licensing assets or forming strategic alliances and joint ventures. We may not be able
to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any
acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent
liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have a
material adverse effect on our financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoing
operations and require management resources that would otherwise focus on developing our existing business. We may experience losses related to
investments in other companies, which could have a material negative effect on our results of operations.
We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of
any acquisition, license, strategic alliance or joint venture. To finance such a transaction, we may choose to issue shares of our common stock as
consideration, 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
other companies or fund a joint venture project using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for
acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
International expansion of our business will expose us to business, regulatory, political, operational, financial and economic risks associated with
doing business outside of the U.S.
Our business strategy contemplates international expansion, including partnering with distributors, and introducing our current products and other planned
products outside the U.S. Doing business internationally involves a number of risks, including:
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multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory
requirements 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 future
products 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;
financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable, and exposure to foreign
currency exchange rate fluctuations;
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reduced protection for intellectual property rights, or lack of them in certain jurisdictions, forcing more reliance on our trade secrets, if
available;
natural disasters, political and economic instability, including wars, terrorism and political unrest, including the outbreak of hostilities in the
Ukraine and the Middle East, outbreak of disease, boycotts, curtailment of trade 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, by
maintaining 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 material adverse
effect on our financial condition, results of operations and cash flows.
Risks related to the operation of our business
Any future distribution or commercialization agreements we may enter into for our products may place the development of these products outside our
control, may require us to relinquish important rights, or may otherwise be on terms unfavorable to us.
We may enter into distribution or commercialization agreements with third parties with respect to our products. Our likely collaborators for any
distribution, marketing, licensing or other collaboration arrangements include large and mid-size companies, regional and national companies, and
distribution or group purchasing organizations. We will have limited control over the amount and timing of resources that our collaborators dedicate to the
development or commercialization of our products. Our ability to generate revenue from these arrangements will depend in part on our collaborators’
abilities to successfully perform the functions assigned to them in these arrangements.
Collaborations involving our products are subject to numerous risks, which may include the following:
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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 on
clinical 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 and
distribution;
collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or
proprietary information 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
our products 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 or
commercialization 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.
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Any termination or disruption of collaborations could result in delays in the development of products, increases in our costs to develop the products or 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 our
growth, which could disrupt our operations.
As of December 31, 2023, we had 33 employees and 9 full-time or part-time consultants. Over the next several years, we expect to experience significant
growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, quality assurance, engineering,
product development, regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve
our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited
financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to
effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to
significant costs and may divert our management and business development resources. Future growth would impose significant added responsibilities on
members of management, including:
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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
and other 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 execution of 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:
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different regulatory requirements for drug approvals in foreign countries;
reduced protection for intellectual property rights;
unexpected changes in tariffs, trade barriers, trade restrictions, export or import sanctions, 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
doing business 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, including the outbreak of hostilities in the Ukraine,
the Middle East, or natural disasters including earthquakes, typhoons, floods and fires.
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In particular, there is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly
China, with respect to trade policies, treaties, tariffs, taxes and other limitations on cross-border operations. The U.S. government has made and continues
to make significant additional changes in U.S. trade policy and may continue to take future actions that could negatively impact U.S. trade. For example,
legislation has been introduced in Congress to limit certain U.S. biotechnology companies from using equipment or services produced or provided by select
Chinese biotechnology companies, and others in Congress have advocated for the use of existing executive branch authorities to limit those Chinese service
providers’ ability to engage in business in the U.S. We cannot predict what actions may ultimately be taken with respect to trade relations between the
United States and China or other countries, what products and services may be subject to such actions or what actions may be taken by the other countries
in retaliation. If we are unable to obtain or use services from existing service providers or become unable to export or sell our products to any of our
customers or service providers, our business, liquidity, financial condition, and results of operations would be materially and adversely affected.
We rely on third parties to conduct certain components of our clinical studies, and those third parties may not perform satisfactorily, including failing
to meet deadlines for the completion of such studies.
We rely on third parties, such as 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 clinical development activities reduces our
control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical studies is conducted
in accordance with the general investigational plan and protocols for the study. Moreover, the FDA requires us and third parties involved in the set-up,
conduct, analysis and reporting of the clinical studies to comply with regulations and with standards, commonly referred to as good clinical practices
(GCPs), to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of patients in clinical studies are
protected. Our clinical investigators are also required to comply with GCPs. Furthermore, these third parties may also have relationships with other entities,
some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our
clinical studies in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory
approvals for our planned products and will not be able to, or may be delayed in our efforts to, successfully commercialize our planned products.
If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.
Our manufacturing processes currently require the controlled use of potentially harmful chemicals. We cannot eliminate the risk of accidental
contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury,
we could be held liable for any resulting damages, and any liability could 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 these
materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have 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 comply with applicable
regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.
Risks related to intellectual property
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain
and could have a material adverse effect on the success of our business.
Our commercial success depends in part on our avoiding infringement and other violations of the patents and proprietary rights of third parties. Patent and
other intellectual property litigation is prevalent in our sectors. There is a substantial amount of litigation, both within and outside the U.S., involving patent
and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, derivation
and administrative law proceedings, inter partes review and post-grant review before the U.S. Patent and Trademark Office (USPTO), as well as
oppositions and similar processes in foreign jurisdictions. Our commercial success depends upon our ability and the ability of our distributors, contract
manufacturers, and suppliers to manufacture, market, and sell our planned products, and to use our proprietary technologies without infringing,
misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. As the
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biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure, the risk increases
that our commercialization of DCCR or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third
parties. Third parties may assert that we are infringing their patents or employing their proprietary technology without authorization. We may become party
to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products. Third parties may
assert infringement claims against us based on existing or future intellectual property rights. If we are found to infringe a third-party’s intellectual property
rights, we could be required to obtain a license from such third-party to continue developing and marketing our products. We may also elect to enter into
such a license in order to settle pending or threatened litigation. However, we may not be able to obtain any required license on commercially reasonable
terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same intellectual property
licensed to us and could require us to pay significant royalties and other fees.
Also, there may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment
related to the use or manufacture of DCCR. Because patent applications can take many years to issue, there may be currently pending patent applications
which may later result in issued patents that our product may infringe.
In addition, third parties may obtain patent rights in the future and claim that use of our products infringes upon these rights. If any third-party patents were
held by a court of competent jurisdiction to cover the manufacturing process of DCCR, any molecules formed during the manufacturing process or any
final product itself, the holders of any such patents may be able to block our ability to commercialize DCCR unless we obtained a license under the
applicable patents, or until such patents expire. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our
formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patent may be able to block our ability
to develop and commercialize our product unless we obtained a license or until such patent expires. In either case, such a license may not be available on
commercially reasonable terms or at all. In addition, we may be subject to claims that we are infringing other intellectual property rights, such as
trademarks or copyrights, or misappropriating the trade secrets of others, and to the extent that our employees, consultants or contractors use intellectual
property or proprietary information owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and
inventions.
We could be forced, including by court order, to cease commercializing the infringing product. In addition, we could be found liable for monetary damages.
A finding of infringement could prevent us from commercializing our planned products or force us to cease some of our business operations, which could
materially harm our business. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial
diversion of employee resources from our business. In the event of a successful infringement or other intellectual property claim against us, we may have to
pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay
royalties, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at
all or whether it would be available on commercially reasonable terms.
Even if we are successful in defending against intellectual property claims, litigation or other legal proceedings relating to such claims may cause us to
incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results
to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our
operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately
conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we
can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectual
property related proceedings could have a material adverse effect on our ability to compete in the marketplace.
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Our ability to successfully commercialize our products may be materially adversely affected if we are unable to obtain and maintain effective
intellectual property rights for our planned products, or if the scope of the intellectual property protection is not sufficiently broad.
Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the U.S. and in other countries
with respect to our proprietary products.
The patent position of pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles
remain unresolved. In recent years patent rights have been the subject of significant litigation. As a result, the issuance, scope, validity, enforceability and
commercial value of the patent rights we rely on are highly uncertain. Pending and future patent applications may not result in patents being issued which
protect our products or which effectively prevent others from commercializing competitive products. The laws of foreign countries may not protect our
rights to the same extent as the laws of the U.S. For example, many countries restrict the patentability of methods of treatment of the human body.
Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are
typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions
claimed in our patents or pending patent applications, or that we or were the first to file for patent protection of such inventions. As a result of these and
other factors, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent
applications may not result in patents being issued which protect products, in whole or in part, or which effectively prevent others from commercializing
competitive products. Changes in either the patent laws or interpretation of the patent laws in the U.S. and other countries may diminish the value of the
patents we rely on or narrow the scope of our patent protection.
Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO or become involved in opposition, derivation,
reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. The costs of
defending our patents or enforcing our proprietary rights in post-issuance administrative proceedings and litigation can be substantial and the outcome can
be uncertain. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow
third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or
commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent
applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize DCCR.
Even if the patent applications we rely on issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent
competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by
developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or
enforceability, and the patents we rely on may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in patent
claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or
commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Generally,
issued patents are granted a term of 20 years from the earliest claimed non-provisional filing date. In certain instances, patent term can be adjusted to
recapture a portion of delay by the USPTO in examining the patent application (patent term adjustment) or extended to account for term effectively lost as a
result of the FDA regulatory review period (patent term extension), or both. The scope of patent protection may also be limited. Without patent protection
for DCCR, we may be open to competition from generic versions of DCCR. Given the amount of time required for the development, testing and regulatory
review of new planned products, patents protecting such products might expire before or shortly after such products are commercialized. As a result, our
patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours or otherwise provide
us with a competitive advantage.
The scope, validity, enforceability, and commercial value of trademark rights are also uncertain. Pending and future trademark applications may not be
successful.
We may become involved in legal proceedings to protect or enforce our intellectual property rights, which could be expensive, time-consuming, or
unsuccessful.
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Competitors may infringe or otherwise violate the patents we rely on, or our other intellectual property rights including trademarks. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims that we assert
against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. In
addition, in an infringement proceeding, a court may decide that a patent we are asserting is invalid or unenforceable or may refuse to stop the other party
from using the technology at issue on the grounds that the patents we are asserting do not cover the technology in question. An adverse result in any
litigation or defense proceedings could put one or more patents at risk of being invalidated or interpreted narrowly and could put our patent applications at
risk of not issuing. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity
challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement, written
description, or lack of patentable subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution
of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third parties may
also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review or post-grant review, or
oppositions or similar proceedings outside the U.S., in parallel with litigation or even outside the context of litigation. The outcome following legal
assertions of invalidity and unenforceability is unpredictable. We cannot be certain that there is no invalidating prior art, of which we and the patent
examiner were unaware during prosecution. For the patents and patent applications that we have licensed, we may have limited or no right to participate in
the defense of any licensed patents against challenge by a third party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we
would lose at least part, and perhaps all, of any future patent protection on our current or future vaccine candidates. Such a loss of patent protection could
harm our business.
We may not be able to prevent misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as
fully as in the U.S. Our business could be harmed if in litigation the prevailing party does not offer us a license on commercially reasonable terms. Any
litigation or other proceedings to enforce our intellectual property rights may fail, and even if successful, may result in substantial costs and distract our
management and other employees.
Interference or derivation proceedings provoked by third parties or brought by the USPTO, or any foreign patent authority may be necessary to determine
the priority of inventions or other matters of inventorship with respect to patents and patent applications. We may become involved in proceedings,
including oppositions, interferences, derivation proceedings 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 adverse determination in any such proceeding could
reduce the scope of, or invalidate, important patent rights, allow third parties to commercialize our technology or products and compete directly with us,
without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. Our business also
could be harmed if a prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Litigation or other
proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may also become
involved in disputes with others regarding the ownership of intellectual property rights. If we are unable to resolve these disputes, we could lose valuable
intellectual property rights.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our
confidential information could be compromised by disclosure during this type of litigation.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and
could distract our technical or management personnel from their normal responsibilities. In addition, there could be public announcements of the results of
hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a
substantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating losses and
reduce the resources available for development activities or any future sales, marketing or distribution activities. Uncertainties resulting from the initiation
and continuation of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
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If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, harming our
business and competitive position.
In addition to our patented technology and products, we rely upon confidential proprietary information, including trade secrets, unpatented know-how,
technology and other proprietary information, to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of
our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our
competitive position in the market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements with our employees
and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to
us. These agreements are designed to protect our proprietary information; however, we cannot be certain that our trade secrets and other confidential
information will not be disclosed or that competitors will not otherwise gain access to our trade secrets, or that technology relevant to our business will not
be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees, consultants or collaborators that are parties
to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could
lose our trade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated or otherwise become known or be
independently discovered by our competitors. In addition, intellectual property laws in foreign countries may not protect trade secrets and confidential
information 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 third
parties, 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 a
material 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 and trademarks on all of our planned products throughout the world would be prohibitively expensive to us.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export
otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the U.S. These products may
compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be
effective or sufficient to prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual
property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of
patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the
infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in
foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
The ongoing conflict in Ukraine and related sanctions could significantly devalue our Russian, Belarusian, and Eurasian patents and/or patent applications.
Recent Russian decrees may also significantly limit our ability to enforce Russian patents. We cannot predict when or how this situation will change.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not
adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:
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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 claims
contained 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 intellectual
property rights;
pending patent applications may not lead to issued patents;
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issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges
by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the
information 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
requirements imposed 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 to the
USPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents or applications. The USPTO and
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 or by other means in accordance with the
applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in
partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to use our technologies and this
circumstance would have a material adverse effect on our business.
Changes in U.S. patent law or the patent law of other countries or jurisdictions could diminish the value of patents in general, thereby impairing our
ability to protect our products.
The U.S. has enacted and implemented wide-ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years,
either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition
to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the
value of patents, once obtained. Depending on actions by Congress, the federal courts, and the USPTO, the laws and regulations governing patents could
change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the
future. For example, recent decisions raise questions regarding the award of patent term adjustment (PTA) for patents in families where related patents have
issued without PTA. Thus, it cannot be said with certainty how PTA will be viewed in future and whether patent expiration dates may be impacted.
Similarly, changes in patent law and regulations in other countries or jurisdictions or changes in the governmental bodies that enforce them or changes in
how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we
have licensed or that we may obtain in the future. For example, the complexity and uncertainty of European patent laws have also increased in recent years.
In Europe, a new unitary patent system took effect June 1, 2023, which will significantly impact European patents, including those granted before the
introduction of such a system. Under the unitary patent system, European applications have the option, upon grant of a patent, of becoming a Unitary
Patent which will be subject to the jurisdiction of the Unitary Patent Court (UPC). As the UPC is a new court system, there is no precedent for the court,
increasing the uncertainty of any litigation. Patents granted before the implementation of the UPC have the ability to opt out of the jurisdiction of the UPC
and remain as national patents in the UPC countries. Patents that remain under the jurisdiction of the UPC will be potentially vulnerable to a single UPC-
based revocation challenge that, if successful, could invalidate the patent in all countries who are signatories to the UPC. We cannot predict with certainty
the long-term effects of any potential changes.
If we do not obtain a patent term extension in the U.S. under the Hatch-Waxman Act and in foreign countries under similar legislation, thereby
potentially extending the term of our marketing exclusivity for our planned products, our business may be materially harmed.
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Depending upon the timing, duration and specifics of FDA marketing approval of our products, if any, one or more of the U.S. patents covering any such
approved product(s) or the use thereof may be eligible for up to five years of patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act
allows a maximum of one patent to be extended per FDA approved product. Patent term extension also may be available in certain foreign countries upon
regulatory approval of our planned products. Nevertheless, we may not be granted patent term extension either in the U.S. or in any foreign country
because of, for example, our failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to
satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the
governmental authority could be less than we request.
If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than requested, the period during which we will
have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent
expiration, and our revenue could be reduced, possibly materially.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of
their former employers or other third parties.
From time to time we may employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information 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. Additionally, while we seek to protect our ownership of intellectual property rights
by ensuring that our agreements with our employees, collaborators and other third parties with whom we do business include provisions requiring such
parties to assign rights in inventions to us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently
or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. These and other claims that we have
misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our business to the infringement claims
discussed above.
Additionally, we may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be
necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we fail in defending any such claims, in
addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable
intellectual property. Even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.
Risks related to government regulation
The regulatory approval process is expensive, time consuming and uncertain, and we may not be successful in obtaining approvals for our planned
products.
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of our products 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. We are not permitted
to market our planned products in the U.S. until we received the requisite approval or clearance from the FDA. We have not submitted an application or
received marketing approval for 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:
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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;
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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 will be required to demonstrate with substantial
evidence from well-controlled clinical studies, and to the satisfaction of the FDA and other regulatory authorities abroad, that such planned products are
safe and effective for their intended uses. Results from preclinical studies and clinical studies can be interpreted in different ways. Even if we believe the
preclinical or clinical data for our planned products are promising, such data may not be sufficient to support approval by the FDA and other regulatory
authorities. Administering any of our planned products to humans may produce undesirable side effects, which could interrupt, delay or cause suspension
of clinical studies of our planned products and result in the FDA or other regulatory authorities denying approval of our planned products for any or all
targeted indications.
Regulatory approval from the FDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial
discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to
abandon or repeat clinical studies or perform additional preclinical studies and clinical studies. The number of preclinical studies and clinical studies that
will be required for FDA approval varies depending on the planned product, the disease or condition that the planned product is designed to address and the
regulations applicable to any particular planned product. The FDA can delay, limit or deny approval of a planned product for many reasons, including, but
not limited to, the following:
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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 of
operations will be materially and adversely harmed.
Of the large number of drugs in development, only a small percentage successfully complete the FDA or comparable foreign regulatory approval processes
and are commercialized. The lengthy approval processes as well as the unpredictability of future clinical trial results may result in our failing to obtain
regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.
Applications for our product candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA or other comparable foreign regulatory authorities may disagree with the design, implementation or results of our clinical trials;
the FDA may reject some or all of our data from clinical studies due to concerns related to bias, unblinding before statistical analysis plan is
finalized, and/or reliability of data when the analysis is considered exploratory and not planned prospectively;
the FDA may not accept data pooled from different studies, especially if the studies features are not sufficiently similar;
the FDA finds that our data are not adequate to support the safety and efficacy of our product candidate for the proposed indication;
the FDA may disagree with our statistical analysis plan;
the FDA or other comparable foreign regulatory authorities may determine that our product candidates are not safe and effective or have
undesirable or unintended side effects, toxicities or other characteristics that preclude our obtaining marketing approval or prevent or limit
commercial use;
the population studied in the clinical trial may not be sufficiently broad or representative to assure efficacy and safety in the full population
for which we seek approval;
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the FDA or other comparable foreign regulatory authorities may disagree with our interpretation of data from nonclinical studies or clinical
trials;
our clinical trials may not meet the statutory standard for substantial evidence of effectiveness or may fail to demonstrate statistical
significance on the primary endpoint;
we may be unable to demonstrate to the FDA or other comparable foreign regulatory authorities that our product candidate’s risk-benefit ratio
for its proposed indication is acceptable;
the FDA or other comparable foreign regulatory authorities may fail to approve the manufacturing processes, test procedures and
specifications or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA or other comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval or resulting in delays in our regulatory approval.
As noted above, we have received preliminary comments from the FDA for our pre-NDA meeting, and as we decided not to proceed with the meeting, they
are considered the official record of the meeting. While the FDA has raised concerns regarding our clinical data, we believe the data has the potential to
support an NDA for DCCR, which we plan to submit in mid-2024. If the FDA disagrees with our interpretation of the data, or if we are required to conduct
additional studies or clinical trials, our regulatory approval will be significantly delayed. This lengthy approval process, as well as the unpredictability of
the results of clinical trials, may result in our failing to obtain regulatory approval to market DCCR, which would significantly harm our business, results of
operations and prospects.
In addition, even if we obtain approval of DCCR, regulatory authorities may approve DCCR for fewer or more limited indications than we initially request,
or may impose significant limitations in the form of narrow indications, warnings, contraindications, or a risk evaluation and mitigation strategy (REMS).
Regulatory authorities may not approve the price we intend to charge for DCCR, may grant approval contingent on the performance of costly post-
marketing clinical trials or other post-marketing studies, or may approve DCCR with a label that does not include the labeling claims necessary or desirable
for the successful commercialization of DCCR. Any of the foregoing scenarios could seriously harm our business.
We received fast track designation for DCCR for the treatment of PWS, and we may seek fast track designation for other product candidates in the
future. Even if received, fast track designation may not actually lead to a faster review process or faster marketing approval.
We aim to benefit from the FDA’s fast track and priority review processes, and we previously received fast track designation for DCCR for the treatment of
PWS. Under this program, the FDA may initiate a rolling review of sections of a fast track-designated drug’s NDA before the application is complete,
although the FDA’s performance goal for reviewing an application does not begin until the last section of the NDA is submitted. In addition, under the
FDA’s policies, a product candidate is eligible for priority review if it provides a significant improvement compared to marketed drugs in the treatment,
diagnosis or prevention of a disease. A fast track-designated drug candidate would ordinarily meet the FDA’s criteria for priority review.
The fast track designation for DCCR, or for other future product candidates that we may develop, may not actually lead to a faster review process. Any
delays in the review process or in the approval of DCCR or our future potential products will delay revenue from their potential sales and will have a
material adverse impact on our business. Moreover, a fast track designation may be withdrawn by the FDA if the agency believes that the designation is no
longer supported by data emerging in the clinical trial process.
Even if we receive marketing approval for a planned product, we will be subject to ongoing regulatory obligations and continued regulatory review,
which may result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.
Once 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. Future approvals may contain requirements for potentially costly post-marketing follow-up studies to monitor the safety and effectiveness of
the approved product. In addition,
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we are subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the labeling, packaging,
adverse event reporting, storage, advertising, promotion and recordkeeping for our products.
In addition, we are required to comply with cGMP regulations regarding the manufacture of our drugs, which include requirements related to quality
control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must approve these
manufacturing facilities before they can be used to manufacture drug products, and these facilities are subject to continual review and periodic inspections
by the 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 may impose 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 health
authorities, including, among other things, recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of
adverse experiences with the product. The drug name will also be subject to review and approval by the FDA and other non-U.S. regulatory authorities.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are subject to periodic unannounced
inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and
generally require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP
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 if
problems occur after the product reaches the market, though the FDA must provide an application holder with notice and an opportunity for a hearing in
order to withdraw its approval of an application. Later discovery of previously unknown problems with a product, including adverse events of
unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
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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 product
approvals;
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. While physicians
may prescribe drugs and devices for off label uses, manufacturers may only promote for the approved indications and in accordance with the provisions of
the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off label uses, and a company that
is found to have improperly promoted off label uses may be subject to significant liability.
Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which the development
program is designed to address the unmet medical need, may be designated as fast track and/or breakthrough candidates by the FDA and may be eligible
for accelerated and priority review.
Drugs that are developed for rare diseases can be designated as Orphan Drugs. In the U.S., the disease or condition has an incidence of less than 200,000
persons and in the E.U. the prevalence of the condition must be not more than 5 in 10,000 persons. In the U.S., orphan-designated drugs are granted up to
7-year market exclusivity. In the E.U., products granted orphan designation are subject to reduced fees for protocol assistance, marketing authorization
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applications, inspections before authorization, applications for changes to marketing authorizations, and annual fees, access to the centralized authorization
procedure, and 10 years of market exclusivity.
Drugs are also subject to extensive regulation outside of the U.S. In the E.U., there is a centralized approval procedure that authorizes marketing of a
product in all countries of the E.U. (which includes most major countries in the E.U.). If this centralized approval procedure is not used, approval in one
country of the E.U. can be used to obtain approval in another country of the E.U. under one of two simplified application processes: the mutual recognition
procedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of the
E.U. registration procedures, separate pricing and reimbursement approvals are also required in most countries. The E.U. also has requirements for
approval of manufacturing facilities for all products that are approved for sale by the E.U. regulatory authorities.
Failure to obtain 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 international markets.
We have had limited interactions with foreign regulatory authorities. The approval procedures vary among countries and can involve additional clinical
testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Moreover, clinical studies or manufacturing
processes conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by
regulatory authorities in other countries or regions, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory
authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect
on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may
not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and even if we file we may not
receive necessary approvals to commercialize our products in any market.
Healthcare reform measures could hinder or prevent our planned products’ commercial success.
In the U.S., there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that
could affect our future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakers regularly
propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce
the costs of medical products and services. For example, one of the most significant healthcare reform measures in decades, the Patient Protection and
Affordable Care Act of 2010 (PPACA), was enacted in 2010. The PPACA contains a number of provisions, including those governing enrollments in
federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and
will result in the development of new programs. The PPACA, among other things:
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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 a condition for the
manufacturer’s outpatient drugs to be covered under Medicare Part D.
Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the PPACA. In June 2021, the U.S. Supreme
Court dismissed the most recent judicial challenge to the PPACA without specifically ruling on the constitutionality of the ACA. Thus, the ACA remains in
force in its current form. Any changes to the PPACA are likely to have an impact on our results of operations and may have a material adverse effect on our
results of operations. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or the
effect of any future legislation or regulation in the U.S. 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
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recommend proposals for spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion
for the years 2013 through 2021, which triggered the legislation’s automatic reduction to several government programs, including aggregate reductions to
Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, former President Obama signed into law the American
Taxpayer Relief Act of 2012 (ATRA), which delayed for another two months the budget cuts mandated by the sequestration provisions of the Budget
Control Act of 2011. The ATRA, among other things, also reduced Medicare payments to several providers, including hospitals, and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years. In March 2013, the President signed an executive
order implementing sequestration, and in April 2013, the 2% Medicare reductions went into effect. We cannot predict whether any additional legislative
changes will affect our business.
There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care.
We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies,
managed care organizations and other payers of healthcare services to contain or reduce costs of health care may adversely affect:
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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.
There has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has
resulted in several Congressional inquiries and proposed and enacted legislation designed, among other things, to bring more transparency to product
pricing, to review the relationship between pricing and manufacturer patient programs, and to reform government program reimbursement methodologies
for pharmaceutical products. For example, in August 2022, Congress passed the Inflation Reduction Act of 2022 (IRA), which includes prescription drug
provisions that have significant implications for the pharmaceutical industry and Medicare beneficiaries, including allowing the federal government to
negotiate a maximum fair price for certain high-priced single source Medicare drugs, imposing penalties and excise tax for manufacturers that fail to
comply with the drug price negotiation requirements, requiring inflation rebates for all Medicare Part B and Part D drugs, with limited exceptions, if their
drug prices increase faster than inflation, and redesigning Medicare Part D to reduce out-of-pocket prescription drug costs for beneficiaries, among other
changes. Various industry stakeholders, including certain pharmaceutical companies and the Pharmaceutical Research and Manufacturers of America, have
initiated lawsuits against the federal government asserting that the price negotiation provisions of the IRA are unconstitutional. The impact of these judicial
challenges, legislative, executive, and administrative actions and any future healthcare measures and agency rules implemented by the government on us
and the pharmaceutical industry as a whole is unclear. The implementation of cost containment measures or other healthcare reforms may prevent us from
being able to generate revenue, attain profitability, or commercialize our product candidates if approved.
In addition, individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and
transparency measures and, in some cases, mechanisms to encourage importation from other countries and bulk purchasing. A number of states are
considering or have recently enacted state drug price transparency and reporting laws that could substantially increase our compliance burdens and expose
us to greater liability under such state laws once we begin commercialization after obtaining regulatory approval for any of our products. Further, the FDA
recently authorized the State of Florida to import certain prescription drugs from Canada for a period of two years to help reduce drug costs, provided that
Florida’s Agency for Health Care Administration meets the requirements set forth by the FDA. Other states may follow Florida. The implementation of
cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our
product candidates.
Further, changes in regulatory requirements and guidance may occur and we may need to amend clinical study protocols to reflect these changes.
Amendments may require us to resubmit our clinical study protocols IRBs for reexamination, which may impact the costs, timing or successful completion
of a clinical study. In light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the
Governmental Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have
resulted in the recall and withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk
management programs that may,
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for instance, restrict distribution of drug products or require safety surveillance or patient education. The increased attention to drug safety issues may result
in a more cautious approach by the FDA to clinical studies and the drug approval process. Data from clinical studies may receive greater scrutiny with
respect to safety, which may make the FDA or other regulatory authorities more likely to terminate or suspend clinical studies before completion or require
longer or additional clinical studies that may result in substantial additional expense and a delay or failure in obtaining approval or approval for a more
limited indication than originally sought.
Given the serious public health risks of high-profile adverse safety events with certain drug products, the FDA may require, as a condition of approval,
costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling,
special packaging or labeling, expedited reporting of certain adverse events, preapproval of promotional materials and restrictions on direct-to-consumer
advertising.
In addition, if the U.S. Supreme Court reverses or curtails the Chevron doctrine, which gives deference to regulatory agencies in litigation against the FDA
and other agencies, more companies may bring lawsuits against the FDA to challenge longstanding decisions and policies of the FDA, which could
undermine the FDA’s authority, lead to uncertainties in the industry, and disrupt the FDA’s normal operations, which could delay the FDA’s review of our
marketing applications.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be
adversely affected.
Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payers, certain federal
and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject
to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The
regulations that may affect our ability to operate include, without limitation:
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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 the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs,
such as the Medicare 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 which
payment 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 be
presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entities
like 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 to
healthcare matters;
the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics and medical
supplies to report to the HHS information related to physician payments and other transfers of value and physician ownership and investment
interests;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain
electronic 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 services
reimbursed by any third-party payer, including commercial insurers.
The PPACA, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or
entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may
assert that a claim including items or
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services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject
to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines,
curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for
violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention
from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may
prove costly.
Risks related to ownership of our securities
Our stock price may be volatile, and purchasers of our securities could incur substantial losses.
Our stock price has been and is likely to continue to be volatile. The stock market in general, and the market for biotechnology and medical device
companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result
of this 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
influenced by many factors, including the following:
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the results of our clinical trials and our ability to obtain regulatory approval of DCCR in Prader Willi Syndrome;
our ability to successfully commercialize, and realize significant revenues from sales of our products;
the success of competitive products or technologies;
the results of other 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 these
introductions 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 our
commercialization 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 patent
protection 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;
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actual or anticipated changes in earnings estimates or changes in stock market analyst recommendations regarding our common stock, other
comparable 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; including those due to inflation; 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 the past,
following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted
against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our
business, financial condition, results of operations and growth prospects.
Future sales of our common stock, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if
our business 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 adversely affect
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 common
stock are freely tradable, without restriction, in the public market, except for any shares held by our affiliates.
In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a
financing, acquisition, litigation settlement, employee arrangement or otherwise. Any such issuance could result in substantial dilution to our existing
stockholders and could cause our stock price to decline.
Our executive officers, directors and principal stockholders may continue to maintain the ability to control or significantly influence all matters
submitted to stockholders for approval and under certain circumstances may have control over key decision making.
Our executive officers, directors and principal stockholders own a majority of our outstanding common stock. As a result, the foregoing group of
stockholders are able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these
stockholders will control the election of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. This
concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.
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 Internal Revenue
Code of 1986, as amended, (the Code). The limitations apply if an “ownership change,” as defined by Section 382, occurs. Generally, an ownership change
occurs if the percentage of the value of the stock that is owned by one or more direct or indirect “five percent shareholders” increases by more than 50%
over their lowest ownership percentage at any time during the applicable testing period (typically three years). 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, of which
both changes will limit our ability to utilize our existing and acquired net operating losses and other tax attributes to offset taxable income. In addition, we
also raised capital in October 2019, June 2020, March 2022, December 2022 and October 2023 that may further limit our ability to utilize our 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 income will be subject to limitations, which could potentially result in increased future
tax liability to us.
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 will result in the issuance of common stock that dilute the ownership interests of existing stockholders. Any
sales of the common stock issuable upon exercise of our warrants could adversely affect prevailing market prices of our common stock.
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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 of our common stock to decline, and the potential for such downward pressure on the price of our common stock may encourage short selling of
our common stock 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 by
means 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 short
sales are sales made in an amount not greater than the number of shares subject to the short seller’s right to acquire common stock, such as upon exercise of
warrants. A holder of warrants may close out any covered short position by exercising all, or a portion, of its warrants, or by purchasing shares in the open
market. In determining the source of shares to close out the covered short position, a holder of warrants will likely consider, among other things, the price
of common stock available for purchase in the open market as compared to the exercise price of the warrants. The existence of a significant number of
short sales generally causes the price of common stock to decline, in part because it indicates that a number of market participants are taking a position that
will be profitable only if the price of the common stock declines.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and
trading volume could decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our
business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price
would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our
stock price and trading volume to decline.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by
our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders
may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit
the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In
addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more
difficult for stockholders to replace members of our Board. Because our Board is responsible for appointing the members of our management team, these
provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions
include the following:
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our Board is divided into three classes with staggered three-year terms which may delay or prevent a change of our management or a change
in control;
our Board has the right to elect directors to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a
director, which will prevent stockholders from being able to fill vacancies on our Board;
our stockholders are not able to act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a
majority of our capital stock cannot take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called
by our Board, 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 to
elect director candidates;
amendments of our certificate of incorporation and bylaws require the approval of 66 2/3% of our outstanding voting securities;
our stockholders are required to provide advance notice and additional disclosures in order to nominate individuals for election to our Board
or to propose matters that can be acted upon at a stockholders’
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meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of
directors or otherwise attempting to obtain control of our company; and
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our Board are able to issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our Board 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 the date
of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a
prescribed manner.
Our employment agreements with our executive officers may require us to pay severance benefits to any of those persons who are terminated in
connection with a change in control of us, which could harm our financial condition or results.
Certain of our executive officers are parties to employment agreements that contain change in control and severance provisions providing for aggregate
cash payments for severance and other benefits and acceleration of stock options vesting in the event of a termination of employment in connection with a
change in control of us. The accelerated vesting of options could result in dilution to our existing stockholders and harm the market price of our common
stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may
discourage or prevent third parties from seeking a business combination with us.
We have not paid dividends in the past and do not expect to pay dividends in the future, and, as a result, any return on investment may be limited to the
value of our stock.
We have never paid dividends and do not anticipate paying dividends in the foreseeable future. The payment of dividends will depend on our earnings,
capital requirements, financial condition, prospects and other factors our Board may deem relevant. If we do not pay dividends, our stock may be less
valuable because a return on your investment will only occur if our stock price appreciates and you sell our common stock thereafter.
General risks
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 on
electronic medical systems. As part of the American Recovery and Reinvestment Act 2009, or ARRA, Congress amended the privacy and security
provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA imposes limitations on the use and disclosure of an
individual’s protected healthcare information by healthcare providers, healthcare clearinghouses, and health insurance plans, collectively referred to as
covered entities. The HIPAA amendments also impose compliance obligations and corresponding penalties for non-compliance on individuals and entities
that provide services to healthcare providers and other covered entities, collectively referred to as business associates. ARRA also made significant
increases in the penalties for improper use or disclosure of an individual’s health information under HIPAA and extended enforcement authority to state
attorneys general. The amendments also create notification requirements for individuals whose health information has been inappropriately accessed or
disclosed: notification requirements to federal regulators and in some cases, notification to local and national media. Notification is not required under
HIPAA if the health information that is improperly used or disclosed is deemed secured in accordance with encryption or other standards developed by
HHS. Most states have laws requiring notification of affected individuals and state regulators in the event of a breach of personal information, which is a
broader class of information than the health information protected by HIPAA. Many state laws impose significant data security requirements, such as
encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of the U.S. implicate local and national
data protection standards, impose additional
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compliance requirements and generate additional risks of enforcement for non-compliance. We may be required to expend significant capital and other
resources to ensure ongoing compliance with applicable privacy and data security laws, to protect against security breaches and hackers or to alleviate
problems caused by such breaches.
Unfavorable U.S. or global economic conditions as a result of international conflict, or otherwise, could adversely affect our ability to raise capital
and our business, results of operations and financial condition.
While the potential economic impact brought by the hostilities in the Ukraine and the Middle East are difficult to assess or predict, these conditions have
resulted in, and may continue to result in, extreme volatility and disruptions in the capital and credit markets, reducing our ability to raise additional capital
through equity, equity-linked or debt financings, which could negatively impact our short-term and long-term liquidity and our ability to operate in
accordance with our operating plan, or at all. Additionally, our results of operations could be adversely affected by general conditions in the global
economy and financial markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand
for our products and services our ability to raise additional capital when needed on favorable terms, if at all. A weak or declining economy could strain our
customers’ budgets or cause delays in their payments to us. Additionally, inflation and surging oil and gas prices could increase our costs of production.
Any of the foregoing could harm our business, and we cannot anticipate all of the ways in which the current economic climate and financial market
conditions could adversely impact our ability to raise capital, business, results of operations and financial condition.
We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management has devoted
and will be required to continue to devote substantial time to new compliance initiatives.
We have incurred and will continue to incur significant legal, accounting and other expenses as a public company. We are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, the other rules and regulations of the SEC, and the rules and regulations of Nasdaq. The
expenses of being a public company are material, and compliance with the various reporting and other requirements applicable to public companies
requires considerable time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and national securities exchanges
have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls.
Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. These rules and regulations will continue
to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, these rules and
regulations may make it difficult and expensive for us to obtain adequate director and officer liability insurance, and we may be required to accept reduced
policy limits on coverage or incur substantial costs to maintain the same or similar coverage. The impact of these events could also make it more difficult
for us to attract and retain qualified personnel to serve on our Board, our Board committees, or as executive officers.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and
procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management
to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act (Section 404). We
currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience
and technical accounting knowledge.
If we are not able to comply with the requirements of Section 404 in a timely manner the market price of our stock could decline and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources. Our
ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements.
We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our
business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our
operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective. This, in turn, could have an adverse
impact on trading prices for our common stock, and could adversely affect our ability to access the capital markets.
51
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
52
ITEM 1C. CYBERSECURITY
Item 1C. Cybersecurity
Our board of directors is responsible for overseeing our risk management program and cybersecurity is a critical element of this program. Management is
responsible for the day-to-day administration of our risk management program and our cybersecurity policies, processes, and practices. Our cybersecurity
policies, standards, processes, and practices are based on recognized frameworks established by the Center for Internet Security (CIS) and other applicable
industry standards and are integrated into our overall risk management system and processes. We have not identified any risks from known cybersecurity
threats, including as a result of any prior cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our
operations, business strategy, results of operations, or financial condition. We face certain ongoing risks from cybersecurity threats that, if realized, are
reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition. See “Risk Factors -
Intrusions into our computer systems could result in compromise of confidential information.”
Cybersecurity Risk Management and Strategy
Our cybersecurity risk management strategy focuses on several areas:
•
•
•
•
•
Identification and Reporting: We have implemented a cross-functional approach to assessing, identifying and managing material
cybersecurity threats and incidents. Our program includes controls and procedures to identify, classify and escalate certain cybersecurity
incidents to provide management visibility and obtain direction from management as to the public disclosure and reporting of material
incidents in a timely manner.
Technical Safeguards: We implement technical safeguards that are designed to protect our information systems from cybersecurity threats,
including firewalls, intrusion prevention and detection systems, anti-malware functionality, and access controls, which are evaluated and
improved through vulnerability assessments and cybersecurity threat intelligence, as well as outside audits and certifications.
Incident Response and Recovery Planning: We are establishing incident response, business continuity, and disaster recovery plans designed
to address our response to a cybersecurity incident.
Third-Party Risk Management: We maintain a risk-based approach to identifying and overseeing material cybersecurity threats presented by
third parties, including vendors, service providers, and other external users of our systems, as well as the systems of third parties that could
adversely impact our business in the event of a material cybersecurity incident affecting those third-party systems, including any outside
auditors or consultants who advise on our cybersecurity systems.
Periodic Assessments: We conduct periodic assessments and testing of our policies, standards, processes, and practices in a manner intended
to address cybersecurity threats and events. The results of such assessments, audits, and reviews are evaluated by management and reported
to our Audit Committee and our board of directors, and we adjust our cybersecurity policies, standards, processes, and practices as necessary
based on the information provided by these assessments, audits, and reviews.
Governance
Our board of directors oversees our risk management program, including the management of cybersecurity threats as part of its general oversight
function. Our Audit Committee is taking the lead on behalf of the board of directors on oversight of our cybersecurity risk management program and
receives reports from management concerning our cybersecurity risk management program.
Our cybersecurity risk assessment and management processes are implemented and maintained by various members of our management team, IT
department and other employees, including but not limited to the individuals on our cybersecurity incident management team, which includes individuals
who have a diverse combination of relevant expertise, experience, education and training, with representation from our IT, finance, legal, human resources,
among others. Our team includes individuals with relevant experience in enterprise risk management and disclosure controls and procedures. Additionally,
certain members of our IT department have experience managing cybersecurity programs and are specifically assigned cybersecurity oversight. Our
cybersecurity incident response processes are designed to escalate certain cybersecurity incidents to members of management depending on the
53
circumstances, including in some cases to our executive team. Our cybersecurity incident management team, and other individuals as needed, work to help
us mitigate and remediate cybersecurity incidents of which we are notified.
Facilities
ITEM 2. PROPERTIES
Our principal facilities consist of office space in Redwood City, California. We currently occupy 6,368 square feet of office space under a non-
cancelable operating lease that expires in May 2025. On February 8, 2024, the Company entered into a six-month office license agreement to license 4,141
square feet of additional space adjacent to its existing office where the Company is currently located in Redwood City, California. The term of the new
space expires October 31, 2024, unless terminated earlier in accordance with the office license agreement.
We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional
space can be leased on commercially reasonable terms to accommodate any future needs.
We 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 not
have 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 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
54
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock is quoted on The Nasdaq Capital Market under the symbol “SLNO”. Our 2022 common warrants, 2023 Tranche A pre-funded
warrants, 2023 Tranche B warrants and pre-funded warrants, and October 2023 pre-funded warrants are not traded on a national securities exchange.
As of March 1, 2024, there were 37 shareholders of record for our common stock. A substantially greater number of stockholders may be “street
name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
Dividend Policy
We have never declared or paid cash dividends on our common stock, and currently do not plan to declare dividends on shares of our common stock
in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of cash
dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements,
our overall financial condition and any other factors deemed relevant by our board of directors.
Unregistered Sales of Equity Securities and Use of Proceeds
N/A.
ITEM 6. RESERVED
55
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that
appear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements are often identified by the use of words such as
“may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” “plan,” or “continue,” and similar expressions or
variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of this Annual Report on Form
10-K and elsewhere 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 on Form 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 Overview
We are focused on the development and commercialization of novel therapeutics for the treatment of rare diseases. Our lead candidate is DCCR
(Diazoxide Choline) Extended-Release tablets, a once-daily oral tablet for the treatment of Prader-Willi Syndrome (PWS). We have a Fast-Track
designation for DCCR in PWS and orphan designation for the drug in the United States (U.S.) and European Union (E.U.).
DCCR has been evaluated in a Phase 3 study (C601 or DESTINY PWS), a 3-month randomized, double-blind placebo-controlled study, which
completed enrollment in January 2020, with 127 patients at 29 sites in the U.S. and U.K. Participants who completed DESTINY PWS were eligible to
receive DCCR in a long-term open-label extension period (C602). Top line results from DESTINY PWS were announced in June 2020. Although the trial
did not meet its primary endpoint of change from baseline in hyperphagia, significant improvements were observed in two of three key secondary
endpoints.
In February 2021, we announced analysis limited to data from C601 collected before the onset of the COVID-19 pandemic. The analysis of the
data through March 1, 2020 showed statistical significance in the primary, all key secondary and several other efficacy endpoints. In September 2021, we
announced interim one-year data from C602 showing statistically significant reduction in hyperphagia and all other PWS behavioral parameters and
statistically significant improvements compared to natural history of PWS from the PATH for PWS Study (PATH) over a one-year treatment period. The
PATH study is an ongoing study sponsored by the Foundation for Prader-Willi Research (FPWR) to advance the understanding of the natural history in
individuals with PWS.
The FDA provided official meeting minutes from a Type C meeting in January 2022 that recommended additional controlled data be included in a
New Drug Approval (NDA) submission.
In March 2022, we submitted an amended protocol that incorporated a randomized withdrawal (RW) period to Study C602 in order to obtain
additional controlled data requested by the FDA. The RW period of Study C602 was a multi-center, randomized, double-blind, placebo-controlled study of
DCCR in 77 patients with PWS at 17 sites in the U.S. and 5 sites in the U.K. This RW period consisted only of patients currently enrolled in Study C602
and did not enroll any new patients. We announced the initiation of the RW period for Study C602 in October 2022, and completed enrollment in May
2023. The FDA has acknowledged that data from the study has the potential to support an NDA submission for DCCR.
On September 26, 2023, we announced positive statistically significant top-line results from the RW period of Study C602. Subsequently, we
received preliminary comments from the FDA for our pre-NDA meeting, and as we decided not to proceed with the meeting, they are considered the
official record of the meeting. The FDA stated that the potential for data from the DCCR clinical program to provide substantial evidence of effectiveness
will be a
56
matter of review following the submission of an NDA. We plan to submit our NDA for DCCR to the FDA in mid-2024.
As of December 31, 2023, we had an accumulated deficit of $276.4 million, primarily as a result of research and development and general and
administrative expenses. We may never be successful in commercializing our novel therapeutic-lead candidate DCCR. Accordingly, we expect to incur
significant losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits. As of
December 31, 2023, we had cash and cash equivalents of $169.7 million.
Financial overview
Summary
We have not generated net income from operations to date, and at December 31, 2023 we had an accumulated deficit of $276.4 million, primarily as
a result of research and development and general and administrative expenses. We may never be successful in commercializing our novel therapeutics
products for the treatment of rare diseases. Accordingly, we expect to incur significant losses from operations for the foreseeable future, and there can be no
assurance that we will ever generate significant revenue or profits.
Revenue recognition
To date, we have earned no revenue from the commercial development and sale of novel therapeutic products.
Research and development expenses
Research and development expenses consist primarily of expenses incurred by contract research organizations (CROs) associated with our clinical
trials, contract manufacturing organizations (CMOs) associated with the manufacture of our drug product, employee related expenses, including salaries
and benefits, and professional consultant costs. These expenses will vary with the cadence and success of our product candidate progressing from clinical to
commercial stage.
General and administrative expenses
General and administrative expenses consist principally of salaries and benefits, stock-based compensation expense, professional fees for legal,
consulting, audit and tax services, insurance, rent, pre-commercial activities, and other general operating expenses not otherwise included in research and
development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure, an increase in pre-
commercial activities, other administrative expenses, and increased professional fees associated with being a public reporting company.
Change in fair value of contingent consideration
Change in fair value of contingent consideration represents the change in the fair value of the additional consideration that we expect to pay to the
former Essentialis stockholders based on our assessment of the expected likelihood of achieving two commercial sales milestones of $100.0 million in
revenue and $200.0 million in revenue in future years.
Other income (expense), net
Other income (expense), net is comprised of interest income and the change in the fair value of the 2018 PIPE common stock warrant liabilities.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations are based upon our audited financial statements, which
have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base
our estimates on historical experience and on various other assumptions that we believe to be reasonable in
57
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more
fully described in Note 3 to our audited financial statements contained herein.
Research and development expenses
Research and development expenses are charged to operations as incurred. Research and development expenses consist primarily of salaries,
benefits, bonus, share-based compensation, consultant fees, certain facility costs and other costs associated with clinical trials and the manufacture of our
drug product. Clinical trial costs are a significant component of research and development expenses and include costs associated with CROs and other
vendors. Invoicing from CROs and CMOs for services performed can often occur several months later. We accrue the costs incurred for clinical trial
activities as measured by patient progression and the timing of various aspects of the trial. For other services, we accrue the costs in connection with third-
party contractor activities based on our estimate of fees and costs associate with the contract that were rendered during the period and they are expensed as
incurred.
Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future
use are expensed to research and development costs when incurred.
Stock-based compensation expense
Stock-based compensation expense related to stock options and restricted stock units granted to employees, nonemployees and directors are
measured at the date of grant based on the estimated fair value of the award. For restricted stock units this fair value is based on our common stock price on
the grant date. We estimate the grant date fair value of stock options, and the resulting stock-based compensation expense, using the Black-Scholes option-
pricing model. The grant date fair value of stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the
vesting period for service-based awards. For performance-based awards the requisite service period is the longest explicit, implicit or derived service period
based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If we
had made different assumptions, our stock-based compensation expense, net loss and net loss per share of common stock could have been significantly
different. These assumptions include:
•
•
•
•
Expected volatility: We calculated the estimated volatility rate for stock options granted based on the volatility of our common stock for a
historical period equal to the expected life of the stock options.
Expected life: Due to the lack of historical exercise history, the expected life of our service-based stock options is determined utilizing the
“simplified method”, based on the average of the contractual term of the options and the weighted-average vesting period. The expected life for
performance-based options is determined based on consideration of the contractual term of the stock options, an estimate of the date the
performance criteria would be met and expectations of employee behavior.
Risk-free rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to
liquidity.
Expected dividend yield: We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable
future. Consequently, we used an expected dividend yield of zero.
Contingent consideration
Contingent consideration elements of a business combination are recorded in accordance with ASC 805 which provides that, when contingent
consideration terms provide for future payment obligations, the obligation is measured at its fair value on the acquisition date, and the subsequent increase
or decrease of the value of the estimated amounts of contingent consideration to be paid is be recognized as expense or income, respectively, in the
consolidated statements of operations.
Our agreement to pay the former Essentialis stockholders for achieving certain commercial milestones resulted in the recognition of contingent
consideration, which was recorded at the inception of the transaction, and
58
subsequent changes to estimate the amount of contingent consideration to be paid is recognized as expenses or income in the consolidated statements of
operations. The fair value of the contingent consideration is based on our analysis of the likelihood of the drug indication moving from Phase 3 through
approval by the FDA and then reaching the cumulative revenue milestones.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
We account for warrants in accordance with the guidance in ASC 815 Derivatives and Hedging. We classify common stock purchase warrants and
other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give us a choice of
net-cash settlement or settlement in shares (physical settlement or net-share settlement). We classify any contracts that (i) require net-cash settlement
(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 a choice of net-
cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions, as either an asset or a liability. We
assess classification of freestanding derivatives at each reporting date to determine whether a change in classification between equity and liabilities is
required. We determined that certain freestanding derivatives, which principally consist of the 2018 PIPE Warrants, do not satisfy the criteria for
classification as equity instruments due to the existence of certain cash settlement features that are not within our sole control or variable settlement
provision that cause them to not be indexed to our stock.
We classified the 2018 PIPE Warrants at their fair value and re-measured them at each balance sheet date until they were exercised or expired. Any
changes in the fair value were recognized as Other income (expense) in the consolidated statements of operations. The 2018 PIPE Warrants expired in
December 2023.
Income Taxes
We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance
sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. We have provided a
valuation allowance to reduce deferred tax assets to the amount that will more likely than not be realized.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur
in the calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenues and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or
decrease to our tax provision in a subsequent period.
We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates.
Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred
tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.
We account for uncertainty in income taxes as required by the provisions of ASC Topic 740, Income Taxes, which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being
realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of
various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic
adjustments and may not accurately anticipate actual outcomes.
In addition, the use of net operating loss and tax credit carryforwards may be limited under Section 382 of the Internal Revenue Code in certain
situations where changes occur in the stock ownership of a company. In the event that we have had a change in ownership, utilization of the carryforwards
could be restricted. For more information, see the section titled “Risk Factors—Our ability to use our net operating loss carry forwards and certain other tax
attributes will be limited.”
59
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
Operating expenses:
Research and development
General and administrative
Change in fair value of contingent consideration
Total operating expenses
Operating loss
Other income (expense), net
Change in fair value of warrant liability
Interest income
Total other income (expense), net
Net loss
Revenue
Year Ended
December 31,
Increase (decrease)
2023
2022
Amount
Percentage
(in thousands)
$
$
25,189 $
13,481
2,714
41,384
(41,384 )
(182 )
2,578
2,396
(38,988 ) $
15,265 $
9,844
(712 )
24,397
(24,397 )
30
300
330
(24,067 ) $
9,924
3,637
3,426
16,987
(16,987 )
(212 )
2,278
2,066
(14,921 )
65 %
37 %
481 %
70 %
70 %
(707 %)
759 %
626 %
62 %
We have not commenced commercialization of DCCR, our current sole novel therapeutic product, and accordingly, through December 31, 2023,
have generated no revenue.
Research and development expenses
Research and development expenses were $25.2 million for the year ended December 31, 2023, an increase of $9.9 million from $15.3 million in
2022. The increase is primarily due to increased spending in clinical trials and manufacturing efforts, and expenditures in support of an NDA submission.
General and administrative expenses
General and administrative expenses were $13.5 million for the year ended December 31, 2023, an increase of $3.6 million from $9.8 million in
2022. The increase was primarily related to higher stock-based compensation expense, higher costs as a result of an increase in headcount, and higher
professional and consulting expenses in 2023.
Change in fair value of contingent consideration
We are obligated to make cash payments of up to a maximum of $21.2 million to the former Essentialis stockholders upon the achievement of
certain future commercial milestones associated with the sales of DCCR in accordance with the terms of our merger agreement with Essentialis. The fair
value of the liability for the contingent consideration payable by us achieving two commercial sales milestones of $100 million and $200 million in
revenue, respectively, in future years was estimated to be $11.5 million as of December 31, 2023, a $2.7 million increase from the estimate as of December
31, 2022.
Other income (expense), net
We had other income (expense), net of $2.4 million, an increase of $2.1 million from $0.3 million in 2022. Interest income during 2023 was $2.3
million higher than in 2022, partially offset by a decrease in fair value of the 2018 PIPE Warrants of $0.2 million during 2023 compared to 2022.
Liquidity and Capital Resources
We had a net loss of $39.0 million during 2023 and an accumulated deficit of $276.4 million at December 31, 2023 as a result of having incurred
losses since our inception. We had $169.7 million in cash and cash equivalents
60
and $159.9 million of working capital at December 31, 2023, and used $24.9 million of cash in operating activities during 2023. As of December 31, 2023,
we had lease obligations totaling $0.4 million to be paid through 2025, consisting of an operating lease for office space in Redwood City, California.
We have financed our operations principally through issuances of equity securities. In July 2021, we announced that we were implementing an “at-
the-market” (ATM) offering for up to $25.0 million. As of December 31, 2023, we have sold 1,877,170 shares of common stock through the ATM, totaling
$7.4 million in net proceeds. We terminated the ATM offering in connection with the October 2023 financing discussed below. In December 2022, we
entered into a securities purchase agreement providing for the sale of up to $60.0 million in warrants and the common stock issuable upon the exercise
thereof. During 2023, we received $10.0 million from the sale of these warrants and $33.1 million in proceeds from the exercise of certain of these
warrants. Warrants with an aggregate exercise price of $16.9 million are still outstanding. In October 2023, we announced the closing of the underwritten
public offering of 3,450,000 shares of our common stock at a public offering of $20.00 per share, which included the exercise in full by the underwriters of
their option to purchase additional shares. The gross proceeds of the public offering were $69.0 million, before deducting the underwriting discount and
other estimated offering expenses. We also announced the closing of approximately $60.0 million of shares of our common stock and pre-funded warrants
in a concurrent private offering pursuant to the securities purchase agreement with certain investors, including entities affiliated with existing stockholders,
at a price per share of common stock equal to the public offering price of $20.00 and a price per per-funded warrant of $19.99. In aggregate, we received
$129.0 million of gross proceeds from this financing.
We expect to continue incurring losses for the foreseeable future and will be required to raise additional capital to complete our clinical trials,
pursue product development initiatives and penetrate markets for the sale of our products. We believe that we will continue to have access to capital
resources through possible public or private equity offerings, debt financings, corporate collaborations or other means, but the access to such capital
resources is uncertain and is not assured. In the future, if we are unable to secure additional capital, we may be required to curtail our clinical trials and
development of new products and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and
meet our obligations. These measures could cause significant delays in our efforts to complete clinical trials and commercialize our products, which is
critical to the realization of our business plan and our future operations.
Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Year Ended
December 31,
2023
2022
(in thousands)
$
$
(24,940 ) $
-
180,019
155,079 $
(20,781 )
(13 )
14,092
(6,702 )
Cash used in operating activities
During 2023, operating activities used net cash of $24.9 million, which was primarily due to the loss of $39.0 million which included $5.9 million of
stock-based compensation expense, non-cash expense of $2.7 million for the change in fair value of contingent consideration, $2.0 million of depreciation
and amortization, $0.3 million of non-cash lease expense, and $0.2 million for the change in fair value of common stock warrant liability. Additionally,
there was a $3.0 million net increase usage of cash during 2023 due to changes in operating assets and liabilities.
During 2022, operating activities used net cash of $20.8 million, which was primarily due to the loss of $24.1 million which included non-cash
income of $0.7 million for the change in fair value of contingent consideration, adjusted for non-cash expense of $2.5 million of stock-based compensation
expense, $2.0 million of depreciation
61
and amortization, and $0.3 million of non-cash lease expense. Additionally, there was a $0.8 million net increase usage of cash during 2022 due to changes
in operating assets and liabilities.
Cash used in investing activities
There were no purchases during 2023 and minimal cash used during 2022 for the costs of acquiring property and equipment.
Cash provided by financing activities
During 2023, we received $43.1 million from the sale and issuance of the warrants pursuant to the December 2022 Securities Purchase Agreement
and the exercise of certain such warrants, and $129.0 million gross proceeds in conjunction with our October 2023 financing. As of December 31, 2023, all
offering costs have been paid. We also received $9.3 million of net cash proceeds from the exercise of warrants from our March 2022 financing and $7.1
million of net cash proceeds through the ATM. The total net proceeds amount was slightly offset by payments for the taxes from net share-settled vesting of
restricted stock.
During 2022, we received $13.8 million of net cash proceeds from our March 2022 financing. As of December 31, 2022, all offering costs have
been paid. We also received $0.3 million of net cash proceeds through the ATM. The total net proceeds amount was slightly offset by payments for the
taxes from net share-settled vesting of restricted stock.
As of December 31, 2023, we had cash and cash equivalents of $169.7 million.
We are obligated to make cash earnout payments of up to a maximum of $21.2 million to the former Essentialis stockholders upon the achievement
of certain commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of our merger agreement with Essentialis.
Off-Balance Sheet Arrangements
As of December 31, 2023, 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 Update
Recently Issued Accounting Guidance
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB), or other standard setting
bodies and adopted by us as of the specified effective date.
Interest Rate Sensitivity
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had unrestricted cash and cash equivalents totaling $169.7 million at December 31, 2023. This balance was invested primarily in money market
funds and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have material
exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.
62
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Soleno Therapeutics, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
63
64
66
67
68
69
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Soleno Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Soleno Therapeutics, Inc. (the “Company”) as of December 31, 2023 and 2022, the
related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and
the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the
period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
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
and regulations 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 obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
1. Accrual of Clinical Trial Costs
Description of the matter
As discussed in Note 3 to the consolidated financial statements, the Company records research and development costs associated with clinical trial
activities based upon estimates of costs incurred through the balance sheet date that have yet to be invoiced by the contract research organizations (“CRO”)
and other vendors.
The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the
trial. Estimated accruals are determined based on reviewing contractual terms and through communications with internal clinical personnel and external
service providers including CRO’s as to the
64
progress or state of its trials. The principal consideration for our determination that performing procedures related to the clinical trial expenses, specifically
related to the year-end accrual for clinical trial costs, is a critical audit matter is that there was judgment by management in determining the progress of the
activities included in the individual clinical trial agreements based on internal and external information that involves a high volume of data.
How We Addressed the Matter in Our Audit
To evaluate the accrual for clinical expenses, our audit procedures included, among others, testing the completeness and accuracy of the underlying data
used in the estimates and evaluating the significant assumptions including, but not limited to, subject visit dates and costs per subject visit, that are used by
management to estimate the recorded accruals. To assess the reasonableness of the significant assumptions, we obtained an understanding of the
Company’s estimation process relating to accrual for clinical trial costs, confirmed clinical activity with the Company's CRO for active trials, corroborated
the progress of clinical trials with the Company’s clinical team and obtained third party invoices related to active patient sites, currently enrolled patients,
and subject visit dates. We also tested a sample of subsequent payments to assess the impact to the accrual at the balance sheet date and compared that to
the Company’s estimates.
2.
Fair Value of Contingent Consideration
Description of the Matter
As discussed in Notes 3 and 4 to the consolidated financial statements, the Company’s acquisition-related purchase price contingent liability, which is
estimated using scenario-based methods based upon the Company’s analysis of the likelihood of obtaining specified approvals from the Federal Drug
Administration as well as reaching cumulative revenue milestones, is remeasured to its estimated fair value each reporting period, with changes in fair
value recorded in the statements of operations.
Auditing the valuation of the acquisition-related contingent consideration liability was complex and highly judgmental due to the significant estimation
required in determining the fair value. In particular, the fair value estimate was sensitive to significant assumptions such as the Company’s projected future
sales, which are affected by expectations about approval of a New Drug Application and future industry, market or economic conditions.
How We Addressed the Matter in Our Audit
To evaluate the estimated fair value of the contingent consideration liability, we performed audit procedures that included, among others, assessing the
terms of the arrangement, evaluating the methodology used, and testing the significant assumptions discussed above used by the Company in its analysis.
We involved our valuation specialists to assist in the evaluation of the significant assumptions and methodology used by the Company. Our valuation
specialists recalculated the work performed by the Company to ensure that recorded amount was accurate. We also compared the significant assumptions to
current industry, market and economic trends.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2014.
San Francisco, CA
March 6, 2024
65
Soleno Therapeutics, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Long-term assets
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Other long-term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities
Accounts payable, net
Accrued compensation
Accrued clinical trial site costs
Operating lease liabilities
Other current liabilities
Total current liabilities
Long-term liabilities
2018 PIPE Warrant liability
Contingent liability for Essentialis purchase price
Long-term lease liabilities
Total liabilities
$
$
$
December 31,
2023
December 31,
2022
169,681 $
1,677
171,358
12
407
8,749
165
180,691 $
3,149 $
3,135
3,393
273
1,555
11,505
-
11,549
130
23,184
14,602
1,045
15,647
26
131
10,693
—
26,497
1,777
1,675
3,222
155
484
7,313
1
8,835
—
16,149
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding
Common stock, $0.001 par value, 100,000,000 shares authorized,
31,678,159 and 8,159,382 shares issued and outstanding at
December 31, 2023 and December 31, 2022, respectively
Additional paid-in-capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
32
433,885
(276,410 )
157,507
180,691 $
8
247,762
(237,422 )
10,348
26,497
$
See accompanying notes to consolidated financial statements
66
Soleno Therapeutics, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Operating expenses
Research and development
General and administrative
Change in fair value of contingent consideration
Total operating expenses
Operating loss
Other income (expense), net
Change in fair value of warrant liability
Interest income
Total other income (expense), net
Net loss
Net loss per common share, basic and diluted
For the Years Ended
December 31,
2023
2022
25,189 $
13,481
2,714
41,384
(41,384 )
(182 )
2,578
2,396
(38,988 ) $
(2.36 ) $
15,265
9,844
(712 )
24,397
(24,397 )
30
300
330
(24,067 )
(2.87 )
$
$
$
Weighted-average common shares outstanding used to calculate basic and
diluted net loss per common share
16,492,132
8,397,088
See accompanying notes to consolidated financial statements.
67
Soleno Therapeutics, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Balances at December 31, 2021
Stock-based compensation
Issuance of restricted stock units under equity incentive plan
Tax withholding payments for net share-settled equity awards
Sale of common stock in public offering, net of issuance costs of
$701
Sale of pre-funded warrants in public offering, net of issuance costs
of $333
Sale of common stock, net of issuance costs of $10
Exercise of common stock warrants
Net loss
Balances at December 31, 2022
Stock-based compensation
Issuance of restricted stock units under equity incentive plan
Tax withholding payments for net share-settled equity awards
Sale of common stock and issuance of common stock warrants and
pre-funded common stock warrants, net of issuance costs of $8,449
Exercise of common stock warrants
Exercise of stock options
Net loss
Balances at December 31, 2023
Common Stock
Amount
Shares
5,324,287 $
-
18,650
(3,683 )
Paid-In
Capital
5 $
—
—
—
231,143 $
2,530
—
(16 )
Accumulated Stockholders’
Deficit
(213,355 ) $
—
—
—
Equity
17,793
2,530
—
(16 )
2,666,667
3
9,324
—
9,327
—
104,773
48,688
—
8,159,382 $
—
423,248
(128 )
7,047,397
15,961,267
86,993
—
31,678,159 $
—
—
—
—
8 $
—
—
—
6
17
1
—
32 $
4,439
342
—
—
247,762 $
5,809
136
—
137,851
41,981
346
—
433,885 $
—
—
—
(24,067 )
(237,422 ) $
—
—
—
—
—
—
(38,988 )
(276,410 ) $
4,439
342
—
(24,067 )
10,348
5,809
136
—
137,857
41,998
347
(38,988 )
157,507
See accompanying notes to consolidated financial statements
68
Soleno Therapeutics, Inc.
Consolidated Statements of Cash Flows
(in thousands)
For the Years Ended December 31,
2022
2023
$
(38,988 ) $
(24,067 )
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Noncash lease expense
Stock-based compensation expense
Change in fair value of common stock warrants
Change in fair value of contingent consideration
Change in operating assets and liabilities:
Prepaid expenses, other current assets and other assets
Accounts payable
Accrued compensation
Accrued clinical trial site costs
Operating lease liabilities
Other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from sale of common stock, common stock warrants and pre-funded stock warrants, net of issuance costs
Proceeds from exercise of common stock warrants and pre-funded stock warrants, net of costs
Proceeds from stock option exercises
Tax withholding payments for net share-settled equity awards
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of non-cash investing and financing information
Operating lease right-of-use assets obtained in exchange for operating lease obligations
Non-cash exercise of 2018 PIPE Warrants
$
$
$
See accompanying notes to consolidated financial statements.
69
1,958
321
5,945
182
2,714
(837 )
1,372
1,460
171
(309 )
1,071
(24,940 )
—
-
137,857
41,815
347
—
180,019
155,079
14,602
169,681
$
597
183
$
$
1,964
290
2,530
(30 )
(712 )
113
(1,477 )
947
(198 )
(302 )
161
(20,781 )
(13 )
(13 )
14,108
—
—
(16 )
14,092
(6,702 )
21,304
14,602
—
—
Soleno Therapeutics, Inc.
December 31, 2023
Notes to Consolidated Financial Statements
Note 1. Overview
Soleno Therapeutics, Inc. (the Company or Soleno) is focused on the development and commercialization of novel therapeutics for the treatment
of rare diseases. Its lead candidate is DCCR (Diazoxide Choline) Extended-Release tablets, a once-daily oral tablet for the treatment of Prader-Willi
Syndrome (PWS). DCCR has received orphan designation for the treatment of PWS in the United States (U.S.) as well as in the European Union (E.U.).
The Company incorporated in the State of Delaware on August 25, 1999, and is located in Redwood City, California. It initially established its
operations as Capnia, a diversified healthcare company that developed and commercialized innovative diagnostics, devices and therapeutics addressing
unmet medical needs. During 2017, the Company merged with Essentialis, Inc (Essentialis) and subsequently received stockholder approval to amend its
Amended and Restated Certificate of Incorporation to change its name from “Capnia, Inc.” to “Soleno Therapeutics, Inc.”. Essentialis was a privately held
clinical-stage company focused on the development of breakthrough medicines for the treatment of rare diseases where there is increased mortality and risk
of cardiovascular and endocrine complications. After the merger, the Company’s primary focus has been the development and commercialization of novel
therapeutics for the treatment of rare diseases and the Company divested all prior business efforts.
Note 2. Liquidity
The Company had a net loss of $39.0 million during 2023 and has an accumulated deficit of $276.4 million at December 31, 2023 resulting from
having incurred losses since its inception. The Company had $169.7 million of cash and cash equivalents on hand at December 31, 2023 and used $24.9
million of cash in its operating activities during 2023.
The Company has financed its operations principally through issuance of equity securities. On October 2, 2023, the Company closed a public and
concurrent private financing with gross proceeds of $129.0 million.
In December 2022, the Company entered into a Securities Purchase Agreement providing for the sale of up to $60.0 million in warrants (Tranche A
and Tranche B) and the common stock issuable upon the exercise thereof. The Company completed the closing of the sale and issued both tranches of
warrants for $10.0 million in May 2023. The announcement of positive top-line data from the randomized withdrawal period of Study C602 triggered the
mandatory exercise of the Tranche A warrants, and as of December 31, 2023, the Company had received $15.0 million. Certain investors exercised their
Tranche B warrants and the Company has received $18.1 million as of December 31, 2023. The receipt of the exercise price of the remaining Tranche B
warrants for up to $16.9 million is contingent upon the exercise of such warrants. The Company also received $9.3 million in gross proceeds from the
exercise of certain March 2022 warrants during 2023.
The Company expects to continue incurring losses for the foreseeable future. However, the Company expects that its current cash and cash
equivalents balances will be sufficient to enable the Company to meet its obligations for at least the next twelve months from the date of this filing.
70
Note 3. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP),
and the applicable rules and regulations of the Securities and Exchange Commission (SEC). Certain reclassifications on the consolidated statements of cash
flows have been made to conform to current period presentation.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Reverse Stock Split
On June 1, 2022, the stockholders of the Company approved a reverse stock split of its common stock at a ratio of one-for-fifteen, to be effected at
the sole discretion of the Company’s Board of Directors as described in the proxy statement filed with the SEC on April 21, 2022. The implementation of
the reverse stock split was approved by the Company’s Board of Directors on August 16, 2022.
On August 26, 2022, the Company filed a certificate of amendment to its amended and restated certificate of incorporation in order to effectuate a
reverse stock split of the Company’s issued and outstanding common stock on a one-for-fifteen basis. All common share and per share data are
retrospectively restated to give effect of the split for all periods presented herein. After giving effect to the reverse stock split, the total number of shares of
all classes of capital stock that the Corporation is authorized to issue is 110,000,000 shares, consisting of 100,000,000 shares of common stock, having a
par value of $0.001 and 10,000,000 shares of preferred stock, having a par value of $0.001.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of expenses in the financial statements
and accompanying notes. Actual results could differ from those estimates. Key estimates in the financial statements include the valuation of deferred
income tax assets, the valuation of financial instruments, stock-based compensation, accrued costs for services rendered in connection with third-party
contractor clinical trial activities, and the valuation of contingent liabilities for the purchase price of assets obtained through acquisition.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents at U.S. banking
institutions. At December 31, 2023, the majority of the Company’s funds were invested with two separate financial institutions and at times these balances
may exceed the federally-insured limits. Operating cash in excess of federally-insured limits is custodied at a separate financial institution with an
overnight sweep feature into a U.S. government money market fund. As of December 31, 2022, the Company’s funds were invested in one financial
institution which at times may exceed the federally insured limit.
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal
reporting, making operating decisions, and assessing financial performance. All long-lived assets are maintained in the U.S.
Cash and Cash Equivalents
The Company considers all highly liquid investments, including its money market funds, purchased with an original maturity of three months or less
to be cash equivalents. The Company’s cash and cash equivalents are held
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primarily in institutions in the U.S. and include deposits in a money market funds which were unrestricted as to withdrawal or use.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of payments primarily related to clinical trials, insurance and short-term deposits. Prepaid expenses
are initially recorded upon payment and are expensed as goods or services are received.
Property and Equipment, Net
Property and equipment are stated at cost net of accumulated depreciation and amortization calculated using the straight-line method over the
estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of
their useful life or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When
assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is
reflected in operations in the period realized.
Leases
The Company determines whether an arrangement is a lease at inception. Specifically, it considers whether it controls the underlying asset and has
the right to obtain substantially all the economic benefits or outputs from the asset. If the contractual arrangement contains a lease, the Company then
determines whether it is an operating or finance lease. Right-of-Use (ROU) assets represent the Company’s right to use an underlying asset for the lease
term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized
at commencement date based on the present value of lease payments over the lease term. Lease expense for operating lease payments is recognized on a
straight-line basis over the lease term. Finance lease classification results in a front-loaded expense recognition pattern over the lease term as it recognizes
interest expense and amortization expense as separate components of lease expense.
The Company does not separate lease components from non-lease components for all classes of underlying assets, and instead accounts for the lease
and non-lease components as a single component. Variable lease payments are recognized as they are incurred and primarily include common area
maintenance, utilities, real estate taxes, insurance and other operating costs that are passed on from the lessor in proportion to the space leased by the
Company. The Company does not recognize lease assets and lease liabilities for leases with an original lease term of less than one year.
Long-Lived Assets
The Company reviews its long-lived assets for impairment annually and whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net
cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is
measured based on the difference between the carrying amount and the fair value of the assets.
Intangible Assets
In March 2017, the Company completed the acquisition of Essentialis in accordance with the merger agreement by and between the Company and
Essentialis dated December 22, 2016 (the “Merger Agreement”). The merger transaction was accounted for as an asset acquisition under the acquisition
method of accounting and accordingly, the value of $22.0 million was assigned to the identifiable intangible asset relating to the patent for DCCR, which
patent expires in June 2028.
Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which for the patent is 11 years. The useful
life of the intangible asset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life.
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Research and Development
Research and development costs are charged to operations as incurred. Research and development costs consist primarily of salaries, benefits,
bonus, share-based compensation, consultant fees, certain facility costs and other costs associated with clinical trials. Clinical trial costs are a significant
component of research and development expenses and include costs associated with third-party contractors and other vendors. Invoicing from third-party
contractors for services performed can often occur several months later. The Company accrues the costs incurred for clinical trial activities as measured by
patient progression and the timing of various aspects of the trial. For other services the Company accrues the costs in connection with third-party contractor
activities based on its estimate of fees and costs associate with the contract that were rendered during the period and they are expensed as incurred.
Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future
use are expensed to research and development costs when incurred.
Change in fair value of contingent consideration
The Company recorded the value of contingent future consideration to be paid for the acquisition of Essentialis as a liability in March 2017 at the
date of the acquisition. The changes in value of the liability for the contingent consideration since the acquisition date are recorded as operating expense in
the consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are
recorded based on the estimated future tax effects of differences between the amounts at which assets and liabilities are recorded for financial reporting
purposes and the amounts recorded for income tax purposes. A valuation allowance is provided against the Company’s deferred income tax assets when
their realization is not reasonably assured.
The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still
subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s
sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each
balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the
sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits
requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes
available.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i)
require physical settlement 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 event occurs 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 (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of
its freestanding derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required. The Company
determined that certain freestanding derivatives, which principally consist of 2018 PIPE Warrants, do not satisfy the criteria for classification as equity
instruments due to the existence of certain cash settlement features that are not within the sole control of the Company or variable settlement provision that
cause them to not be indexed to the Company’s own stock.
The Company classified the 2018 PIPE Warrants at their fair value and re-measured them at each balance sheet date until they were exercised or
expired. Any changes in the fair value were recognized as Other income (expense) in the consolidated statements of operations. The 2018 PIPE Warrants
expired in December 2023.
73
Stock-Based Compensation
Stock-based compensation costs related to stock options and restricted stock units granted to employees, nonemployees and directors are measured
at the date of grant based on the estimated fair value of the award. For restricted stock units this fair value is based on the Company’s common stock price
on the grant date. The Company estimates the grant date fair value of stock options, and the resulting stock-based compensation expense, using the Black-
Scholes option-pricing model. The grant date fair value of stock-based awards is recognized on a straight-line basis over the requisite service period, which
is generally the vesting period for service-based awards. For performance-based awards the requisite service period is the longest explicit, implicit or
derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If the
Company had made different assumptions, its 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 calculated the estimated volatility rate for stock options granted based on the volatility of our common stock for a
historical period equal to the expected life of the stock options.
Expected life: Due to the lack of historical exercise history, the expected life of the Company’s service-based stock options is determined
utilizing the “simplified method”, based on the average of the contractual term of the options and the weighted-average vesting period. The
expected life for performance-based options is determined based on consideration of the contractual term of the stock options, an estimate of
the date the performance criteria would be met and expectations of employee behavior.
Risk-free rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to
liquidity.
Expected divided yield: The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the
foreseeable future. Consequently, it used an expected dividend yield of zero.
The Company accounts for forfeitures as they occur.
Recent Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting
bodies that are adopted by the Company as of the specified effective date.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which amends the guidance in ASC 740, Income
Taxes. This ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of
information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the
effectiveness of income tax disclosures. This ASU is effective for fiscal years beginning after December 15, 2024. Adoption is permitted either
prospectively or retrospectively, and the Company will adopt this ASU on a prospective basis. The Company is currently evaluating the impact of adopting
this ASU on its consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial
Instruments, which, together with subsequent amendments, amends the requirement on the measurement and recognition of expected credit losses for
financial assets held. ASU 2016-13 is effective for the Company for the annual periods beginning after December 15, 2022, including interim periods
within those fiscal years, with early adoption permitted. The Company adopted this ASU effective January 1, 2023. There was no impact on the Company's
financial statements upon the adoption of this ASU.
Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies that do not require adoption until a future
date are not currently expected to have a material impact on the Company’s financial statements upon adoption.
74
Note 4. Fair Value of Financial Instruments
The carrying value of the Company’s cash, cash equivalents and accounts payable, approximate fair value due to the short-term nature of these
items.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:
•
•
•
Level I — Unadjusted quoted prices in active markets for identical assets or liabilities;
Level II — Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets
or liabilities; and
Level III — Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair
value hierarchy (in thousands):
Liabilities
Essentialis purchase price contingency liability
Liabilities
2018 PIPE Warrant liability
Essentialis purchase price contingency liability
Total common stock warrant and contingent
consideration liability
Fair Value Measurements at December 31, 2023
Total
Level 1
Level 2
Level 3
$
11,549 $
- $
- $
11,549
Fair Value Measurements at December 31, 2022
Total
Level 1
Level 2
Level 3
$
$
1 $
8,835
8,836 $
— $
—
— $
— $
—
— $
1
8,835
8,836
The Company’s estimated fair value of the 2018 PIPE Warrants was calculated using a Black-Scholes pricing model. The Black-Scholes pricing
model requires the input of highly subjective assumptions including the expected stock price volatility, the expected term, the expected dividend yield and
the risk-free interest rate. The 2018 PIPE Warrants expired on December 21, 2023.
Based on the terms of the completed merger with Essentialis on March 7, 2017, the Company is obligated to make cash earnout payments of up to a
maximum of $21.2 million to the former Essentialis stockholders. The fair value of the Essentialis purchase price contingent liability is estimated using
scenario-based methods based upon the Company’s analysis of the likelihood of obtaining specified approvals from the FDA as well as achieving two
commercial sales milestones of $100 million and $200 million in cumulative revenue. The Level 3 estimates are based, in part, on subjective assumptions.
In determining the likelihood of this occurring, the analysis relied on published research relating to clinical development success rates. Based on
management’s assessment, an 88% and a 72% probability of achieving all three milestones was determined to be reasonable as of December 31, 2023 and
December 31, 2022, respectively. During the periods presented, the Company has not changed the manner in which it values its Essentialis purchase price
contingent liability.
75
The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the
hierarchy during the periods presented.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 assets and liabilities (dollars in thousands):
Balance at December 31, 2021
Change in value of 2018 PIPE Warrants
Change in value of contingent liability
Balance at December 31, 2022
Change in value of 2018 PIPE Warrants
Exercise of 2018 PIPE Warrants
Expiration of 2018 PIPE Warrants
Change in value of contingent liability
Balance at December 31, 2023
2018 PIPE Warrants
Number of
Warrants
Liability
Purchase Price
Contingent
Liability
34,241 $
—
—
34,241 $
—
(21,789 )
(12,452 )
—
0 $
31 $
(30 )
—
1 $
419
(183 )
(237 )
—
- $
9,547
-
(712 )
8,835
—
—
—
2,714
11,549
Note 5. Other Financial Statement Details
Property and Equipment, Net
Property and equipment are summarized in the following table (in thousands):
Computer hardware
Furniture and fixtures
Less accumulated depreciation and amortization
Total
December 31,
2023
December 31,
2022
$
$
72 $
29
101
(89 )
12 $
72
29
101
(75 )
26
Depreciation expense was approximately $14 thousand and $20 thousand for the years ended December 31, 2023 and December 31, 2022,
respectively.
Intangible Assets, Net
Intangible assets consist of the following (in thousands):
Patents and merger costs
$
22,003
$
(13,254 ) $
8,749 $
22,003 $
(11,310 ) $
10,693
Amount
December 31, 2023
Accumulated
Amortization
Net
Amount
Amount
December 31, 2022
Accumulated
Amortization
Net
Amount
76
Future amortization expense for intangible assets over their remaining useful lives is as follows (in thousands):
Year ending December 31
2024
2025
2026
2027
2028 and thereafter
Total
Patents and
trademarks
1,944
1,944
1,944
1,944
973
8,749
$
Amortization expense was $1.9 million for the year ended December 31, 2023 and 2022.
Note 6. Warrants
The Company has issued multiple warrant series, of which the 2018 PIPE Warrants were determined to be liabilities pursuant to the guidance
established by ASC 815 Derivatives and Hedging.
Warrants Issued as Part of the Units in the 2018 PIPE Offering
The 2018 PIPE Warrants were issued on December 19, 2018 in the 2018 PIPE Offering, pursuant to a Warrant Agreement with each of the investors
in the 2018 PIPE Offering, and prior to their expiration on December 21, 2023, entitled the holders to purchase 34,241 shares of the Company’s common
stock at an exercise price equal to $30.00 per share, subject to adjustments.
In the event of a change of control of the Company, the holders of unexercised warrants had the option to present their unexercised warrants to the
Company, or its successor, to be purchased by the Company, or its successor, in an amount equal to the per share value determined by the Black-Scholes
methodology.
Since the Company may have been obligated to settle the 2018 PIPE Warrants in cash, the Company classified the 2018 PIPE Warrants as long-term
liabilities at their fair value and re-measured the warrants at each balance sheet date until they were exercised or expire. Any change in the fair value is
recognized as Other income (expense) in the Company’s consolidated statements of operations.
There were no 2018 PIPE Warrants outstanding at December 31, 2023 as the warrants were either exercised or expired, and the Company estimated
the fair value of the liability for the 2018 PIPE Warrants at approximately $1 thousand at December 31, 2022. During 2023, 21,789 2018 PIPE Warrants
were exercised for net proceeds of $0.2 million, and the Company issued 9,683 shares of common stock. The remaining 12,452 2018 PIPE Warrants
expired. The increase of $0.2 million and the decrease of $30 thousand in the fair value of the liability for the 2018 PIPE Warrants during the years ended
December 31, 2023 and 2022, respectively, was recorded as Other income in the consolidated statements of operations.
The Company has calculated the fair value of the 2018 PIPE Warrants using a Black-Scholes option-pricing model. The following summarizes
certain key assumptions used in estimating the fair values:
Volatility
Contractual term (years)
Expected dividend yield
Risk-free rate
77
December 31,
2022
117 %
1.0
— %
4.74 %
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. These
assumptions include the following estimates:
•
•
•
•
Volatility: The Company calculated the estimated volatility rate based on its historical volatility of the warrants.
Contractual term: The expected life of the warrants, which is based on the contractual term of the warrants.
Expected dividend yield: The Company has never declared or paid any cash dividends and does not currently plan to pay cash dividends in the
foreseeable future. Consequently, the Company used an expected dividend yield of zero.
Risk-free rate: The risk-free interest rate is based on the U.S. Treasury rate for similar periods as the expected life of the warrants.
Note 7. Leases
Facility Leases
The Company's operating lease for its headquarters facility office space in Redwood City, California began in June 2021 and expired in May 2023.
In April 2023, the Company entered into a twenty-four month lease extension commencing on June 1, 2023. The term of the lease extension expires in May
2025.
The Company’s operating lease ROU assets, current operating lease liabilities and long-term operating lease liabilities each appear as a separate line
within the Company’s consolidated balance sheet. As of December 31, 2023 and December 31, 2022, the Company’s short-term liabilities were equal to
$0.3 million and $0.2 million, respectively, and the long-term operating lease liabilities were equal to $0.1 million as of December 31, 2023. There were no
long-term operating lease liabilities as of December 31, 2022.
The Company recorded an increase to its right-of-use asset by $0.6 million and an increase to its lease liability by $0.6 million as a result of the
lease extension. The weighted average discount rate related to the Company’s lease liabilities was 8.25% as of December 31, 2023 over a remaining term of
17 months, and 9% as of December 31, 2022 over the remaining term of 5 months. The discount rates were determined based on estimates of the
Company's incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.
The components of lease expense were as follows (in thousands):
Operating lease cost:
Operating lease cost
Short-term lease cost
Total operating lease cost
Year Ended
December 31,
2023
December 31,
2022
$
$
312
44
356
$
$
324
29
353
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Year Ended
December 31,
2023
December 31,
2022
$
341 $
354
78
The following is a schedule by year of future maturities of the Company’s operating lease liabilities as of December 31, 2023 (in thousands):
2024
2025
Total lease payments
Less interest
Total
287
143
430
(27 )
403
$
Note 8. Commitments and Contingencies
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and
provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against
the Company in the future but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will
be made, and such expenditures can be reasonably estimated.
Note 9. Stockholders’ Equity
Convertible Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock.
Public Offering of Common Stock and Concurrent Private Placement of Common Stock and Pre-Funded Warrants
On October 2, 2023, the Company closed an underwritten public offering of 3,450,000 shares of its common stock at a public offering of $20.00 per
share, which included the exercise in full by the underwriters of their option to purchase additional shares. The gross proceeds of the public offering were
$69.0 million, before deducting the underwriting discount and other offering expenses. Concurrently, the Company also completed the closing of
approximately $60.0 million for 1,825,000 shares of its common stock and 1,175,000 pre-funded warrants in a private offering pursuant to a securities
purchase agreement with certain investors, including entities affiliated with existing stockholders, at a price per share of common stock equal to the public
offering price of $20.00 and a price per per-funded warrant of $19.99. In aggregate, the Company received $129.0 million of gross proceeds less offering
costs of $8.2 million The Company is not required under any circumstance to settle any of the pre-funded warrants for cash, and therefore classified the
pre-funded warrants as permanent equity.
Securities Purchase Agreement
On December 16, 2022, the Company entered into a Securities Purchase Agreement for a private placement (Private Placement) with certain entities
and members of management (collectively, Purchasers). Pursuant to the Securities Purchase Agreement, the Company agreed to sell to the Purchasers
warrants to purchase up to an aggregate of 22,598,870 shares of the Company’s common stock, at a purchase price of $0.4425 per warrant. The closing of
the Private Placement occurred on May 8, 2023 (the Issue Date), following the satisfaction of certain closing conditions, including the completion of
enrollment in the randomized withdrawal period of Study C602. The Company received gross proceeds of $10.0 million for the sale and issuance of
warrants to purchase common stock.
The warrants were separated into two tranches with 8,598,870 Tranche A warrants with an exercise price of $1.75 and aggregate proceeds of up to
approximately $15.0 million, and 14,000,000 Tranche B warrants with an exercise price of $2.50 and aggregate proceeds of up to $35.0 million. The
Tranche A warrants were immediately exercisable and were required to be exercised within 30 days of announcement of positive top-line data from the
79
randomized withdrawal period of Study C602. On September 26, 2023, the Company announced positive top-line data and subsequently received $15.0
million from the exercise of the Tranche A warrants. The Tranche B warrants are also immediately exercisable and expire upon the earlier of 3.5 years from
the date of issuance or 30 days following receipt of FDA approval of DCCR for the treatment of PWS. During 2023, certain investors exercised their
Tranche B warrants and the Company received $18.1 million. The receipt of the aggregate exercise price of up to $16.9 million for the remaining Tranche
B warrants is contingent upon the exercise of such warrants.
Underwritten Public Offering
On March 31, 2022, the Company sold 2,666,667 shares of its common stock at a public offering price of $3.75, and for certain investors, in lieu of
common stock, pre-funded warrants (the March 2022 pre-funded warrants) to purchase 1,333,333 shares of its common stock at a public offering price
$3.60 per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.15 per share exercise price for each
March 2022 pre-funded warrant. The March 2022 pre-funded warrants are immediately exercisable and may be exercised at any time until all of the March
2022 pre-funded warrants are exercised in full. Each share of common stock or March 2022 pre-funded warrant was sold together with one, immediately
exercisable, common warrant (the 2022 common warrants) with a five-year term to purchase one share of common stock at an exercise price of $4.50 per
share. The net proceeds of the offering were $13.8 million, after deducting the underwriting discount and other offering expenses. The Company is not
required under any circumstance to settle any of the 2022 pre-funded warrants or the 2022 common warrants for cash, and therefore classified both types of
warrants as permanent equity.
In 2023, 2,070,934 March 2022 warrants were exercised for gross proceeds of $9.3 million and all 1,280,965 March 2022 pre-funded warrants were
exercised using the cashless exercise option with no additional proceeds received by the Company.
At the Market Offering
In July 2021, the Company entered into a Controlled Equity Offering Sales Agreement under which the Company may sell shares of its common
stock having an aggregate offering price of up to $25.0 million from time to time in any method permitted by law deemed to be an “at the market” Rule 415
under the Securities Act of 1933, as amended. As of December 31, 2023, the Company has sold 1,877,170 shares of common stock through the at the
market program, totaling $7.4 million in net proceeds. The Controlled Equity Offering Sales Agreement was terminated in connection with the October 2,
2023 financing.
Other Common Stock Warrants
As of December 31, 2023, the Company had 6,804 common stock warrants outstanding from the 2010/2012 convertible notes, with an exercise
price of $365.25 and expire in November 2024. The Company also had
80
outstanding 1,100 common stock warrants issued to the underwriter in the Company’s IPO, with an exercise price of $535.50 and a term of 10 years,
expiring in November 2024.
As of December 31, 2023 and December 31, 2022, the following table summarizes the Company's outstanding common stock warrants:
As of December 31, 2023
As of December 31, 2022
Number of Common
Warrant Shares
Weighted Average
Exercise Price per
Share
Number of Common
Warrant Shares
Weighted Average
Exercise Price per
Share
Common stock warrants
2018 PIPE warrants
March 2022 Common warrants
March 2022 Pre-funded warrants
May 2023 Tranche A Pre-funded warrants
May 2023 Tranche B warrants
May 2023 Tranche B Pre-funded warrants
October 2023 Pre-funded warrants
Total
7,904 $
— $
1,929,066 $
— $
2,758,281 $
6,750,000 $
451,632 $
1,175,000 $
13,071,883
388.94
-
4.50
-
0.01
2.50
0.01
0.01
7,904 $
34,241 $
4,000,000 $
$
1,280,965
$
—
$
—
$
—
—
$
5,323,110
(1) Subject to earlier expiration as described above.
Equity Incentive Plans
2014 Plan
Expiration Date
November 2024
388.94
December 2023
30.00
March 2027
4.50
March 2027
0.15
—
November 2026
(1)
— November 2026
November 2026
—
N/A
—
The Company maintains the 2014 Equity Incentive Plan (the 2014 Plan). Under the 2014 Plan the Company may grant stock options, stock
appreciation rights, restricted stock, restricted stock units, performance units or performance shares to employees, directors, advisors, and consultants.
Options granted under the 2014 Plan may be incentive stock options (ISOs) or nonqualified stock options (NSOs). ISOs may be granted only to Company
employees, including officers and directors.
The Board has the authority to determine to whom stock options will be granted, the number of options, the term, and the exercise price. Options are
to be granted at an exercise price not less than fair value. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise
price of an option will not be less than 110% of fair value. Performance-based grants have vesting contingent upon the achievement of certain performance
criteria related to the Company’s commercialization of its therapeutics. The contractual term of an option is no longer than five years for ISOs for which the
grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. The terms and conditions
governing restricted stock units is at the sole discretion of the Board.
On March 23, 2023, the Company filed a Registration Statement on Form S-8 which registered 238,329 shares available for grant and issuance
under the 2014 Plan, all of which became available for grant and issuance under the 2014 Plan on January 1, 2023. On May 25, 2023, the stockholders
approved the Amended and Restated 2014 Plan which included an increase of 1.8 million shares available for grant and issuance. As of December 31,
2023, a total of 1,465 shares were available for future grant under the 2014 Plan.
Inducement Plan
The Company maintains the 2020 Inducement Equity Incentive Plan (the Inducement Plan). The Inducement Plan provides for the grant of equity-
based awards, including non-statutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance
units, and its terms are substantially similar to the Company’s 2014 Equity Incentive Plan.
81
In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to
individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with
the Company), as an inducement material to the individuals’ entry into employment with the Company, or, to the extent permitted by Rule 5635(c)(3) of the
Nasdaq Listing Rules, in connection with a merger or acquisition. On March 23, 2023, the Company filed a Registration Statement on Form S-8 which
registered 500,000 shares available for issuance under the Inducement Plan, all of which became available for grant and issuance under the Inducement
Plan on February 17, 2023.
As of December 31, 2023, a total of 445,668 shares were available for future grant under the Inducement Plan.
Stock-based compensation expense
The Company recognized stock-based compensation expense related to options and restricted stock units granted to employees, directors and
consultants for the years ended December 31, 2023 and 2022 of $5.9 million and $2.5 million, respectively. The compensation expense is allocated on a
departmental basis, based on the classification of the option holder. For the year ended December 31, 2023, the total income tax benefit related to stock-
based compensation was $1.9 million, however, due to net operating losses and a full valuation allowance, no tax benefit was recognized in the financial
statements. The total income tax benefit related to stock-based compensation for the year ended December 31, 2022 was zero.
Stock compensation expense was recognized in the consolidated statements of operations as follows (in thousands):
Research and development
General and administrative
Total
Stock Options
Year ended
December 31,
2023
December 31,
2022
$
$
2,434 $
3,511
5,945 $
692
1,838
2,530
The Company granted options to purchase 1,821,784 and 283,919 of the Company’s common stock during the years ended December 31, 2023 and
2022, respectively. There were no performance-based options granted in 2023 and 2022, respectively. The fair value of each award granted was estimated
on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Expected life (years)
Risk-free interest rate
Volatility
Dividend rate
Year Ended
December 31,
2023
5.3-6.1
3.5%-4.5%
98%-122%
— %
December 31,
2022
5.5-6.0
1.7%-3.1%
88%-95%
— %
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. These
assumptions include the following estimates:
•
Expected life: The expected life of stock options represents the period of time that the options are expected to be outstanding. Due to the lack
of historical exercise history, the expected life of the Company’s service-based stock options has been determined utilizing the “simplified
method”, based on the average of the contractual term of the options and the weighted-average vesting period. The expected life for the
performance-based options was determined based on consideration of the contractual term of the stock options, an estimate of the date the
performance criteria would be met and expectations of employee behavior.
82
•
•
•
Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected life of
the stock options.
Volatility: The estimated volatility rate is based on the volatilities of the Company’s common stock for a historical period equal to the expected
life of the stock options.
Dividend rate: The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the
foreseeable future. Consequently, the Company used an expected dividend yield of zero.
The following table summarizes stock option transactions for the years ended December 31, 2023 and 2022 as issued under the 2014 Plan and the
Inducement Plan:
Balance at December 31, 2021
Options granted
Options canceled/forfeited
Balance at December 31, 2022
Options granted
Options exercised
Options canceled/forfeited
Balance at December 31, 2023
Options exercisable at December 31, 2023
Options vested and expected to vest at
December 31, 2023
Number of
Options
Outstanding
408,329 $
283,919
(5,674 )
686,574 $
1,821,784
(89,993 )
(48,700 )
2,369,665 $
797,988 $
Weighted-
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
46.28
3.56
19.31
28.83
6.18
4.01
67.84
11.56
18.31
7.94
7.93
8.72 $
7.76 $
70,834
20,320
2,346,707 $
11.34
8.75 $
70,834
The weighted-average grant date fair value of employee options granted was $5.04 and $2.62 per share for the years ended December 31, 2023 and
December 31, 2022, respectively. At December 31, 2023 total unrecognized employee stock-based compensation for options that are expected to vest was
$9.1 million, which is expected to be recognized over the weighted-average remaining vesting period of 2.5 years.
Restricted Stock Units
There were 420,710 and 8,965 restricted stock units granted by the Company during the years ended December 31, 2023 and December 31, 2022,
respectively, to employees and certain directors. In 2023, 414,710 restricted stock units were granted to employees with a six-month vesting period, and all
such restricted stock units vested during 2023. The restricted stock units granted to certain directors in 2022 were 100% vested on the grant date and
represent compensation for past board services. The shares were valued based on the Company’s common stock price on the grant date.
83
The following table summarizes restricted stock unit transactions for the years ended December 31, 2023 and 2022 as issued under the 2014 Plan:
Outstanding at December 31, 2021
Restricted stock units granted
Restricted stock units vested
Restricted stock units cancelled/forfeited
Outstanding at December 31, 2022
Restricted stock units granted
Restricted stock units vested
Restricted stock units cancelled/forfeited
Outstanding at December 31, 2023
Number of
Restricted Stock
Units
Weighted-
Average
Grant-Date Fair
Value per Share
29,050 $
8,965
(18,646 )
(301 )
19,068 $
420,710
(423,248 )
(996 )
15,534 $
57.75
5.33
32.55
57.85
57.75
5.49
6.43
5.25
43.92
The weighted-average grant-date fair value of all restricted stock units granted was $5.49 and $5.33 per share during the year ended December 31,
2023 and 2022, respectively. The fair value of all restricted stock units vested during the year ended December 31, 2023 and 2022 was $12.0 million and
$0.1 million, respectively. At December 31, 2023, total unrecognized employee stock-based compensation related to restricted stock units was $0.2 million,
which is expected to be recognized over the weighted-average remaining vesting period of 0.2 years.
2014 Employee Stock Purchase Plan
The Company’s board of directors and stockholders have adopted the 2014 Employee Stock Purchase Plan (the ESPP). The ESPP has become
effective, and the board of directors will implement commencement of offers thereunder in its discretion. A total of 1,864 shares of the Company’s
common stock has been made available for sale under the ESPP. In addition, the ESPP provides for annual increases in the number of shares available for
issuance under the plan on the first day of each year beginning in the year following the initial date that the board of directors authorizes commencement,
equal to the least of:
•
•
•
1.0% of the outstanding shares of the Company’s common stock on the first day of such year;
3,729 shares; or
such amount as determined by the board of directors.
As of December 31, 2023, there were no purchases by employees under this plan.
Note 10. Income Taxes
The geographical distribution of loss before income taxes are summarized below (in thousands):
United States
Foreign
Loss before income taxes
December 31,
2023
2022
$
$
(39,180 ) $
192
(38,988 ) $
(24,173 )
106
(24,067 )
84
The provision for income tax benefit differs from the amount estimated by applying the statutory federal income tax rate to the operating loss due to
the following (in thousands):
Tax (benefit) on the loss before income tax expense
computed at the federal statutory rate
State tax (benefit) at statutory rate, net of federal
benefit
Foreign rate differential
Change in valuation allowance
Change in research and development credits
Stock based compensation
Change in fair value of warrants
Change in fair value of contingent consideration
Section 162(m) limitation
Change in net operating loss true up
Change in capital losses
Change in state rates
Other
Provision for income tax benefit
December 31,
2023
2022
$
(8,187 ) $
(5,055 )
(505 )
6
8,934
(1,631 )
(600 )
38
570
589
39
—
653
94
— $
(527 )
-
5,702
(652 )
(734 )
(6 )
(150 )
-
739
405
375
(97 )
—
$
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as
follows at December 31, 2023 and 2022 (in thousands):
Non-current deferred tax assets:
Federal and state net operating loss carryforwards
Research and other credits
Capitalized research and development
Reserves and accruals
Fixed assets
Capital loss carryover
Stock based compensation
Lease liability
Other deferred tax assets
Gross non-current deferred tax assets
Intangible assets
Right-of-use assets
Total non-current deferred tax liabilities
Total deferred tax assets
Valuation allowance
Net deferred tax assets
December 31,
2023
2022
51,481 $
6,352
6,778
655
29
432
2,013
85
54
67,879
(1,837 )
(86 )
(1,923 )
65,956
(65,956 )
— $
49,024
4,146
2,828
547
44
555
2,682
42
72
59,940
(2,888 )
(35 )
(2,923 )
57,017
(57,017 )
—
$
$
The Company has recorded a full valuation allowance against its net deferred tax assets due to the uncertainty as to whether such assets will be
realized. The valuation allowance increased by $8.9 million from December 31, 2022 to December 31, 2023 primarily due to the generation of current year
net operating losses, research and development credits claimed, capitalized research and developments costs, and stock-based compensation.
As of December 31, 2023, the Company had $206.7 million of federal, $111.0 million of state and $2.3 million of foreign net operating losses
available to offset future taxable income. The Federal net operating loss carryforwards arising from years prior to 2018 began to expire in 2022, however
post 2017 federal net operating loss
85
carryforwards of $93.1 million may be carried forward indefinitely. The state net operating loss carryforwards will begin to expire in 2028 and the foreign
net operating loss carryforward can be carried forward indefinitely, if not utilized. As of December 31, 2023, the Company also had $6.4 million of federal
and $3.4 million of state research and development credit carryforwards. The federal research and development credit carryforward begin to expire in 2024
and the state research and development credit can be carried forward indefinitely. Beginning in fiscal year 2023, the Tax Cuts and Jobs Act of 2017
eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize such costs over a period of five or
fifteen years. While it is possible that Congress may modify, defer, or repeal such provision, we have no assurance that the provision will be modified,
deferred or repealed.
Utilization of the net operating loss and tax credit carry forwards are subject to an annual limitation due to the ownership percentage change
limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net
operating loss before utilization. The Company completed Section 382 analysis through December 2016 and determined that an ownership change, as
defined under Section 382 of the Internal Revenue Code, occurred in June 2016. The Company’s tax attributes are subject to an annual limitation of $0.5
million per year for federal purposes. For years ended after December 31, 2016, the utilization of net operating losses and tax credit carryforwards are
subject to further limitation in the event an additional ownership change were to occur for tax purposes. The Company is currently in the process of
analyzing whether there was an ownership change, as defined under Section 382 of the Internal Revenue Code, resulting from the issuance of new shares
during 2018 through 2023 and expects that analysis to completed during 2024. As such, as of the date of these consolidated financial statements the
Company is not able to determine the impact on the net operating loss (NOL) carryforwards, if any.
U.S. taxes and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries as of December 31,
2023, as the earnings, if any, are intended to be indefinitely reinvested.
The following tables summarize the activities of gross unrecognized tax benefits (in thousands):
Beginning balance
Increase related to current year tax positions
Ending balance
December 31,
2023
2022
$
$
1,936 $
1,002
2,938 $
1,557
379
1,936
The Company uses the “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement
criteria for income tax benefits. The Company has determined it has $2.9 million of unrecognized assets and liabilities related to uncertain tax positions as
of December 31, 2023. Changes in the unrecognized tax benefits within the next 12 months are expected to be similar to prior years and should not
significantly increase or decrease. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this
amount will be recorded as a component of other expense.
There were no unrecognized tax benefits that would impact the effective tax rate as of December 31, 2023 and December 31, 2022. As of December
31, 2023, unrecognized tax benefits of $2.9 million would be offset by a change in valuation allowance.
The Company files income tax returns in the U.S. federal jurisdiction, certain state jurisdictions, United Kingdom and Ireland. In the normal course
of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. In the U.S federal jurisdiction, tax
years 2003 forward remain open to examination, in the state tax jurisdiction, years 2008 forward remain open to examination and in the foreign
jurisdiction, years 2015 forward remain open to examination. The Company is currently not under audit by any federal, state, local or foreign jurisdiction.
86
Note 11. Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Shares
of common stock that are potentially issuable for little or no cash consideration at issuance, such as the Company's pre-funded warrants issued in March
2022 and October 2023 and in connection with the exercise of certain May 2023 Tranche A and Tranche B warrants, are considered outstanding common
stock and are included in the calculation of basic and diluted net loss per share in connection with ASC 260 Earnings Per Shares. Diluted net loss per share
is computed by dividing net loss by the weighted-average number of common stock outstanding and dilutive potential common stock that would be issued
upon the exercise or vesting of common stock awards, restricted stock units and exercise of common stock warrants that are not pre-funded. The Company
applies the two-class method to calculate basic and diluted earnings per share as its warrants issued in March 2022 and May 2023 are participating
securities. However, the two-class method does not impact the net loss per share of common stock as the March 2022 and May 2023 common warrants
issued do not participate in losses. For the years ended December 31, 2023 and 2022, the effect of issuing the respective potential common stock is anti-
dilutive due to the net losses in those periods and therefore the number of shares used to compute basic and diluted net loss per share are the same in each
of those periods.
The following securities are included in the weighted-average common shares outstanding used to calculate basic and diluted net loss per common
share:
Common stock
March 2022 pre-funded warrants
May 2023 Tranche A pre-funded exchange warrants
May 2023 Tranche B pre-funded exchange warrants
October 2023 pre-funded warrants
Total
As of December 31,
2023
15,040,036
290,665
778,904
92,801
289,726
16,492,132
2022
7,409,165
987,923
-
-
-
8,397,088
The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstanding
because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares):
Warrants issued to 2010/2012 convertible note
holders to purchase common stock
Warrants issued to underwriter to purchase common
stock
2018 PIPE warrants
March 2022 common warrants
May 2023 Tranche B warrants
Options to purchase common stock
Outstanding restricted stock units
Total
87
As of December 31,
2023
2022
6,804
6,804
1,100
-
1,929,066
6,750,000
2,369,665
15,534
11,072,169
1,100
34,241
4,000,000
-
686,574
19,068
4,747,787
Note 12. Defined Contribution Plan
The Company sponsors a 401(k) Plan, which stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain
limitations of eligible compensation. The Company may match employee contributions in amounts to be determined at the Company’s sole discretion. The
Company made no matching contributions during the years ended December 31, 2023 and 2022.
Note 13. Subsequent Events
On February 8, 2024, the Company entered into a six-month office license agreement to license 4,141 square feet of additional space adjacent to its
existing office where the Company is currently located in Redwood City, California. The term of the new space expires October 31, 2024, unless
terminated earlier in accordance with the license agreement.
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Disclosure Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in
U.S. Securities and Exchange Commission, (SEC), rules and forms, and that such information is accumulated and communicated to our management to
allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as
defined 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,
based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported, with the time periods specified in the SEC’s rules and forms,
and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer as appropriate to
allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal Executive Officer and
Principal Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external 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) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance
with GAAP and that receipts and expenditures are being made only in accordance with authorizations of our management and board of directors, and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of 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, management
concluded that our internal control over financial reporting was effective as of December 31, 2023.
Changes in Internal Controls
There have been no changes to our internal control over financial reporting that occurred during our last fiscal quarter ended December 31, 2023 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
89
ITEM 9B. OTHER INFORMATION
None.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
90
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.
The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.
The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.
The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.
The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.
The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
91
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
1.
2.
Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K
Financial Schedules: All schedules have been omitted because the information called for is not required or is shown either in the financial statements
or in the notes thereto.
3.
Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.
92
EXHIBIT INDEX
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
Exhibit
Number
Description of Document
1.1
Underwriting Agreement, dated as of September 28, 2023, by
and between Soleno Therapeutics, Inc. and Guggenheim
Securities, LLC, as representative of the underwriters named
therein
8-K
September 29, 2023
2.1
Stock Purchase Agreement, dated as of July 18, 2017, and
between Soleno Therapeutics, Inc., a Delaware corporation, and
NeoForce Holdings, Inc. a Delaware corporation
8-K
July 24, 2017
2.2
Joint Venture Agreement, dated as of December 4, 2017, by and
among Soleno Therapeutics, Inc., Capnia, Inc., and OptAsia
Healthcare Limited
8-K
December 8, 2017
2.3
PRC IP Purchase Agreement, dated as of December 4, 2017, by
and between OptAsia Healthcare Limited and Capnia, Inc.
8-K
December 8, 2017
2.4
Transition Services Agreement, dated as of December 4, 2017,
by and among Soleno Therapeutics, Inc., a Delaware
corporation, Capnia, Inc. and OptAsia Healthcare, Ltd., a Hong
Kong company
8-K
December 8, 2017
3.1
Amended and Restated Certificate of Incorporation of Soleno
Therapeutics, Inc.
S-1/A
August 7, 2014
3.2
3.3
3.4
3.5
3.6
3.7
4.1
Amended and Restated Bylaws of Soleno Therapeutics, Inc.
S-1/A
July 1, 2014
Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock.
Certificate of Designation of Preferences, Rights and
Limitations of Series B Convertible Preferred Stock
8-K
8-K
October 15, 2015
July 6, 2016
Certificate of Amendment
8-K
May 11, 2017
Certificate of Amendment to the Certificate of Incorporation
8-K
October 6, 2017
Certificate of Amendment to the Certificate of Incorporation
8-K
August 25, 2022
Form of the Registrant's common stock certificate.
S-1/A
August 5, 2014
93
1.1
2.1
2.1
2.2
2.3
3.2
3.4
3.1
3.1
3.1
3.1
3.1
4.1
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
Exhibit
Number
4.2
4.3
4.4
4.5
4.6
4.7
Description of Document
Amended and Restated Investors’ Rights Agreement, dated
March 20, 2008, by and among Soleno Therapeutics, Inc. and
certain holders of the Soleno Therapeutics, Inc.’s capital stock
named therein.
S-1/A
July 1, 2014
Form of Series A Warrant Agreement.
S-1/A
August 5, 2014
Form of the Series A Warrant certificate.
S-1/A
August 5, 2014
Form of Underwriters’ Compensation Warrant.
S-1/A
August 5, 2014
Form of Convertible Promissory Note issued in February 2010
and March 2010 in connection with the 2010 convertible note
financing.
S-1
June 10, 2014
Form of Warrant to Purchase Shares issued in February 2010
and March 2010 in connection with the 2010 convertible note
financing.
4.8
Form of Convertible Promissory Note issued in November 2010
in connection with the 2010 convertible note financing.
4.9
Form of Warrant to Purchase Shares issued in November 2010 in
connection with the 2010 convertible note financing.
4.10
Form of Convertible Promissory Note issued in January 2012 in
connection with the 2012 convertible note financing.
S-1
S-1
S-1
S-1
June 10, 2014
June 10, 2014
June 10, 2014
June 10, 2014
4.11
4.12
4.13
Form of Warrant to Purchase Shares issued in January 2012 in
connection with Soleno Therapeutics, Inc.’s 2012 convertible
note financing.
S-1
June 10, 2014
Form of Convertible Promissory Note issued in July 2012 and
August 2012 in connection with the 2012 convertible note
financing.
S-1
June 10, 2014
Form of Warrant to Purchase Shares issued in July 2012 and
August 2012 in connection with the 2012 convertible note
financing.
S-1
June 10, 2014
4.14
Form of Convertible Promissory Note issued in April, August
and October 2014 in connection with the 2014 convertible note
financing.
S-1
June 10, 2014
4.15
Form of Warrant to Purchase Shares issued in April, August and
October 2014 in connection with the 2014 convertible note
financing.
S-1
June 10, 2014
94
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Exhibit
Number
4.16
Description of Document
Registrant’s
Form
Form of unit certificate.
S-1/A
August 5, 2014
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
4.16
Filed
Herewith
4.17
Form of Series B Warrant Agreement.
S-1/A
November 4, 2014
4.18
Form of the Series B Warrant certificate.
S-1/A
November 4, 2014
4.19
Form of the Series C Warrant Agreement.
4.20
Form of the Series C Warrant certificate.
S-4
S-4
April 1, 2015
April 1, 2015
4.21
Form of Series D Common Stock Purchase Warrant.
8-K
October 15, 2015
4.22
Form of Placement Agent Warrant.
8-K
October 15, 2015
4.23
Form of Series D common stock Warrant Certificate.
8-K
October 15, 2015
4.24
Form of Series A Convertible Preferred Stock Certificate.
8-K
October 15, 2015
4.25
Form of Placement Agent Warrant.
8-K
July 6, 2016
4.26
Form of Series B Convertible Preferred Stock Certificate.
8-K
July 6, 2016
4.27
Form of Common Stock Purchase Warrant
8-K
December 13, 2017
4.28
Form of Common Stock Purchase Warrant
8-K
December 19, 2018
4.17
4.18
4.19
4.20
4.1
4.2
4.3
4.4
4.1
4.2
4.1
4.1
4.29
Description of the Registrant’s Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934
10-K
March 4, 2020
4.29
4.30
Form of Pre-Funded Warrant To Purchase Common Stock.
8-K
March 30, 2022
4.31
Form of Common Warrant To Purchase Common Stock.
8-K
March 30, 2022
4.32
Form of Tranche A Warrant to Purchase Common Stock
8-K
December 19, 2022
4.33
Form of Tranche B Warrant to Purchase Common Stock
8-K
December 19, 2022
9.10
Form of Voting Agreement.
8-K
October 15, 2015
9.20
Form of Voting Agreement.
8-K
July 6, 2016
9.30
Form of Voting Agreement.
8-K
December 27, 2016
4.1
4.2
10.2
10.3
9.1
9.1
10.1
95
Exhibit
Number
10.1
Description of Document
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers.
S-1/A
June 10, 2014
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.2
1999 Incentive Stock Plan and forms of agreements thereunder.
S-1/A
June 10, 2014
10.3
2010 Equity Incentive Plan and forms of agreements thereunder. S-1/A
June 10, 2014
10.4
2014 Equity Incentive Plan and forms of agreements thereunder. S-1/A
July 1, 2014
10.5
2014 Employee Stock Purchase Plan and forms of agreements
thereunder.
S-1/A
July 1, 2014
10.6
Offer Letter, dated June 22, 2007, by and between Soleno
Therapeutics, Inc. and Ernest Mario, Ph.D.
10.7
Employment Agreement, dated April 6, 2010, by and between
Soleno Therapeutics, Inc. and Anish Bhatnagar.
10.8
Offer Letter, dated May 29, 2013, between Soleno Therapeutics,
Inc. and Anthony Wondka.
10.9
Offer Letter, dated April 17, 2014, by and between Soleno
Therapeutics, Inc. and Antoun Nabhan.
10.10
Asset Purchase Agreement dated May 11, 2010, by and between
Soleno Therapeutics, Inc. and BioMedical Drug Development
Inc.
S-1
S-1
S-1
S-1
June 10, 2014
June 10, 2014
June 10, 2014
June 10, 2014
S-1
June 10, 2014
10.10
10.11
Convertible Note and Warrant Purchase Agreement, dated
February 10, 2010, by and among Soleno Therapeutics, Inc. and
the investors named therein.
S-1
June 10, 2014
10.11
10.12
10.13
Amendment No. 1 to Convertible Note and Warrant Purchase
Agreement, Convertible Promissory Notes and Warrants to
Purchase Shares, dated November 10, 2010, by and among
Soleno Therapeutics, Inc. and the investors named therein.
Amendment No. 2 to Convertible Note and Warrant Purchase
Agreement, Convertible Promissory Notes and Warrants to
Purchase Shares, dated January 17, 2012, by and among Soleno
Therapeutics, Inc. and the investors named therein.
96
S-1
June 10, 2014
10.12
S-1
June 10, 2014
10.13
Exhibit
Number
Description of Document
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
10.14
Convertible Note and Warrant Purchase Agreement, dated
January 16, 2012, by and among Soleno Therapeutics, Inc. and
the investors named therein.
10.15
10.16
Omnibus Amendment to Convertible Note and Warrant
Purchase Agreement, Convertible Promissory Notes and
Warrants to Purchase Shares, dated July 31, 2012, by and among
Soleno Therapeutics, Inc. and the investors named therein.
Omnibus Amendment to Convertible Promissory Notes and
Warrants to Purchase Shares, dated April 28, 2014, by and
among Soleno Therapeutics, Inc. and the investors named
therein.
10.17
Convertible Note and Warrant Purchase Agreement, dated April
28, 2014, by and among Soleno Therapeutics, Inc. and the
investors named therein.
S-1
June 10, 2014
10.14
S-1
June 10, 2014
10.15
S-1
June 10, 2014
10.16
S-1
June 10, 2014
10.17
10.18
Omnibus Amendment to Convertible Note and Warrant
Purchase Agreement, Convertible Promissory Notes and
Warrants to Purchase Shares, dated May 5, 2014, by and among
Soleno Therapeutics, Inc. and the investors named therein.
S-1
June 10, 2014
10.19
Sublease, dated May 20, 2014, by and among Soleno
Therapeutics, Inc. and Silicon Valley Finance Group.
S-1/A
July 1, 2014
10.20
Offer Letter, dated June 24, 2014, by and between Soleno
Therapeutics, Inc. and David D. O’Toole.
S-1/A
July 22, 2014
10.18
10.19
10.20
10.21
Loan Agreement by and between Soleno Therapeutics, Inc. and
the investors named therein, dated September 29, 2014.
S-1/A
September 29, 2014
10.21
10.22
Revised Second Tranche Closing Notice and Letter Amendment
dated August 18, 2014 relating to the August 2014 Notes.
S-1/A
November 4, 2014
10.22
10.23
Second Tranche Subsequent Closing Notice and Letter
Amendment dated October 22, 2014 relating to the October
2014 Notes.
S-1/A
November 4, 2014
10.24
Form of Warrant Exercise Agreement.
8-K
March 5, 2015
10.23
10.1
97
Advisory Agreement by and between Soleno Therapeutics, Inc.
Description of Document
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
and Maxim Group LLC, dated March 4, 2015.
S-4
April 1, 2015
10.25
Exhibit
Number
10.25
10.26
Agreement and First Amendment to Asset Purchase Agreement
between the Company, BDDI and affiliate of BDDI, dated June
30, 2015.
10.27
Common Stock Purchase Agreement between the Company and
an affiliate of BDDI, dated June 30, 2015.
10.28
Registration Rights Agreement between the Company and
Aspire Capital Fund, LLC, dated July 24, 2015.
10.29
Common Stock Purchase Agreement between the Company and
Aspire Capital Fund, LLC, dated July 24, 2015.
10.30
Engagement Letter dated September 17, 2015, between Soleno
Therapeutics, Inc. and Maxim Group, LLC.
8-K
8-K
8-K
8-K
8-K
July 7, 2015
July 7, 2015
July 27, 2015
July 27, 2015
October 15, 2015
10.31
Securities Purchase Agreement dated October 12, 2015.
8-K
October 15, 2015
10.32
Form of Registration Rights Agreement.
8-K
October 15, 2015
10.33
Form of Lock-Up Agreement.
8-K
October 15, 2015
10.1
10.2
4.1
10.1
1.1
10.1
10.2
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
between Soleno Therapeutics, Inc. and Bemes, Inc. signed
January 26, 2016.
10.36
Engagement Letter dated June 26, 2016, between Soleno
Therapeutics, Inc. and Maxim Group, LLC.
8-K
8-K
January 28, 2016
July 6, 2016
10.37
Securities Purchase Agreement dated June 29, 2016.
8-K
July 6, 2016
10.38
Form of Registration Rights Agreement dated June 29, 2016.
8-K
July 6, 2016
10.1
1.1
10.1
10.2
10.39
Amendment No. 1 to Securities Purchase Agreement dated
September 20, 2016.
S-1/A
September 20, 2016
10.39
98
Exhibit
Number
10.40
Description of Document
Agreement and Plan of Merger and Reorganization, dated as of
December 22, 2016, by and among Soleno Therapeutics, Inc., a
Delaware 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 the stockholders’ representative.
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
8-K
December 27, 2016
2.1
10.41
Registration Rights Agreement between the Company and
Aspire Capital Fund, LLC, dated January 27, 2017.
10.42
Common Stock Purchase Agreement between the Company and
Aspire Capital Fund, LLC, dated January 27, 2017.
S-1
S-1
February 1, 2017
10.51
February 1, 2017
10.52
10.43
10.44
Stock Purchase Agreement made by and between the Company
and NeoForce Holdings, Inc. a Delaware corporation dated July
18, 2017
8-K
July 24, 2017
Joint Venture Agreement dated as of December 4, 2017 by and
among Soleno Therapeutics, Inc., Capnia, Inc., and OptAsia
Healthcare Limited
8-K
December 8, 2017
10.45
Securities Purchase Agreement, dated as of December 11, 2017
8-K
December 13, 2017
10.46
Confidential Consulting Agreement, dated September 5, 2017 by
and between FLG Partners, LLC and the Company
8-K
June 4, 2018
10.47
Securities Purchase Agreement, dated as of December 19, 2018
8-K
December 19, 2018
2.1
2.1
10.1
10.1
10.1
10.48
Employment Agreement with Kristen Yen
S-1
March 29, 2019
10.48
10.49
Underwriting Agreement, dated as of June 24, 2020, by and
between the Company and Guggenheim Securities, LLC dated
June 24, 2020
10.50
2020 Inducement Equity Incentive Plan, as amended on January
24, 2024
10.51
Employment Agreement by and between the Company and
James Mackaness, dated as of November 11, 2020
10.52
Amendment to Employment Agreement by and between the
Company and James Mackaness, dated as of January 8, 2021
8-K
8-K
8-K
8-K
June 26, 2020
January 30, 2024
1.1
10.1
November 13, 2020
10.1
January 13, 2021
10.1
99
Exhibit
Number
Description of Document
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
10.53
Amendment to Employment Agreement by and between the
Company and Kristen Yen, dated as of January 8, 2021
10.54
Amendment to Employment Agreement by and between the
Company and Patricia Hirano, dated as of January 8, 2021
8-K
8-K
January 13, 2021
January 13, 2021
10.55
Lease agreement between the Company and Hudson Towers at
Shore Center, LLC dated April 16, 2021
10-Q
May 5, 2021
10.56
Securities Purchase Agreement dated December 16, 2022
8-K
December 19, 2022
10.2
10.3
10.55
10.1
10-Q
August 8, 2023
10.1
10.57
Amendment to lease agreement between Soleno Therapeutics,
Inc. and Hudson Towers at Shore Center, LLC, dated as of April
24, 2023
10.58
License Agreement for Space and Services, dated February 8,
2024, by and between Soleno Therapeutics, Inc. and Hudson
Towers at Shore Center, LLC
10.59
Outside Director Compensation Policy
21.1
Subsidiaries
23.1
Consent of Marcum LLP
31.1
Certification of Principal Executive Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as amended
31.2
Certification of Principal Financial and Accounting Officer
Required Under Rule 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended
32.1
Certification of Principal Executive Officer Required Under
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. §1350
32.2
Certification of Principal Financial and Accounting Officer
Required Under Rule 13a-14(b) of the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. §1350
97.1
Compensation Recovery Policy
100
X
X
X
X
X
X
X
X
X
Exhibit
Number
101.INS
Description of Document
Inline XBRL Instance Document – the instance document does
not appear in the Interactive Data file because XBRL tags are
embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema With Embedded
Linkbase Documents
104
Cover Page Interactive Data File (embedded within the Inline
XBRL document).
101
Registrant’s
Form
Incorporated by Reference from
Date Filed
with the SEC
Exhibit
Number
Filed
Herewith
X
X
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 6, 2024
Soleno Therapeutics, Inc.
By:
/S/ ANISH BHATNAGAR
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Anish Bhatnagar, with full power of substitution and
resubstitution 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 the
name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form 10-K
and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto
said 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
that said 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 the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ ANISH BHATNAGAR
President, Chief Executive Officer and Director
March 6, 2024
(Principal Executive Officer)
Anish Bhatnagar
/S/ JAMES MACKANESS
Chief Financial Officer (Principal Financial and
March 6, 2024
James Mackaness
Accounting Officer)
/S/ ERNEST MARIO
Chairman
March 6, 2024
Ernest Mario
/S/ ANDREW SINCLAIR
Director
March 6, 2024
Andrew Sinclair
/S/ WILLIAM G. HARRIS
Director
March 6, 2024
William G. Harris
/S/ GWEN MELINCOFF
Director
March 6, 2024
Gwen Melincoff
/S/ BIRGITTE VOLCK
Director
March 6, 2024
Birgitte Volck
/S/ MATTHEW PAULS
Director
March 6, 2024
Matthew Pauls
102
LICENSE AGREEMENT FOR SPACE AND SERVICES
Exhibit 10.58
THIS LICENSE AGREEMENT FOR SPACE AND SERVICES (known as the “Agreement” or the “License”) is made and entered into as of
the 8th day of February , 2024, by and among HUDSON TOWERS AT SHORE CENTER, LLC, a Delaware limited liability company, as licensor
(“Licensor”) and SOLENO THERAPEUTICS, INC., a Delaware corporation, as licensee (“Licensee”). Pursuant to the terms of this License, Licensor
agrees to license the Licensed Space to Licensee, together with the non-exclusive right to use any portions of the Building designated for the common use
of tenants and others (the “Common Areas”).
1.
Basic License Information.
A.
B.
C.
D.
E.
F.
“Building” shall mean the building located at 203 Redwood Shores Parkway, Redwood City, California, and commonly known as Towers @
Shores - 203 Redwood Shores. The “Property” means the Building and the parcel(s) of land upon which it is located.
“Licensed Space” shall mean the area shown on Exhibit A and known as (i) Suite 540 consisting of approximately 2,231 rentable square
feet on the fifth floor of the Building and (ii) Suite 545 consisting of approximately1,910 rentable square feet on the fifth floor of the
Building.
“License Period”: shall mean the period starting on February 15, 2024 (the “Start Date”), and ending on October 31, 2024 (the “End
Date”), unless terminated earlier in accordance with this License, including, without limitation, Section 1.3 of Exhibit B hereto.
Notwithstanding the foregoing, Licensee may enter the Licensed Space before the Start Date (but no earlier than 15 days prior to the Start
Date), solely for the purpose of installing telecommunications and data cabling, equipment, furnishings and other personal property in the
Licensed Space. Other than the obligation to pay the Licensed Space Fee (as defined below), all of Licensee’s obligations hereunder shall
apply during any period of such early entry.
“Licensed Space Fee”: $16,564.00 per month, plus any associated state and local taxes.
“Security Deposit”: $0.00.
“Notice Addresses”: Prior to the Start Date, notices shall be sent to Licensee at: Suite 500 at the Building. On and after the Start Date,
notices shall be sent to Licensee at the Licensed Space. Notices for Licensor shall be sent to: Hudson Towers at Shore Center, c/o Hudson
Pacific Properties, 333 Twin Dolphin Drive, Suite 100, Redwood City, California 94065; Attn: Building manager. With copies to: Hudson
Towers at Shore Center, c/o Hudson Pacific Properties, 333 Twin Dolphin Drive, Suite 100, Redwood City, California 94065; Attn:
Managing Counsel and Hudson Towers at Shore Center, c/o Hudson Pacific Properties, 11601 Wilshire Boulevard, Suite 900, Los Angeles,
California 90025; Attn: Lease Administration.
2.
3.
Possession and Delivery. The Licensed Space is accepted by Licensee in “as is” condition and configuration. If, for any reason, Licensor is unable
to provide use of the Licensed Space on the Start Date, Licensee agrees that the Start Date shall be automatically postponed until possession
becomes available. Licensor’s failure to deliver possession of the Licensed Space shall not subject Licensor to any liability for loss or damage, nor
shall it affect the validity of this Agreement. The parties agree that if Licensor does not deliver possession of the Licensed Space on or prior to
February 15, 2024 (“Required Start Date”), Licensee shall have the right to terminate this License by delivery of written notice to Licensor prior to
the earlier to occur of (a) five (5) business days after the Required Start Date and (b) the date Licensor delivers possession of the Licensed Space to
Licensee. Except as otherwise explicitly set forth herein, Licensor shall have no obligation to furnish any services to the Licensed Space or to the
Licensee in connection herewith.
Fees. “Additional Fees” means all sums (exclusive of the Licensed Space Fee) that Licensee is required to pay Licensor. The Licensed Space Fee
and Additional Fees are collectively referred to as “Fees”. All Fees shall be payable by Licensee without any setoff or deduction. The Licensed
Space Fee shall be due and payable in advance on the first day of each calendar month without notice or demand, provided that the first installment
of the License Space Fee shall be payable upon the execution of this License. Any Additional Fees shall be due and payable by Licensee 30 days
after billing by Licensor. All payments of Fees shall be by good and sufficient check or by other means (such as automatic debit or electronic
transfer) acceptable to Licensor. If Licensee fails to pay any Fees when due, Licensee shall pay an administration charge equal to 5% of the past due
Fees. Acceptance of less than the correct amount of Fees shall be considered a payment on account of the earliest Fee due. No endorsement or
statement on a check or letter accompanying a check or payment shall be considered an accord and satisfaction. Licensee’s covenant to pay Fees is
independent of every other covenant in this License.
4.
5.
6.
7.
Compliance with Laws; Use. The Licensed Space shall be used only for general office purposes and for no other use whatsoever. Licensee and its
employees, agents, contractors and invitees (the “Licensee Controlled Parties”) shall comply with all statutes, codes, ordinances, orders, rules and
regulations of any municipal or governmental entity (collectively referred to as “Laws”) regarding the operation of Licensee’s business and the use
and occupancy of the Licensed Space. Licensee shall comply with the rules and regulations of the Building (a copy of which is available in the
Building management office and) which are incorporated herein by reference and such other reasonable rules and regulations adopted by Licensor
from time to time.
Security Deposit. [Intentionally Omitted].
Services. Licensor agrees, at no additional charge to Licensee, to furnish Licensee with heat and air conditioning, repair and maintenance services
and office cleaning services for normal office use in such reasonable quantities and during such reasonable hours as shall be reasonably determined
by Licensor. Licensor’s repair and maintenance obligations shall include necessary maintenance and repairs to the structure, mechanical (including
HVAC), electrical, plumbing and fire/life safety systems, Common Areas, roof and elevators located within and serving the Building. Licensor shall
promptly make repairs (considering the nature and urgency of the repair) for which Licensor is responsible. Licensor shall provide and install, at
Licensee’s sole cost and expense, any suite numbers and Licensee identification on the exterior of the Licensed Space using the standard graphics
for the Building. Licensor’s failure, for any reason, to furnish any services or perform any maintenance and repairs shall not render Licensor liable
to Licensee, constitute a constructive eviction, or give rise to an abatement of Fees.
Repairs and Alterations. Licensee shall not make alterations, additions or improvements to the Licensed Space, including the installation of any
phone or data lines (collectively referred to as “Alterations”), without first obtaining the written consent of Licensor in each instance, which
Licensor may withhold in its sole and absolute discretion. For any Alteration, (a) Licensee, before commencing work, shall deliver to Licensor, and
obtain Licensor’s approval of, plans and specifications; (b) Licensor, in its discretion, may require Licensee to obtain security for performance
satisfactory to Licensor; (c) Licensee shall deliver to Licensor “as built” drawings (in CAD format, if requested by Licensor), completion affidavits,
full and final lien waivers, and all governmental approvals; and (d) Licensee shall pay Licensor upon demand (i) Licensor’s reasonable out-of-
pocket expenses incurred in reviewing the work, and (ii) a coordination fee equal to 5% of the cost of the work, except for the installation of any
Lines (defined below). All Alterations shall become Licensor’s property upon installation and without compensation to Licensee. Notwithstanding
the foregoing, unless otherwise notified by Licensor, Licensee, at its expense and before the expiration or earlier termination hereof, shall (a) remove
any Alterations, (b) repair any resulting damage to the Building, and (c) restore the affected portion of the Building to its condition existing before
the installation of such Alterations. If Licensee fails to complete such removal, repair or restoration when required, Licensor may do so at Licensee’s
expense. Licensor, directly or through a contractor designated by Licensor, shall have the right to perform any Alterations requested by Licensee.
Licensor shall be entitled to receive a market fee for the services it provides in connection with the performance of any such Alterations. Licensee
shall make all payments for Alterations in a timely manner so as not to permit any mechanic’s or other liens to be placed upon the Building or
Licensed Space in connection with any Alterations. Licensee shall fully discharge any such lien within 10 days after it first becomes aware of the
same. Licensee shall not damage or deface the furnishings, walls, floors, ceilings or other portions of the Licensed Space, Common Areas, or
Building. Licensor shall have the right to repair any damage caused by Licensee at Licensee’s sole cost and expense. Licensee shall reimburse
Licensor for the reasonable cost of any such repairs within 10 days after receipt of an invoice, together with an administrative charge in an amount
equal to 5% of the cost of the repairs. All Lines installed pursuant to this Agreement shall be (a) installed in accordance with this Section 7; and (b)
clearly marked with adhesive plastic labels (or plastic tags attached to such Lines with wire) to show Licensee’s name, suite number, and the
purpose of such Lines (i) every six (6) feet outside the Licensed Space (including the electrical room risers and any Common Areas), and (ii) at their
termination points. Licensor may designate specific contractors for work relating to vertical Lines. Sufficient spare cables and space for additional
cables shall be maintained for other occupants, as reasonably determined by Licensor. Unless otherwise notified by Licensor, Licensee, at its
expense and before the expiration or earlier termination hereof, shall remove all Lines and repair any resulting damage. As used herein, “Lines”
means all communications or computer wires and cables serving the Licensed Space installed by or at the direction of Licensee.
8.
Entry by Licensor. Licensor may enter the Licensed Space to inspect or show the Licensed Space, to clean and make repairs, alterations or
additions to the Licensed Space, and to conduct or facilitate repairs, alterations or additions to any portion of the Building. Except in emergencies or
to provide janitorial and other Building services, Licensor shall provide Licensee with 24 hours prior notice of entry into the Licensed Space, which
may be given orally. Any such entry shall not (a) entitle Licensee to any abatement of the Licensed Space Fee or any other charges hereunder, (b)
subject Licensor to any claims or liability or (c) be considered a constructive eviction.
2
9.
10.
11.
12.
13.
Assignment and Subletting. Licensee shall not assign, sublicense, transfer or encumber any interest in this License or allow any third party to use
any portion of the Licensed Space (collectively or individually, a “Transfer”). Any Transfer or attempted Transfer shall be a default by Licensee
and, in addition to any other rights and remedies, shall entitle Licensor to terminate this License.
Indemnity and Waiver of Claims. Except to the extent caused by the negligence or willful misconduct of Licensor, Licensee shall indemnify,
defend and hold Licensor, and its owners, partners, principals, members, trustees, officers, directors, shareholders, agents, employees and lenders
(“Licensor Related Parties”) harmless against and from all liabilities, damages, claims, and expenses, including, without limitation, reasonable
attorneys’ fees (if and to the extent permitted by Law), which may be imposed upon, incurred by or asserted against Licensor or any of the Licensor
Related Parties and arising out of or in connection with any damage or injury occurring in the Licensed Space or the Common Areas, or any acts or
omissions (including violations of Law) of Licensee or any Licensee Controlled Parties. Licensee hereby waives all claims against Licensor and the
Licensor Related Parties for (i) any damage to person or property (or resulting from the loss of use thereof), except to the extent caused by the
negligence or willful misconduct of Licensor or any Licensor Related Party and (ii) any failure to prevent or control any criminal or otherwise
wrongful conduct by any third party or to apprehend any third party who has engaged in such conduct. Notwithstanding any provision herein to the
contrary, neither Licensor nor any Licensor Related Party shall be liable for (and Licensee hereby waives any claims for) any injury or damage to, or
interference with, Licensee’s business, including loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss
of use, or for any form of special or consequential damage.
Insurance. Licensee shall carry and maintain: (1) Commercial General Liability Insurance applicable to the Licensed Space and its appurtenances
providing, on an occurrence basis, a minimum combined single limit of $3,000,000.00, (2) Property/Business Interruption Insurance written on an
All Risk or Special Perils form, covering Licensee’s personal property for the full replacement cost value (subject to reasonable deductible
amounts), (3) Worker’s Compensation to the extent required by Law and Employer’s Liability of $1,000,000.00 per occurrence, and (4) Business
Automobile Insurance covering bodily injury and property damage on all owned, hired, and non-owned automobiles with, on an occurrence basis, a
minimum combined single limit of $3,000,000.00. Any company writing any of Licensee’s insurance shall have an A.M. Best rating of not less than
A-VIII. Licensee’s policy for Commercial General Liability Insurance shall name Licensor (and its successors and assigns), the managing agent for
the Building (and its successors and assigns), Licensor’s direct and indirect owners (and their successors and assigns), and their respective members,
principals, beneficiaries, partners, officers, directors, employees, and agents, and other designees of Licensor and its successors as the interest of
such designees shall appear, as additional insureds. At least two (2) business days prior to the Start Date, Licensee shall deliver to Licensor
certificates of insurance evidencing the foregoing insurance and other requirements. All policies of Licensee’s insurance shall contain endorsements
that the insurer(s) shall give Licensor and its designees at least 30 days’ advance written notice of any cancellation, termination, material change or
lapse of insurance. If Licensee retains any third parties to provide services to the Licensed Space, including, without limitation, services for event
planning, catering, parking or photography, such third party service providers will be required to maintain insurance upon the same terms and
conditions set forth herein with respect to Licensee plus such additional insurance (including, but not limited to, Automobile and Worker’s
Compensation liability insurance coverage) as Licensor deems appropriate for the type of services to be performed. Licensee and Licensor hereby
waive and shall cause their respective insurance carriers to waive any and all rights of recovery against the other or against the trustees, members,
principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents of the other, for loss of or damage to its property to the
extent such loss or damage is covered by insurance or required to be covered by insurance in accordance with this License. For the purposes of this
waiver, any deductible with respect to a Licensee’s insurance shall be deemed covered by and recoverable by Licensee under valid and collectable
policies of insurance.
Casualty Damage and Condemnation. This License shall automatically terminate if any material part of the Licensed Space is rendered unusable
as a result of a fire or other casualty. Such termination shall be effective as of the date of the fire or other casualty. Licensor shall not be liable for
any loss or damage to Licensee’s property or to the business of Licensee resulting in any way from the fire or other casualty or Licensor’s
performance or failure to perform repairs. This License shall automatically terminate if any material part of the Licensed Space is taken or
condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a “Taking”). Such termination
shall be effective as of the date of the Taking. All compensation awarded for a Taking, or sale proceeds, shall be the property of Licensor.
Events of Default. Licensee shall be considered to be in default of this License upon the occurrence of any of the following events: (A) Licensee’s
failure to pay when due all or any portion of the Fees, if the failure continues for 3 days after written notice to Licensee, which notice shall be in
satisfaction of and not in addition to any notice required by Law (“Monetary Default”); or (B) Licensee’s failure (other than a Monetary Default) to
comply with any term, provision or covenant of this License, if the failure is not cured within 15 days after written notice to Licensee.
3
14.
15.
16.
17.
Remedies. Upon any default, Licensor shall have the right without notice or demand (except as provided in Section 13) to terminate this License, in
which case Licensee shall immediately surrender the Licensed Space to Licensor. If Licensee fails to surrender the Licensed Space, Licensor may, in
compliance with applicable Law and without prejudice to any other right or remedy, enter upon and take possession of the Licensed Space. Licensee
shall pay Licensor on demand the amount of all past due Fees, plus other losses and damages which Licensor may suffer as a result of Licensee’s
default. In addition to the right to terminate this License and collect damages, Licensor shall have the right to pursue any other remedy now or
hereafter available at Law or in equity.
Limitation of Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LICENSE, THE LIABILITY OF
LICENSOR (AND OF ANY SUCCESSOR) TO LICENSEE SHALL BE LIMITED TO THE TOTAL AMOUNT OF LICENSED SPACE FEES
PAID BY LICENSEE. LICENSEE SHALL LOOK SOLELY TO FEES RECEIVED BY LICENSOR FOR THE RECOVERY OF ANY
JUDGMENT OR AWARD AGAINST LICENSOR. NEITHER LICENSOR NOR ANY LICENSOR RELATED PARTY SHALL BE
PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LICENSOR,
LICENSEE SHALL GIVE LICENSOR AND THE SECURITY HOLDER(S) WHOM LICENSEE HAS BEEN NOTIFIED HOLD SECURITY
AGREEMENTS, NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT.
Holding Over. For each and every month or portion thereof that Licensee continues to use or occupy the Licensed Space after the expiration or
earlier termination of this License, Licensee shall pay Licensor an amount equal to 150% of the monthly Licensed Space Fee. Licensee’s payment of
such amounts shall not be construed to extend the License Period or prevent Licensor from immediate recovery of possession of the Licensed Space
by summary proceedings or otherwise.
Subordination and Attornment; No Lease. THIS LICENSE IS NOT INTENDED TO CREATE A LEASE OR ANY OTHER INTEREST IN
REAL PROPERTY IN FAVOR OF LICENSEE, BUT MERELY CREATES A REVOCABLE LICENSE IN ACCORDANCE WITH THE TERMS
HEREOF. LICENSEE ACKNOWLEDGES THAT ITS AGREEMENT TO TREAT THIS AGREEMENT AS A LICENSE FORMED A
MATERIAL PART OF THE CONSIDERATION FOR LICENSOR’S AGREEMENT TO ENTER INTO THIS LICENSE. This Agreement shall be
subject and subordinate to all existing and future ground or underlying leases, mortgages, trust deeds and other encumbrances against the Building
or Property, all renewals, extensions, modifications, consolidations and replacements thereof (each, a “Security Agreement”), and all advances
made upon the security of such mortgages or trust deeds, unless in each case the holder of such Security Agreement (each, a “Security Holder”)
requires in writing that this Agreement be superior thereto. Upon any termination or foreclosure (or any delivery of a deed in lieu of foreclosure) of
any Security Agreement, Licensee, upon request, shall attorn, without deduction or set-off, to the Security Holder or purchaser or any successor
thereto and shall recognize such party as the licensor hereunder provided that such party agrees not to disturb Licensee’s occupancy so long as
Licensee timely pays all sums due hereunder and otherwise performs its obligations hereunder. Within 10 days after request by Licensor, Licensee
shall execute such further instruments as Licensor may reasonably deem necessary to evidence the subordination or superiority of this Agreement to
any Security Agreement. Licensee waives any right it may have under Law to terminate or otherwise adversely affect this Agreement or Licensee’s
obligations hereunder upon a foreclosure.
18.
Surrender of Licensed Space. At the termination of this License, Licensee shall remove Licensee’s personal property from the Licensed Space, and
quit and surrender the Licensed Space to Licensor, broom clean, and in good order, condition and repair, ordinary wear and tear and casualty
excepted. If Licensee fails to remove any of Licensee’s personal property and/or Lines within 2 days after the termination of this License, Licensor,
at Licensee’s sole cost and expense, shall be entitled (but not obligated) to remove, store or dispose of Licensee’s personal property. Licensor shall
not be responsible for the value, preservation or safekeeping of Licensee’s personal property.
19.
Relocation.
A.
B.
[Intentionally Omitted].
Licensor shall have the right to terminate this License if Licensor enters into a contract for the sale of the Building. Such cancellation shall be
exercised by Licensor by the service of not less than 60 days’ written notice of such termination prior to or within 30 days after the sale of the
Building. Such notice shall set forth the date upon which the termination will be effective. No money or other consideration shall be payable
by Licensor to Licensee for Licensor’s exercise of this right, and the right is hereby reserved to Licensor and all purchasers, successors,
assigns, transferees, and ground tenants of Licensor, as the case may be, and is in addition to all other rights of Licensor. Licensee has read
the foregoing and understands that Licensor has a right to terminate this License as provided above.
20. Miscellaneous.
A.
All demands, approvals, consents or notices shall be in writing and delivered by hand or sent by registered or certified mail with return
receipt requested, or sent by overnight or same day courier service at the party’s respective Notice Address(es)
4
B.
C.
D.
E.
F.
G.
H.
I.
set forth in Section l, with a copy to the third party. Each notice shall be deemed to have been received or given on the earlier to occur of
actual delivery or the date on which delivery is refused, or, if Licensee has vacated the Licensed Space or other Notice Address without
providing a new Notice Address, 3 days after notice is deposited in the U.S. mail or with a courier service in the manner described above.
Any party may, at any time, change its Notice Address (other than to a post office box address) by giving the other parties written notice of
the new address.
Either party’s failure to declare a default immediately upon its occurrence, or delay in taking action for a default shall not constitute a waiver
of the default, nor shall it constitute an estoppel. If either party institutes a suit against the other for violation of or to enforce any covenant,
term, or condition of this License, the prevailing party shall be entitled to all of its costs and expenses, including, without limitation,
reasonable attorneys’ fees. Licensor and Licensee hereby waive any right to trial by jury in any proceeding based upon a breach of this
License.Whenever a period of time is prescribed for the taking of an action by Licensor or Licensee, the period of time for the performance
of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor
or materials, epidemics, pandemics, public health emergencies, war, civil disturbances and other causes beyond the reasonable control of the
performing party (“Force Majeure”). However, events of Force Majeure shall not extend any period of time for the payment of sums
payable by either party or any period of time for the written exercise of an option or right by either party.
This License shall be interpreted and enforced in accordance with the Laws of the state or commonwealth in which the Building is located.
Licensor shall have the right to transfer and assign, in whole or in part, all of its ownership interest, rights and obligations in the Building or
this License, including the Security Deposit, and upon transfer, Licensor, as the case may be, shall be released from any further obligations
hereunder, and Licensee agrees to look solely to the successor in interest for the performance of such obligations and the return of any
Security Deposit.
Licensee represents that it has dealt with no broker (other than with respect to Jones Lang LaSalle) in connection with this License. Licensee
shall indemnify and hold Licensor and the Licensor Related Parties harmless from all claims of any other brokers claiming to have
represented Licensee in connection with this License.
This License constitutes the entire agreement between the parties and supersedes all prior agreements and understandings related to the
Licensed Space. This License may be modified only by a written agreement signed by Licensor and Licensee.
Licensee represents and warrants to Licensor that each individual executing this License on behalf of Licensee is authorized to do so on
behalf of Licensee and that Licensee is not, and the entities or individuals constituting Licensee or which may own or control Licensee or
which may be owned or controlled by Licensee are not, among the individuals or entities identified on any list compiled pursuant to
Executive Order 13224 for the purpose of identifying suspected terrorists.
Each party hereto, and their respective successors and assigns shall be authorized to rely upon the signatures of all of the parties hereto which
are delivered by facsimile, PDF or DocuSign (or the like) as constituting a duly authorized, irrevocable, actual, current delivery hereof with
original ink signatures of each person and entity. This Agreement may be executed in counterparts, each of which shall be deemed an original
part and all of which together shall constitute a single agreement.
Licensee hereby acknowledges and agrees that (a) there is a risk of exposure to pathogens (including, without limitation, the novel
coronavirus SARS-CoV-2 and mutations, adaptations or variations thereof) (collectively, (“Contagions”)) everywhere people are present,
including at the Building; and (b) no precautions, including those implemented by Licensor and/or third parties (e.g., the CDC and applicable
governmental agencies),can entirely eliminate the risk of exposure to Contagions. Accordingly, by entering into the Building, Licensee and
Licensee’s members, officers, directors, employees and agents (each a “Licensee Related Party”) knowingly and voluntarily assume the risk
of exposure to Contagions. Licensee, on behalf of itself and, to the fullest extent permitted by applicable law, the Licensee Related Parties,
hereby waives all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including,without limitation,
reasonable attorneys’ fees (for purposes of this section, “Claims”) against Licensor and all Licensor Related Parties arising out of or in
connection with exposure to Contagions at the Building, including, without limitation any damages due to illness, short- or long-term adverse
health effects, disability and/or death (the “Released Claims”). With regard to the Released Claims, Licensee expressly waives the
provisions of California Civil Code Section 1542, which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR OR
RELEASING PARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER
FAVOR AT THE TIME OF EXECUTING THE RELEASE AND THAT, IF KNOWN BY HIM
OR HER, WOULD HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH
THE DEBTOR OR RELEASED PARTY.
5
Licensee acknowledges that it has received the advice of legal counsel with respect to the aforementioned waiver and understands the terms
thereof.
21.
Entire Agreement. This License and the following exhibits and attachments, which are hereby incorporated into and made a part of this License,
constitute the entire agreement among the parties: Exhibit A (Outline and Location of Licensed Space); and Exhibit B (Additional Provisions.
Licensor and Licensee have executed this License as of the day and year first above written.
LICENSOR:
HUDSON TOWERS AT SHORE CENTER, LLC,
a Delaware limited liability company
By:
Hudson Pacific Properties, L.P.,
a Maryland limited partnership,
its sole member
By: Hudson Pacific Properties, Inc.,
a Maryland corporation,
its general partner
By:
/s/ Kenneth Young
Name: Kenneth Young
Title:
Senior Vice President, Leasing
LICENSEE:
SOLENO THERAPEUTICS, INC., a Delaware
corporation
By:
/s/ Jim Mackaness
Name:
Jim Mackaness
Title:
Chief Financial Officer
By:
Name:
Title:
[secretary] [assistant secretary] [chief financial officer] [assistant
treasurer]
6
EXHIBIT A
OUTLINE AND LOCATION OF LICENSED SPACE
7
EXHIBIT B
ADDITIONAL PROVISIONS
1.1. Energy Usage. If Licensee (or any party claiming by, through or under Licensee) pays directly to the provider for any energy
consumed at the Property, Licensee, promptly upon request, shall deliver to Licensor (or, at Licensor’s option, execute and deliver to
Licensor an instrument enabling Licensor to obtain from such provider) any data about such consumption that Licensor, in its
reasonable judgment, is required for benchmarking purposes or to disclose to a prospective buyer, tenant or mortgage lender under any
applicable law.
1.2. California Civil Code Section 1938. Pursuant to California Civil Code § 1938, Licensor hereby states that the Licensed Space has
not undergone inspection by a Certified Access Specialist (CASp) (defined in California Civil Code § 55.52).
Accordingly, pursuant to California Civil Code § 1938(e), Licensor hereby further states as follows: “A Certified Access Specialist
(CASp) can inspect the Licensed Space and determine whether the Licensed Space complies with all of the applicable construction-
related accessibility standards under state law. Although state law does not require a CASp inspection of the Licensed Space, the
commercial property owner or lessor may not prohibit the lessee, tenant or licensee from obtaining a CASp inspection of the Licensed
Space for the occupancy or potential occupancy of the lessee, tenant or licensee, if requested by the lessee,tenant or licensee. The
parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp
inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the
Licensed Space”.
In accordance with the foregoing, Licensor and Licensee agree that if Licensee requests a CASp inspection of the Licensed Space,
then Licensee shall pay (i) the fee for such inspection, and (ii) except as may be otherwise expressly provided in this Agreement, the
cost of making any repairs necessary to correct violations of construction-related accessibility standards within the Licensed Space.
1.3. Licensee’s Acceleration Option. Licensee shall have the right to accelerate (for purposes of this Section 1.3, “Licensee’s
Acceleration Option”) the End Date, with respect to the Licensed Space, to a date that is 60 days after Licensor’s receipt of written
notice from Licensee (for purposes of this Section 1.3, the “Accelerated End Date”). In such event (a) Licensee shall remain liable
for the Licensed Space Fee and other sums due (if any) under the Agreement up to and including the Accelerated End Date even
though billings for such amounts may occur subsequent to the Accelerated End Date and (b) the term of the Agreement shall expire as
of the Accelerated End Date with the same force and effect as if such term were by the provisions of the Agreement, fixed to expire on
the Accelerated Expiration Date.
8
EXHIBIT A
OUTLINE AND LOCATION OF LICENSED SPACE
9
10
SOLENO THERAPEUTICS, INC.
OUTSIDE DIRECTOR COMPENSATION POLICY
(Adopted on March 5, 2024)
Exhibit 10.59
Soleno Therapeutics, Inc. (the “Company”) believes that the granting of equity and cash compensation to its members
of the Board of Directors (the “Board,” and members of the Board, the “Directors”) represents an effective tool to attract, retain,
and reward Directors who are not employees of the Company (the “Outside Directors”). This Outside Director Compensation
Policy (the “Policy”) is intended to formalize the Company’s policy regarding the compensation to its Outside Directors. Unless
otherwise defined herein, capitalized terms used in this Policy will have the meaning given to such terms in the Company’s 2014
Equity Incentive Plan (the “Plan”), or if the Plan is no longer in place, the meaning given to such terms or any similar terms in
the equity plan then in place. Each Outside Director will be solely responsible for any tax obligations incurred by such Outside
Director as a result of the equity and cash payments such Outside Director receives under this Policy.
1. CASH COMPENSATION
Annual Cash Retainer
Each Outside Director will be paid an annual cash retainer of $42,500. There are no per‑meeting attendance fees for
attending Board meetings.
Non-Executive Chair / Committee Membership Annual Cash Retainer
Each Outside Director who serves as Non-Executive Chair, or chair or member of a committee of the Board will be paid
additional annual fees as follows:
Non-Executive Chair:
Chair of Audit Committee:
Member of Audit Committee (other than the Chair of the
Audit Committee):
$30,000
$20,000
$10,000
Chair of Nominating and Corporate Governance Committee:
$10,000
Member of Nominating and Corporate Governance
Committee (other than the Chair of the Nominating and
Corporate Governance Committee):
Chair of Compensation Committee:
$5,000
$15,000
Member of Compensation Committee (other than the Chair of
the Compensation Committee):
$7,500
1
Each annual cash retainer and additional annual fee will be paid quarterly in arrears on a prorated basis.
2. EQUITY COMPENSATION
Outside Directors will be eligible to receive all types of Awards (except Incentive Stock Options) under the Plan (or the
applicable equity plan in place at the time of grant), including discretionary Awards not covered under this Policy. All grants of
Awards to Outside Directors pursuant to Section 2 of this Policy will be automatic and nondiscretionary, except as otherwise
provided herein, and will be made in accordance with the following provisions:
a. No Discretion. No person will have any discretion to select which Outside Directors will be granted any Awards
under this Policy or to determine the number of Shares to be covered by such Awards.
b. Initial Award. Subject to Section 7 of this Policy, each individual who first becomes an Outside Director will be
granted 13,000 Restricted Stock Units (“RSUs”) (an “Initial Award”). The Initial Award will be made on the first Trading Day
on or after the date on which such individual first becomes an Outside Director, whether through election by the stockholders of
the Company or appointment by the Board to fill a vacancy (such grant date, the “Initial Award Grant Date”). If an individual
was a member of the Board and also an employee, becoming an Outside Director due to termination of employment will not
entitle the Outside Director to an Initial Award.
Subject to Section 3 of this Policy, each Initial Award will be scheduled to vest as follows 1/3rd of the Shares subject to
the Initial Award will be scheduled to vest on each annual anniversary of the Initial Award Grant Date.
c. Annual Award. Subject to Section 7 of this Policy, on the date of each annual meeting of the Company’s stockholders
(each, an “Annual Meeting”), each Outside Director will be automatically granted 6,500 RSUs (an “Annual Award”).
Notwithstanding the foregoing, any Outside Director who has not been a Director for at least six (6) months prior to the date of
the applicable Annual Meeting will not receive an Annual Award.
Subject to Section 3 of this Policy, each Annual Award will be scheduled to vest on the earlier of (i) the one (1)-year
anniversary of the date the Annual Award is granted, or (ii) the day prior to the date of the Annual Meeting next following the
date the Annual Award is granted, in each case, subject to the Outside Director continuing to be a Service Provider through the
applicable vesting date
d. Additional Terms of Initial Awards and Annual Awards. Each Initial Award and Annual Award will be granted under
and subject to the terms and conditions of the Plan and the applicable form of Award Agreement previously approved by the
Board or its Compensation Committee, as applicable, for use thereunder.
3. CHANGE IN CONTROL
In the event of a Change in Control, each Outside Director outstanding Company equity awards will be treated in
accordance with the terms of the Plan.
4. TRAVEL EXPENSES
Each Outside Director’s reasonable, customary, and documented travel expenses to Board meetings will be reimbursed
by the Company.
2
5. ADDITIONAL PROVISIONS
All provisions of the Plan not inconsistent with this Policy will apply to Awards granted to Outside Directors.
6. ADJUSTMENTS
In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other
property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination,
reclassification, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure
of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or
potential benefits intended to be made available under this Policy, will adjust the number of Shares issuable pursuant to Awards
granted under this Policy.
7. LIMITATIONS
No Outside Director may be paid, issued or granted, in any Fiscal Year, cash payments (including the fees under Section
1 above) and Awards with an aggregate value greater than $750,000, increased to $1,000,000 in connection with his or her initial
service (with the value of Awards based on its grant date fair value (determined in accordance with U.S. generally accepted
accounting principles)). Any Awards or other compensation provided to an individual (a) for his or her services as an Employee,
or for his or her services as a Consultant other than as an Outside Director, or (b) prior to the Effective Date, will be excluded for
purposes of the foregoing limits.
8. SECTION 409A
In no event will cash compensation or expense reimbursement payments under this Policy be paid after the later of (a)
the fifteenth (15th) day of the third (3rd) month following the end of the Company’s fiscal year in which the compensation is
earned or expenses are incurred, as applicable, or (b) the fifteenth (15th) day of the third (3rd) month following the end of the
calendar year in which the compensation is earned or expenses are incurred, as applicable, in compliance with the “short-term
deferral” exception under Section 409A of the Internal Revenue Code of 1986, as amended, and the final regulations and
guidance thereunder, as may be amended from time to time (together, “Section 409A”). It is the intent of this Policy that this
Policy and all payments hereunder be exempt from or otherwise comply with the requirements of Section 409A so that none of
the compensation to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any
ambiguities or ambiguous terms herein will be interpreted to be so exempt or comply. In no event will the Company reimburse
an Outside Director for any taxes imposed or other costs incurred as a result of Section 409A.
9. REVISIONS
The Board or any Committee designated by the Board may amend, alter, suspend, or terminate this Policy at any time
and for any reason. No amendment, alteration, suspension, or termination of this Policy will materially impair the rights of an
Outside Director with respect to compensation that already has been paid or awarded, unless otherwise mutually agreed between
the Outside Director and the Company. Termination of this Policy will not affect the Board’s or the Compensation Committee’s
ability to exercise the powers granted to it under the Plan with respect to Awards granted under the Plan pursuant to this Policy
prior to the date of such termination.
3
Subsidiaries of Soleno Therapeutics, Inc.
Subsidiary
Soleno Therapeutics U.K. Ltd.
Soleno Therapeutics Europe Ltd.
Essentialis, Inc.
Jurisdiction
United Kingdom
Ireland
Delaware
Exhibit 21.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement of Soleno Therapeutics, Inc. on Form S-8 (File No.’s 333-200175, 333-210563,
333-220056, 333-224070, 333-230402, 333-235999, 333-239496, 333-252014, 333-264035, 333-270285, 333-273816, 333-276548 and 333-276785) and
Form S-3 (File No. 333-275120) of our report dated March 6, 2024 with respect to our audits of the consolidated financial statements of Soleno
Therapeutics, Inc. as of December 31, 2023 and 2022 and for each of the two years in the period ended December 31, 2023, which report is included in this
Annual Report on Form 10-K of Soleno Therapeutics, Inc. for the year ended December 31, 2023.
/s/ Marcum LLP
Marcum LLP
San Francisco, CA
March 6, 2024
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
Exhibit 31.1
1.
2.
3.
4.
I, Anish Bhatnagar, M.D., certify that:
I have reviewed this annual report on Form 10-K of Soleno Therapeutics, Inc.;
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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange 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)
(b)
(c)
(d)
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 within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 6, 2024
/S/ ANISH BHATNAGAR
Anish Bhatnagar
President, Chief Executive Officer
(principal executive officer)
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
Exhibit 31.2
1.
2.
3.
4.
I, James Mackaness, certify that:
I have reviewed this annual report on Form 10-K of Soleno Therapeutics, Inc.;
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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange 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)
(b)
(c)
(d)
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 within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 6, 2024
/S/ JAMES MACKANESS
James Mackaness
Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Soleno Therapeutics, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2023, as filed
with the Securities and Exchange Commission (the “Report”), Anish Bhatnagar, President, Chief Executive 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 6, 2024
/S/ ANISH BHATNAGAR
Anish Bhatnagar
President, Chief Executive Officer
(principal executive officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Soleno Therapeutics, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2023, as filed
with the Securities and Exchange Commission (the “Report”), James Mackaness, 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 6, 2024
/S/ JAMES MACKANESS
James Mackaness
Chief Financial Officer
(principal financial and accounting officer)
SOLENO THERAPEUTICS, INC.
COMPENSATION RECOVERY POLICY
As adopted October 18, 2023
Exhibit 97.1
Soleno Therapeu cs, Inc. (the “Company”) is commi ed to strong corporate governance. As part of this commitment, the
Company’s Board of Directors (the “Board”) has adopted this clawback policy called the Compensa on Recovery Policy (the “Policy”).
The Policy is intended to further the Company’s pay-for-performance philosophy and to comply with applicable laws by providing rules
rela ng to the reasonably prompt recovery of certain compensa on received by Covered Execu ves in the event of an Accoun ng
Restatement. The applica on of the Policy to Covered Execu ves is not discre onary, except to the limited extent provided below, and
applies without regard to whether a Covered Execu ve was at fault. Capitalized terms used in the Policy are defined below, and the
defini ons have substan ve impact on its applica on so reviewing them carefully is important to your understanding.
The Policy is intended to comply with, and will be interpreted in a manner consistent with, Sec on 10D of the Securi es
Exchange Act of 1934 (the “Exchange Act”), with Exchange Act Rule 10D-1 and with the lis ng standards of the na onal securi es
exchange (the “Exchange”) on which the securi es of the Company are listed, including any official interpre ve guidance.
Persons Covered by the Policy
The Policy is binding and enforceable against all “Covered Execu ves.” A Covered Execu ve is each individual who is or was
ever designated as an “officer” by the Board in accordance with Exchange Act Rule 16a-1(f) (a “Sec on 16 Officer”). The Commi ee may
(but is not obligated to) request or require a Covered Execu ve to sign and return to the Company an acknowledgement that such
Covered Execu ve will be bound by the terms and comply with the Policy. The Policy is binding on each Covered Execu ve whether or
not the Covered Execu ve signs and/or returns any acknowledgment.
Administra on of the Policy
The Compensa on Commi ee (the “Commi ee”) of the Board has full delegated authority to administer the Policy. The
Commi ee is authorized to interpret and construe the Policy and to make all determina ons necessary, appropriate, or advisable for the
administra on of the Policy. In addi on, if determined in the discre on of the Board, the Policy may be administered by the independent
members of the Board or another commi ee of the Board made up of independent members of the Board, in which case all references
to the Commi ee will be deemed to refer to the independent members of the Board or the other Board commi ee. All determina ons
of the Commi ee will be final and binding and will be given the maximum deference permi ed by law.
Accoun ng Restatements Requiring Applica on of the Policy
If the Company is required to prepare an accoun ng restatement due to the material noncompliance of the Company with any
financial repor ng requirement under the securi es laws, including any required accoun ng restatement to correct an error in
previously issued financial statements that is material to the previously issued financial statements, or that would result in a material
misstatement if the error were corrected in the current period or le uncorrected in the current period (an “Accoun ng Restatement”),
then the Commi ee must determine the Excess Compensa on, if any, that must be recovered. The Company’s obliga on to recover
Excess Compensa on is not dependent on if or when restated financial statements are filed.
Compensa on Covered by the Policy
The Policy applies to certain Incen ve-Based Compensa on (certain terms used in this Sec on are defined below) that is
Received on or a er October 2, 2023 (the “Effec ve Date”), during the Covered Period while the Company has a class of securi es listed
on a na onal securi es exchange. Such Incen ve-Based Compensa on is considered “Clawback Eligible Incen ve-Based Compensa on”
if the Incen ve-Based Compensa on is Received by a person a er such person became a Sec on 16 Officer and the person served as a
Sec on 16 Officer at any me during the performance period for the Incen ve-Based Compensa on. “Excess Compensa on” means the
amount of Clawback Eligible Incen ve-Based Compensa on that exceeds the amount of Clawback Eligible Incen ve-Based
Compensa on that otherwise would have been Received had such Clawback Eligible Incen ve-Based Compensa on been determined
based on the restated amounts. Excess Compensa on must be computed without regard to any taxes paid and is referred to in the
lis ngs standards as “erroneously awarded compensa on”.
To determine the amount of Excess Compensa on for Incen ve-Based Compensa on based on stock price or total shareholder
return, where it is not subject to mathema cal recalcula on directly from the informa on in an Accoun ng Restatement, the amount
must be based on a reasonable es mate of the effect of the Accoun ng Restatement on the stock price or total shareholder return upon
which the Incen ve-Based Compensa on was Received and the Company must maintain documenta on of the determina on of that
reasonable es mate and provide that documenta on to the Exchange.
“Incen ve-Based Compensa on” means any compensa on that is granted, earned, or vested based wholly or in part upon the
a ainment of a Financial Repor ng Measure. For the avoidance of doubt, no compensa on that is poten ally subject to recovery under
the Policy will be earned un l the Company’s right to recover under the Policy has lapsed.
“Financial Repor ng Measures” are measures that are determined and presented in accordance with the accoun ng principles
used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock
price and total shareholder return are also Financial Repor ng Measures. A Financial Repor ng Measure need not be presented within
the financial statements or included in a filing with the Securi es and Exchange Commission.
Incen ve-Based Compensa on is “Received” under the Policy in the Company’s fiscal period during which the Financial
Repor ng Measure specified in the Incen ve-Based Compensa on award is a ained, even if the payment, ves ng, se lement or grant
of the Incen ve-Based Compensa on occurs a er the end of that period. For the avoidance of doubt, the Policy does not apply to
Incen ve-Based Compensa on for which the Financial Repor ng Measure is a ained prior to the Effec ve Date.
“Covered Period” means the three completed fiscal years immediately preceding the Accoun ng Restatement Determina on
Date. In addi on, Covered Period can include certain transi on periods resul ng from a change in the Company’s fiscal year.
“Accoun ng Restatement Determina on Date” means the earliest to occur of: (a) the date the Board, a commi ee of the
Board, or one or more of the officers of the Company authorized to take such ac on if Board ac on is not required, concludes, or
reasonably should have concluded, that the Company is required to prepare an Accoun ng Restatement; and (b) the date a court,
regulator, or other legally authorized body directs the Company to prepare an Accoun ng Restatement.
-2-
Repayment of Excess Compensa on
The Company must recover Excess Compensa on reasonably promptly and Covered Execu ves are required to repay Excess
Compensa on to the Company. Subject to applicable law, the Company may recover Excess Compensa on by requiring the Covered
Execu ve to repay such amount to the Company by direct payment to the Company or such other means or combina on of means as
the Commi ee determines to be appropriate (these determina ons do not need to be iden cal as to each Covered Execu ve). These
means include (but are not limited to):
(a)
(b)
(c)
(d)
requiring reimbursement of cash Incen ve-Based Compensa on previously paid;
seeking recovery of any gain realized on the ves ng, exercise, se lement, sale, transfer, or other disposi on of any
equity-based awards (including, but not limited to, me-based ves ng awards), without regard to whether such
awards are Incen ve-Based Compensa on or vest based on the achievement of performance goals;
offse ng the amount to be recovered from any unpaid or future compensa on to be paid by the Company or any
affiliate of the Company to the Covered Execu ve, including (but not limited to) payments of severance that might
otherwise be due in connec on with a Covered Execu ve’s termina on of employment and without regard to whether
such amounts are Incen ve-Based Compensa on;
cancelling outstanding vested or unvested equity awards (including, but not limited to, me-based ves ng awards),
without regard to whether such awards are Incen ve-Based Compensa on; and/or
(e)
taking any other remedial and recovery ac on permi ed by law, as determined by the Commi ee.
The repayment of Excess Compensa on must be made by a Covered Execu ve notwithstanding any Covered Execu ve’s belief
(whether or not legi mate) that the Excess Compensa on had been previously earned under applicable law and therefore is not subject
to clawback.
In addi on to its rights to recovery under the Policy, the Company or any affiliate of the Company may take any legal ac ons it
determines appropriate to enforce a Covered Execu ve’s obliga ons to the Company or to discipline a Covered Execu ve. Failure of a
Covered Execu ve to comply with their obliga ons under the Policy may result in (without limita on) termina on of that Covered
Execu ve’s employment, ins tu on of civil proceedings, repor ng of misconduct to appropriate governmental authori es, reduc on of
future compensa on opportuni es or change in role. The decision to take any ac ons described in the preceding sentence will not be
subject to the approval of the Commi ee and can be made by the Board, any commi ee of the Board, or any duly authorized officer of
the Company or of any applicable affiliate of the Company. For avoidance of doubt, any decisions of the Company or the Covered
Execu ve’s employer to discipline a Covered Execu ve or terminate the employment of a Covered Execu ve are independent of
determina ons under this Policy. For example, if a Covered Execu ve was involved in ac vi es that led to an Accoun ng Restatement,
the Company’s decision as to whether to not to terminate such Covered Execu ve’s employment would be made under its employment
arrangements with such Covered Execu ve and the requirement to apply this no-fault and non-discre onary clawback policy will not be
determina ve of whether any such termina on is for cause, although failure to comply with the Policy might be something that could
result in a termina on for cause depending on the terms of such arrangements.
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Limited Excep ons to the Policy
The Company must recover the Excess Compensa on in accordance with the Policy except to the limited extent that any of the
condi ons set forth below is met, and the Commi ee determines that recovery of the Excess Compensa on would be imprac cable:
(a)
(b)
The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered.
Before reaching this conclusion, the Company must make a reasonable a empt to recover such Excess Compensa on,
document such reasonable a empt(s) to recover, and provide that documenta on to the Exchange; or
Recovery would likely cause an otherwise tax-qualified re rement plan, under which benefits are broadly available to
employees of the Company, to fail to meet the legal requirements as such.
Other Important Informa on in the Policy
The Policy is in addi on to the requirements of Sec on 304 of the Sarbanes-Oxley Act of 2002 that are applicable to the
Company’s Chief Execu ve Officer and Chief Financial Officer, as well as any other applicable laws, regulatory requirements, rules, or
pursuant to the terms of any exis ng Company policy or agreement providing for the recovery of compensa on.
Notwithstanding the terms of any of the Company’s organiza onal documents (including, but not limited to, the Company’s
bylaws), any corporate policy or any contract (including, but not limited to, any indemnifica on agreement), neither the Company nor
any affiliate of the Company will indemnify or provide advancement for any Covered Execu ve against any loss of Excess Compensa on.
Neither the Company nor any affiliate of the Company will pay for or reimburse insurance premiums for an insurance policy that covers
poten al recovery obliga ons. In the event that the Company is required to recover Excess Compensa on pursuant to the Policy from a
Covered Execu ve who is no longer an employee, the Company will be en tled to seek recovery in order to comply with applicable law,
regardless of the terms of any release of claims or separa on agreement that individual may have signed.
The Commi ee or Board may review and modify the Policy from me to me.
If any provision of the Policy or the applica on of any such provision to any Covered Execu ve is adjudicated to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provisions of the Policy or
the applica on of such provision to another Covered Execu ve, and the invalid, illegal or unenforceable provisions will be deemed
amended to the minimum extent necessary to render any such provision or applica on enforceable.
The Policy will terminate and no longer be enforceable when the Company ceases to be listed issuer within the meaning of
Sec on 10D of the Exchange Act.
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ACKNOWLEDGEMENT
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I acknowledge that I have received and read the Compensa on Recovery Policy (the “Policy”) of Soleno Therapeu cs, Inc. (the
“Company”).
I understand and acknowledge that the Policy applies to me, and all of my beneficiaries, heirs, executors, administrators or
other legal representa ves and that the Company’s right to recovery in order to comply with applicable law will apply,
regardless of the terms of any release of claims or separa on agreement I have signed or will sign in the future.
I agree to be bound by and to comply with the Policy and understand that determina ons of the Commi ee (as such term is
used in the Policy) will be final and binding and will be given the maximum deference permi ed by law.
I understand and agree that my current indemnifica on rights, whether in an individual agreement or the Company’s
organiza onal documents, exclude the right to be indemnified for amounts required to be recovered under the Policy.
I understand that my failure to comply in all respects with the Policy is a basis for termina on of my employment with the
Company and any affiliate of the Company as well as any other appropriate discipline.
I understand that neither the Policy, nor the applica on of the Policy to me, gives rise to a resigna on for good reason (or
similar concept) by me under any applicable employment agreement or arrangement.
I acknowledge that if I have ques ons concerning the meaning or applica on of the Policy, it is my responsibility to seek
guidance from my own personal advisors.
I acknowledge that neither this Acknowledgement nor the Policy is meant to cons tute an employment contract.
Please review, sign and return this form to the Chief Execu ve Officer or Chief Financial Officer.
Covered Execu ve
(print name)
(signature)
(date)