NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Description of the Business and Summary of Significant Accounting Policies
Description of the Business
Soliton, Inc. (“Soliton” or the “Company”) was organized under the laws of the State of Delaware on March 27, 2012. The Company operates in one segment as a medical device company organized to develop and commercialize products utilizing a proprietary Rapid Acoustic Pulse ("RAP") technology platform. The Company is a pre-revenue stage company with its first product being developed for the removal of tattoos. In addition, the Company has recently completed a proof-of-concept clinical trial for the reduction of cellulite and has initiated a four-site pivotal trial for the reduction of cellulite.
Initial Public Offering
On February 19, 2019, the Company consummated its initial public offering (“IPO”). In the IPO, the Company sold a total of 2,172,591 shares of common stock at a purchase price of $5.00 per share for gross proceeds of $10,862,955 and net proceeds of approximately $9,700,000. In connection with the closing of the IPO, the Company's convertible notes (and related accrued interest) of $11,784,987 were initially converted into 6,825,391 shares of the Company's common stock, accrued dividends of $4,773,480 were converted into 954,696 shares of the Company's common stock, and preferred stock, both Series A and Series B, was converted into 2,534,766 shares of the Company's common stock. In addition, 127,500 shares of unvested restricted grants were immediately vested upon the completion of the IPO. Total shares of common stock outstanding at the closing of the IPO amounted to 14,613,000. Upon the closing of the IPO, certain notes were to be automatically converted according to their terms into the Company’s common stock to the extent and provided that certain holders of these notes are not permitted to convert such notes to the extent that the holders or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Due to this 4.99% limitation, principal representing $47,781 of these notes remained outstanding and were converted into 273,034 shares of its common stock in August and September 2019 when the conversion did not result in the holders and any of its affiliates owning more than 4.99% of the Company's outstanding common shares.
Private Investment in Public Equity Offering
On June 16, 2019, the Company entered into a private offering with certain institutional and accredited investors for the sale by the Company of 675,000 units (each a “June Unit”) of common stock issued at $14.00 per June Unit for total gross proceeds of $9,450,000. Each June Unit consisted of (i) one share of the Company’s common stock, and (ii) 0.7 of a warrant to purchase one share of common stock (each a “June Warrant”). The offering price of the June Units was $14.00 per Unit. The June Warrants included in the June Units are exercisable at a price of $16.00 per share commencing on the date of issuance and will expire 5 years from the effective date of the registration statement pursuant to which the resale of the shares of common stock underlying the June Warrants are registered, or August 23, 2024. The Company estimates the net proceeds from the closing of the sale of the June Units on June 19, 2019 was approximately $8,600,000 after deducting the placement agent fees and estimated offering expenses payable by the Company.
On October 10, 2019, the Company entered into a private placement with certain institutional and accredited investors for the sale by the Company of 485,250 units (each an “October Unit”) of common stock issued at $12.88 per October Unit for total gross proceeds of $6,250,020. Each October Unit consisted of (i) one share of the Company’s common stock and (ii) 1.1 of a warrant to purchase one share of common stock (each an “October Warrant”). The October Warrants included in the October Units are exercisable at a price of $12.88 per share commencing on the date of issuance and will expire 5 years from the date of issuance. The Company estimates the net proceeds from the closing of the sale of the October Units on October 11, 2019 was approximately $5,700,000 after deducting the placement agent fees and estimated offering expenses payable by the Company.
Going Concern
The Company is an early stage and emerging growth company and has not generated any revenues to date. As such, the Company is subject to all of the risks associated with early stage and emerging growth companies. Since inception, the Company has incurred losses and negative cash flows from operating activities.
For the three and nine months ended September 30, 2019 and 2018, the Company incurred net losses of $4,294,897 and $2,978,621, respectively, and $10,476,776 and $6,895,374, respectively, and for the nine months ended September 30, 2019 and 2018, had net cash flows used in operating activities of $9,033,513 and $3,726,305, respectively. At September 30, 2019,
the Company had an accumulated deficit of $52,768,270, working capital of $6,172,954 and cash, cash equivalents and restricted cash of $8,708,641. The Company does not expect to experience positive cash flows from operating activities in the near future, if at all. The Company anticipates incurring operating losses for the next several years as it completes the development of its products and seeks requested regulatory clearances to market such products. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. The accompanying financial statements have been prepared on a going concern basis and do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s cash, cash equivalents and restricted cash on hand of $8,708,641 as of September 30, 2019 and subsequent closing of approximately $5,700,000 in net proceeds from the Company's private placement with certain institutional and accredited investors on October 11, 2019 are sufficient to fund the Company's operations through the third quarter of 2020 but not beyond. The Company also believes it will need to raise additional capital in order to continue to execute its business plan, including obtaining additional regulatory clearance for its products currently under development and commercializing and generating revenues from products under development. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company. A failure to raise sufficient capital will adversely impact the Company’s ability to meet its financial obligations as they become due and payable and to achieve its intended business objectives. If the Company is unable to raise sufficient additional funds, it will have to scale back its operations.
Basis of Presentation
The accompanying condensed interim financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all the information and notes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and accompanying notes as found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 29, 2019. In the opinion of management, the unaudited condensed interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2018 balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.
Segments
The Company operates in one reportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.
Use of Estimates in Financial Statement Presentation
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include valuation of equity related instruments, estimates of work performed by outside consultants, depreciable lives of long-lived assets (including property and equipment and intangible assets), and the valuation allowance related to deferred taxes. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid accounts with original maturities of three months or less to be cash equivalents or restricted cash. The Company participates in an insured cash sweep program through its bank that sweeps cash balances exceeding the FDIC insured limit of $250,000 into multiple accounts. Periodically in the ordinary course of business, the Company may carry cash balances at financial institutions in excess of the insured limits of $250,000.
Restricted cash consists of amounts held in deposit with the Company’s bank to collateralize a letter of credit which supports the Company's obligations to pay or perform according to the requirements of an underlying agreement with a certain vendor. Such letter of credit has an initial term of one year, renews automatically and can only be modified or canceled with the approval of the beneficiary. As of September 30, 2019, the letter of credit was not used.
Property and Equipment
Property and equipment are stated at historical cost and depreciated on a straight-line basis over the estimated useful lives, generally three to five years. Leasehold improvements are depreciated over the shorter of the remaining lease term or useful lives of the assets. Upon disposition of the assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Repairs and maintenance costs are included as expense in the accompanying condensed statements of operations.
Intangible Assets
Intangible assets include trademarks. At September 30, 2019 and December 31, 2018, the Company had trademarks of $89,521 and $84,942, respectively. The Company no longer amortizes trademarks with indefinite useful lives, rather, such assets are required to be tested for impairment at least annually or sooner if events or changes in circumstances indicate that the asset may be impaired. Amortization expense for each of the three months ended September 30, 2019 and 2018 was $0, and for the nine months ended September 30, 2019 and 2018 was $0 and $376, respectively.
Long-Lived Assets
The Company evaluates its long-lived assets, including equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the asset is considered impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.
Deferred Rent
Deferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period on a straight-line basis differ from the cash payments required.
Convertible Debt
When conversion terms related to convertible debt would be triggered by future events not controlled by the Company, the Company accounts for the conversion feature as contingent conversion options. Recognition of the intrinsic value of the conversion option is recognized only upon the occurrence of a triggering event.
Fair Value Measurements
Fair value is defined as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy which prioritizes the inputs used in the valuation methodologies, as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
At September 30, 2019 and December 31, 2018, the carrying amounts of the Company's financial instruments, including cash and cash equivalents, restricted cash and accounts payable, approximate their respective fair value due to the short-term nature of these instruments.
At September 30, 2019 and December 31, 2018, the Company does not have any assets or liabilities required to be measured at fair value on a recurring basis.
Deferred Direct IPO Issuance Costs – Offering
The Company had capitalized offering costs of $276,560, consisting of legal, accounting and other fees and costs related to the IPO, which were reclassified to additional paid-in capital ("APIC") as a reduction of the proceeds upon the closing of the IPO in February 2019.
Warrants to Purchase Common Stock
The Company issued warrants to purchase shares of common stock related to (i) bridge notes issued prior to its IPO, (ii) private investment public equity ("PIPE") deals, and (iii) as part of underwriter compensation in 2019 and 2018. The Company accounted for such warrants in accordance with Accounting Standards Codification (ASC) Topic 480-10, Distinguishing Liabilities from Equity, which identifies three categories of freestanding financial instruments that are required to be accounted for as a liability. Based on this guidance, the Company determined, for each issuance, that its warrants did not need to be accounted for as a liability. Accordingly, the warrants were classified as equity and are not subject to remeasurement at each balance sheet date. In addition, the Company accounts for issuance costs of warrants issued with debt instruments in accordance with ASC 470-20, Debt with Conversion and Other Options, which states proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) are allocated to elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are accounted for as paid-in capital. The remainder of the proceeds are allocated to the debt instrument, which may result in a discount or premium.
On July 1, 2019, the Company filed a Registration Statement on Form S-1 to register for resale the common stock underlying the June Units sold with the Company's June 2019 private offering. Related registration rights agreements are accounted for in accordance with Topic ASC Topic 450-20, Loss Contingencies, which requires measurement of the contingent liability when an entity would be required to deliver shares under a registration payment arrangement, the transfer of consideration is probable and the number of shares to be delivered can be reasonably estimated. Accordingly, there is no liability under the payment arrangement requiring disclosure or recognition.
The fair value of warrants is estimated using the Black-Scholes option pricing model, based on the market value of the underlying common stock at the measurement dates, the contractual terms of the warrants, risk-free interest rates and expected volatility of the price of the underlying common stock. There are no expected dividends.
Research and Development Expenses
Research and development expenses are recognized as incurred and include the costs related to the Company's various contract research service providers, suppliers, engineering studies, supplies, outsourced testing and consulting, clinical costs, patent costs and salaries and related costs of employees working directly on research activities.
Stock-Based Compensation
Stock-based compensation expense includes the estimated fair value of equity awards vested during the reporting period. The expense for equity awards vested during the reporting period is determined based upon the grant date fair value of the award and is recognized as expense over the applicable vesting period of the stock award using either the straight-line method or the accelerated method, depending on the vesting structure, and is included in general and administrative expenses.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of reported assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Tax rate changes are reflected in income during the period such changes are enacted. The Company's tax years ending December 31, 2016 and thereafter remain subject to examination by the tax authorities.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has recorded a full valuation allowance against its net total deferred tax assets as of September 30, 2019 and December 31, 2018 because management determined that it is not more-likely-than not that those assets will be realized. Accordingly, there was no income tax benefit for all periods presented.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company's financial statement as of September 30, 2019. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date.
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. No interest or penalties have been recognized for the three and nine months ended September 30, 2019 and 2018.
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. The Company's unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and are contemplated in the computations of basic and diluted earnings or loss per share. These securities do not participate in losses and accordingly no such allocation has been made in the periods presented. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
As of September 30, 2019, potentially dilutive securities included options to purchase 2,843,550 common shares, warrants to purchase 888,333 common shares and unvested restricted stock of 170,834 shares.
As of September 30, 2018, potentially dilutive securities included options to purchase 2,235,000 common shares, preferred stock convertible to 2,534,766 common shares, warrants to purchase 91,350 common shares, accrued preferred stock dividend convertible at a price determined by the Company's Board of Directors (the "Board") (the Company also had the option to pay the accrued preferred stock dividend in cash), unvested restricted stock of 227,500 shares, respectively, and notes and accrued interest convertible to common shares upon a future financing.
JOBS Act Accounting Election
The Company is an emerging growth company ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-EGCs but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised, and it has different application dates for public or private companies, the Company, as an EGC, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an EGC nor an EGC which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Subsequent Events
The Company’s management reviewed all material events through the date that the financial statements were issued for subsequent event disclosure consideration. See Note 7 and elsewhere in the notes to the financial statements for additional information.
Recent Accounting Standards
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, “Leases (Topic 842)”, which establishes a right-of-use (“ROU”) model requiring a lessee to recognize a ROU asset and a lease liability for all leases with terms greater-than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is currently effective, for public EGC companies like the Company, for fiscal years beginning after December 15, 2020 and may include interim periods within those fiscal years. The modified retrospective transition approach applies to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has the option to instead apply the provisions at the effective date without adjusting the comparative periods presented. The Company is currently evaluating the impact of this guidance on its financial position, results of operations, and cash flows.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation Stock Compensation (Topic 718), Improvements to Non-Employee Share-Based Payment Accounting.” Under legacy guidance, the accounting for non-employee share-based
payments differs from that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. ASU No. 2018-7 provides that existing employee guidance will apply to non-employee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attributions of compensation cost. The cost of non-employee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for non-employee awards. The Company adopted the standard as of January 1, 2019 and it did not have an impact on the Company's financial statements, as non-employee stock compensation is nominal relative to the Company's total expenses for the three and nine months ended September 30, 2019.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
Reclassifications
In certain instances, amounts reported in prior years' consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had an effect on previously reported cash flows between operating and financing activities.
Note 2 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
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September 30,
2019
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December 31,
2018
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Prepaid insurance
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$
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171,539
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$
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9,453
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Other prepaids and receivables
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26,733
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|
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1,080
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Total prepaid expenses and other current assets
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$
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198,272
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$
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10,533
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Note 3 - Property and Equipment
Property and equipment consisted of the following:
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September 30,
2019
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December 31,
2018
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Computer equipment and software
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$
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115,911
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|
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$
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105,704
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Research and development equipment
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244,480
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244,480
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Lab equipment
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780,000
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780,000
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Leasehold improvements
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271,124
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242,167
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Furniture
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19,893
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19,893
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Subtotal
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1,431,408
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1,392,244
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Less: accumulated depreciation
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(524,099)
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(378,004)
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Total property and equipment, net
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$
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907,309
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$
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1,014,240
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Depreciation expense for the three months ended September 30, 2019 and 2018 was $73,347 and $30,028, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $146,095 and $89,945, respectively.
Note 4 - Convertible Notes Payable
On February 19, 2019, the Company consummated its IPO. In connection with the closing of the IPO, the Company's convertible notes (and related accrued interest) of $11,784,987 were converted into 6,825,391 shares of the Company's common stock. Upon the closing of the IPO, certain notes were to be automatically converted according to their terms into the Company’s common stock to the extent and provided that certain holders of these notes are not permitted to convert such notes to the extent that the holders or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock
after such conversion. Due to this 4.99% limitation, principal representing $47,781 of these notes remained outstanding and were converted into 273,034 shares of its common stock in August and September 2019 when the conversion did not result in the holders and any of its affiliates owning more than 4.99% of the Company's outstanding common shares.
The total amount of issuances under the Company's First Note and First Amendment throughout 2017 amounted to $5,000,000 and were issued to a single related party, who is a major stockholder of the Company. As a result of the Company’s IPO on February 19, 2019, the principal amount of $5,000,000 and accrued interest of $944,063 were converted into 1,585,086 shares of the Company’s common stock.
On November 1, 2017, the Board approved a second note purchase agreement (the "Second Note") allowing the Company to sell an aggregate of $1,900,000 of Notes. The Notes were convertible into either the Company’s preferred or common stock (depends on the equity securities offered in the equity financing) at 75% of the price paid per share in a subsequent equity financing where the Company receives gross proceeds of not less than $5,000,000 or at 85% of the per share price determined by dividing the equity value of the Company that is expected to be available for distribution to the Company’s stockholders by the aggregate number of the Company’s fully-diluted common shares upon the closing of a sale, liquidation, merger, or change of control of the Company. The Notes bore interest at 8.25% per annum and initially matured on June 29, 2018, which date was extended as discussed below. At maturity, the interest rate increased to 12.0% per annum.
The Company closed the initial tranche of the Second Note on November 9, 2017 for $400,000, followed by a tranche on December 1, 2017, for $375,000, a third tranche on December 26, 2017 for $250,000, a fourth tranche on January 8, 2018 for $250,000, a fifth tranche on January 25, 2018 for $250,000 and a final tranche on February 13, 2018 for $375,000 for a total of $1,900,000.
On June 29, 2018, the Company and the related party modified the maturity date of the Notes entered into under the First Note and Second Note to April 30, 2019.
The total amount of issuance under the Second Note amounted to $1,900,000 and were issued to a single related party, who is a major stockholder of the Company. As a result of the Company’s IPO, the principal amount of $1,900,000 and accrued interest of $223,368 were converted into 566,235 shares of the Company’s common stock.
On April 2, 2018, the Board approved a note purchase agreement (the "Third Note"), which was amended on August 10, 2018, allowing the Company to sell an aggregate of $500,000 of Notes. The Third Note provided that, on the closing date of the IPO, the outstanding principal and accrued, but unpaid, interest would be converted into common stock at the conversion price of $0.175. However, certain notes holders were not permitted to convert their notes when the holders or any of its affiliates would beneficially owned in excess of 4.99% of the Company’s common stock after such conversion. The holders of the Company’s outstanding preferred shares agreed to waive the adjustment to the preferred stock conversion price triggered by the Third Note. The Notes bore interest at 10.0% per annum and were to mature on April 2, 2020 but were settled as a result of the Company's IPO on February 19, 2019.
The total amount of issuance under the Third Note amounted to $500,000. The Company issued $250,000 to a single related party, who is a major stockholder of the Company, and $250,000 to four non-related party investors. As a result of the Company’s IPO, principal amount of $452,219 and accrued interest of $43,562 were converted into 2,833,034 shares of the Company’s common stock. In August and September 2019, the remaining principal amount of $47,781 was converted into 273,034 shares of the Company's common stock. As of September 30, 2019, the amount outstanding under the Third Note was fully converted for a total of 3,106,068 shares of the Company's common stock.
On April 17, 2018, the Board approved a note purchase agreement (the "Fourth Note") allowing the Company to sell an aggregate of $3,000,000 of Notes. The Fourth Note provided that on the closing date of the IPO, the outstanding principal and accrued, but unpaid, interest would be converted into common stock at the conversion price of $1.75. The holders of the Company’s outstanding preferred shares agreed to waive the adjustment to the preferred stock conversion price triggered by the Fourth Note. The Notes bore interest at 10% per annum and matured two years from the Note issuance date but were settled as a result of the Company's IPO on February 19, 2019.
The total amount of issuance under the Fourth Note amounted to $3,000,000. The Company issued $1,272,000 in principal amount of such Notes to related party investors and $1,728,000 to non-related party investors. As a result of the Company’s IPO, the principal amount of $3,000,000 and accrued interest of $221,775 were converted into 1,841,036 shares of the Company’s common stock.
The Company incurred issuance costs relating to the Fourth Note in the amount of $163,760, which were being amortized over 24-months but were accelerated as a result of the Company’s IPO closing, resulting in the remaining $118,492 being expensed during the nine months ended September 30, 2019.
The Company also issued warrants to purchase 91,350 shares of common stock at a price of $1.75 per share to placement agents in connection with the Notes issued under the Fourth Note. For additional information, see Note 6. The value of these warrants were $103,006 which was being amortized over 24-months months but were accelerated as a result of the Company’s IPO closing, resulting in the remaining $74,532 being expensed during the nine months ended September 30, 2019.
On August 7, 2018, the Company's Board authorized it to commence a new offering for up to $485,000 10% non-convertible promissory notes, which were accompanied by a five-year warrant to purchase one share of common stock with an exercise price of $1.75 per share for each dollar in principal amount of notes purchased (collectively, the "Fifth Note") that can be exercised (i) at any time on or after the issuance of the notes and (ii) on or prior to the close of business on the five-year anniversary of the issuance of the notes. Mr. Klemp, Dr. Capelli, Ms. Bisson and other members of management collectively purchased $125,000 of such notes and warrants. The principal and interest on the Fifth Note were due on the earlier of one-year from the date of issuance or upon successful completion of the IPO.
On August 31, 2018, the Company's Board approved a $200,000 increase to the Fifth Note authorized on August 7, 2018. On December 21, 2018, the Company's Board approved an additional $300,000 increase to the Fifth Note authorized on August 7, 2018 up to a maximum of $985,000. From October 2018 to February 2019, the Company issued $125,000 and $860,000 of the Fifth Note to related parties and non-related parties, respectively. On February 15, 2019, the Company paid $985,000 in principal and $20,038 in accrued interest to the note holders to repay the Fifth Note in full.
The Company issued 685,000 warrants in connection with the issuances of the Fifth Note in 2018. These warrants were valued at $775,616. Proceeds of $363,748 (of which $66,423 was for related party and $297,325 was for non-related party) were allocated to issuance cost based on the relative fair value of these warrants. These issuance costs were being amortized over 24-months but were accelerated as a result of the Company’s IPO closing, resulting in the remaining balance of $325,955 being expensed during the nine months ended September 30, 2019.
The Company issued 300,000 warrants in connection with the issuances of the Fifth Note in January and February 2019. These warrants were valued at $285,234. Proceeds of $145,974 (of which all was for non-related party) were allocated to issuance cost based on the relative fair value of these warrants. These issuance costs were being amortized over 24-months but were accelerated as a result of the Company’s IPO closing, resulting in the entire balance of $145,974 being expensed during the nine months ended September 30, 2019.
Note 5 - Commitments and Contingencies
On April 5, 2012, the Company entered into a Patent and Technology License Agreement with The University of Texas M.D. Anderson Cancer Center (“MD Anderson”). Pursuant to the agreement, the Company obtained a royalty-bearing, worldwide, exclusive license to intellectual property including patent rights related to the patents and technology the Company uses. Under the agreement, Soliton agreed to pay a nonrefundable license documentation fee 30 days after the effective date of the agreement. Additionally, Soliton agreed to pay a nonrefundable annual maintenance fee starting on the third anniversary of the effective date of the agreement, which escalates each anniversary. Additionally, the Company agreed to a running royalty percentage of net sales. The Company also agreed to make certain milestone and sublicensing payments, including a $250,000 milestone payment made in June 2019 after the Company received U.S. Food & Drug Administration ("FDA") clearance for our RAP device for tattoo removal.
MD Anderson has the right to terminate the agreement upon advanced notice in the event of a default by Soliton. The agreement will expire upon the expiration of the licensed intellectual property. The rights obtained by the Company pursuant to the agreement are made subject to the rights of the U.S. government to the extent that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the U.S. government. All out-of-pocket expenses incurred by MD Anderson in filing, prosecuting and maintaining the licensed patents have been and shall continue to be assumed by the Company.
As the inventor of the intellectual property licensed from MD Anderson, Dr. Capelli, the Company's Chief Executive Officer, is entitled to 50% of the license income (which is determined after MD Anderson recoups any costs associated therewith) that the Company is required to pay to MD Anderson pursuant to the Company's license agreement with MD Anderson.
Leases
The Company leases space for its corporate office. The lease agreement provides for a 5 year term beginning on July 15, 2015, for rent payments of $7,867 per month. Total rent expense under this office space lease arrangement for each of the three months ended September 30, 2019 and 2018 was $23,602 and $24,157, respectively. Total rent expense for the nine months ended September 30, 2019 and 2018 was $71,918 and $65,108, respectively.
Future minimum lease payments as of September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
|
|
|
2019
|
|
$
|
25,988
|
|
|
2020
|
|
106,153
|
|
|
2021
|
|
35,751
|
|
|
Total future minimum lease payments
|
|
$
|
167,892
|
|
Letters of Credit
The Company has an irrevocable letter of credit which supports its obligations to pay or perform according to the requirements of an underlying agreement with a certain vendor. Such letter of credit has an initial term of one year, renews automatically for an additional year and can only be modified or canceled with the approval of the beneficiary. As of September 30, 2019, the letter of credit was not used.
Legal Proceedings
In the normal course of business, from time-to-time, the Company may be subject to claims in legal proceedings. However, the Company does not believe it is currently a party to any pending legal actions. Notwithstanding, legal proceedings are subject-to inherent uncertainties, and an unfavorable outcome could include monetary damages, and in such event, could result in a material adverse impact on the Company's business, financial position, results of operations or cash flows.
Note 6 - Stockholders’ Deficit
Preferred Stock
Until amending the Company's certificate of incorporation in February 2019, the Company was authorized to issue 2,534,766 shares of preferred stock with a par value of $0.001 per share with such designation, rights, and preferences as may be determined from time-to-time by the Company's Board. As of September 30, 2019 and December 31, 2018, there were 0 and 416,666 Series A preferred stock and 0 and 2,118,100 Series B preferred stock issued and outstanding, respectively. Dividends accrued at a rate of 8.00% per annum based on $4.80 per Series A preferred share, the dividends were cumulative but non-compounding.
The Series B preferred stock had similar rights as Series A preferred stock except that the dividends were based on $6.61 per Series B preferred share and Series B preferred stock was convertible into common stock at a rate of $6.61 divided by a conversion price initially set at $6.61. As of the Company’s IPO date of February 19, 2019 and December 31, 2018, accrued dividends for preferred stock were $4,773,480 and $4,613,261, respectively. The holder of the Series A and Series B preferred stock agreed to convert the preferred stock into common stock upon the completion of the Company's IPO. The holders of the Company’s outstanding shares of preferred stock agreed to waive the adjustment to the conversion price of the preferred stock upon the issuances of the Third and Fourth Note.
On February 19, 2019, all outstanding shares of Series A and Series B preferred stock and accrued dividends on these shares were converted into 2,534,766 and 954,696 shares of common stock upon the closing of the Company’s IPO. The Company amended its articles of incorporation on February 19, 2019 to no longer have preferred shares authorized under the amended certificate of incorporation.
Adoption of 2012 Long Term Incentive Plan
In November 2012, the Company’s Board and stockholders adopted the 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan is designed to enable the Company to offer employees, officers, directors and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may be granted under the 2012 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Company’s Board. The 2012 Stock Plan reserves shares of common stock for issuance in accordance with the 2012 Stock Plan’s terms. Total number of shares reserved and
available for issuance under the plan is 789,745 shares. As of September 30, 2019, 14,745 shares remained under the 2012 Stock Plan. The Company does not intend to utilize the 2012 Stock Plan and instead intends to utilize the 2018 Stock Plan.
Adoption of 2018 Stock Plan
In June 2018, the Company’s Board and stockholders adopted the 2018 Stock Plan. The 2018 Stock Plan is designed to enable the Company to offer employees, officers, directors and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may be granted under the 2018 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Company’s Board. The 2018 Stock Plan reserves shares of common stock for issuance in accordance with the 2018 Stock Plan’s terms. Total number of shares reserved and available for issuance under the plan is 3,400,000 shares. As of September 30, 2019, 571,450 shares remained available for grant under the 2018 Stock Plan.
Restricted Stock
Restricted stock activity for the nine months ended September 30, 2019 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Outstanding at December 31, 2018
|
127,500
|
|
|
$
|
3.21
|
|
|
Outstanding at Granted
|
200,000
|
|
|
11.54
|
|
|
Outstanding at Vested
|
(156,666)
|
|
|
4.76
|
|
|
Outstanding at Outstanding at September 30, 2019
|
170,834
|
|
|
$
|
11.54
|
|
On May 8, 2019, the Company granted and issued 200,000 shares of restricted common stock to three consultants in connection with the provision of services pursuant to agreements entered into in April 2019. The consultants were each accredited investors. 25,000 shares vested within four months of the approval date of the agreement. The remaining 175,000 shares vest over 42 months, beginning on September 19, 2019. As of September 30, 2019, 29,166 shares have vested and 170,834 remain unvested.
During the three months ended September 30, 2019 and 2018, the Company recorded $166,289 and $142,634, respectively, in stock-based compensation for the restricted shares previously issued. During the nine months ended September 30, 2019 and 2018, the Company recorded $763,320 and $427,902, respectively, in stock-based compensation for the restricted shares previously issued.
As of September 30, 2019, there was $1,809,135 of unrecognized compensation expense related to restricted shares.
Stock Options
The following table summarizes stock option activities for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining Life
(in Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
2,235,000
|
|
|
$
|
1.74
|
|
|
9.44
|
|
$
|
23,100
|
|
|
Granted
|
608,550
|
|
|
5.70
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
2,843,550
|
|
|
$
|
2.59
|
|
|
8.85
|
|
$
|
23,040,551
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2019
|
767,125
|
|
|
$
|
1.73
|
|
|
8.86
|
|
$
|
6,876,323
|
|
On July 10, 2019, the Company granted 19,000 options to purchase shares of its common stock with a term of 10 years and vesting 25.00% annually over a four-year period. The options had an exercise price of $17.50.
During the nine months ended September 30, 2019, the Company granted certain individuals options to purchase 608,550 shares of the Company’s common stock with an average exercise price of $5.70 per share, for a term of 10 years, and a vesting period ranging from 25.00% per year over 120 days to 25.00% per quarter over 1 year. The options have an aggregated grant date fair value of $2,446,102 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate ranging from 1.76% to 2.53% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life ranging from 5.27 to 6.25 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 84.3% to 85.1% based on the historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock ranging from $1.75 to $17.50 per share.
All options issued and outstanding are being amortized over their respective vesting periods. During the three months ended September 30, 2019 and 2018, the Company recorded option expense of $495,437 and $171,330, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded stock option expense of $1,096,480 and $233,303, respectively. The unrecognized compensation expense at September 30, 2019 was $3,670,583.
Warrants
On April 20, 2018, the Company issued warrants to purchase 79,350 shares of common stock at an exercise price of $1.75. The warrants expire on April 20, 2023. The warrants were issued to a placement agent in connection with notes issued under the Fourth Note.
On June 8, 2018, the Company issued warrants to purchase 12,000 shares of common stock at an exercise price of $1.75. The warrants expire on June 8, 2023. The warrants were issued to a placement agent in connection with notes issued under the Fourth Note.
From October through December 2018, the Company issued warrants to purchase 685,000 shares of common stock at an exercise price of $1.75. The warrants expire 5 years from the date of issuance. In addition, the Company issued warrants to purchase 300,000 shares of common stock at an exercise price of $1.75 on various dates in January and February of 2019. The warrants were issued to investors in connection with notes issued under the Fifth Note.
On February 19, 2019, the Company issued warrants to the underwriters of the Company's IPO to purchase 152,081 shares of common stock at an exercise price of $6.00. The warrants expire five years from the date of issuance.
The grant date fair value of these 1,228,431 warrants was $1,636,232, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount rate in the range of 2.5% to 2.8% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected term of 5 years based on the term of the warrants, (3) expected volatility of 84% to 85% based on the historical volatility of comparable companies' stock, (4) no expected dividends, and (5) fair value of the Company's stock at $1.67 per share for warrants issued prior to the IPO, a value determined by the Company's Board after reviewing and considering, among other factors, a valuation report issued by an independent appraisal firm, or the fair market value of the Company's stock at the closing of its' IPO on February 19, 2019 of $4.87 for warrants on that day.
The fair value amount was included in discounts on convertible notes payable and was amortized over the life of the convertible notes payable. As a result of the Company’s IPO closing on February 19, 2019, all $664,953 of unamortized discount on convertible notes payable was accelerated and recorded as expense.
On June 16, 2019, the Company entered into a private offering with certain institutional and accredited investors for the sale by the Company in a private placement of 675,000 units (each a “June Unit”), each June Unit consisting of (i) one share of its common stock, and (ii) 0.7 of a warrant (a total of 472,500) to purchase one share of common stock (each a “June Warrant”). The June Warrants included in the June Units are exercisable at a price of $16.00 per share commencing on the date of issuance and will expire 5 years from the effective date of the registration statement pursuant to which the resale of the shares of common stock underlying the June Warrants are registered, or August 23, 2024. The Company estimates the net proceeds from the closing of the sale of the June Units on June 19, 2019 was approximately $8,600,000 after deducting the placement agent fees and estimated offering expenses payable by the Company.
The grant date fair value of these 472,500 June Warrants was $4,420,503, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount rate of 1.85% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected term of 5 years based on the term of the warrants, (3) expected volatility of 85% based on the historical volatility of comparable companies' stock, (4) no expected dividends, and (5) fair value of the Company's stock at $14.30 per share.
The fair value amount was included in additional paid-in-capital as a deal cost.
The following table summarizes warrant activity for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
776,350
|
|
|
$
|
1.75
|
|
|
4.80
|
|
$
|
—
|
|
|
Granted
|
924,581
|
|
|
9.73
|
|
|
|
|
|
|
Exercised
|
(644,028)
|
|
|
2.15
|
|
|
|
|
5,500,609
|
|
|
Forfeited (cashless exercise)
|
(168,570)
|
|
|
4.06
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
888,333
|
|
|
$
|
9.33
|
|
|
4.46
|
|
$
|
1,208,572
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2019
|
888,333
|
|
|
$
|
9.33
|
|
|
4.46
|
|
$
|
1,208,572
|
|
Note 7 - Subsequent Events
On October 10, 2019, the Company entered into a private placement of 485,250 units (each an “October Unit”) of common stock issued at $12.88 per October Unit for total gross proceeds of $6,250,020. Each October Unit consisting of (i) one share of the Company’s common stock, and (ii) 1.1 of a warrant to purchase one share of common stock (each an “October Warrant”). The October Warrants included in the October Units are exercisable at a price of $12.88 per share commencing on the date of issuance and will expire 5 years from the date of issuance. The Company estimates the net proceeds from the closing of the sale of the October Units on October 11, 2019 was approximately $5,700,000 after deducting the placement agent fees and estimated offering expenses payable by the Company.
The grant date fair value of these 533,775 October Warrants was $4,537,648, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount rate of 1.59% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected term of 5 years based on the term of the warrants, (3) expected volatility of 82.92% based on the historical volatility of comparable companies' stock, (4) no expected dividends, and (5) fair value of the Company's stock at $12.88 per share.