Our executive officers, directors and principal stockholders own a majority of our outstanding ~~Common Stock.~~common stock. Entities associated with Abingworth LLP, Vivo Ventures, Oracle Investment Management and ~~our Chairman, Ernest Mario,~~Jack W. Schuler, as of December 31, ~~2016,~~2018, beneficially own approximately ~~55%~~46.2 percent of our ~~Common Stock.~~common stock. As a result, the ~~forgoing~~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.

We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management has devoted and will be required to continue to devote substantial time to new compliance initiatives.

We have incurred and will continue to incur significant legal, accounting and other expenses as a public company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the other rules and regulations of the SEC, and the rules and regulations of The NASDAQ Capital Market, or NASDAQ. The expenses of being a public company are material, and compliance with the various reporting and other requirements applicable to public companies requires considerable time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and national securities exchanges have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. These rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, these rules and regulations may make it difficult and expensive for us to obtain adequate director and officer liability insurance, and we may be required to accept reduced policy limits on coverage or incur substantial costs to maintain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified personnel to serve on our Board of Directors, our board committees, or as executive officers.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section ~~404, beginning with our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed March 13, 2015.~~404. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an emerging growth company or smaller reporting company. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do 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, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources. Our ability to 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 and to obtain an unqualified report on internal controls from our auditors as required under Section 404. This, in turn, could have an adverse impact on trading prices for our ~~Common Stock,~~common stock, and could adversely affect our ability to access the capital markets.

Our ability to use our net operating loss carry forwards and certain other tax attributes will be limited.

Our ability to utilize our federal net operating loss, carryforwards and federal tax credit will be limited under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code. The limitations apply if an “ownership change,” as defined by Section 382, occurs. Generally, an ownership change occurs if the percentage of the value of the stock that is owned by one or more direct or indirect “five percent shareholders” increases by more than 50% over their lowest ownership percentage at any time during the applicable testing period (typically three years). 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. 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.

~~Our Common Stock is eligible for sale and as a result, any such sales could depress the market price of our Common Stock.~~

As of December 31, 2016, we had Series A Warrants outstanding exercisable for an aggregate of 2,425,605 shares of Common Stock, Series C Warrants outstanding exercisable for an aggregate of 590,415 shares of Common Stock, Series D Warrants outstanding exercisable for an aggregate of 2,930,812 shares of Common Stock and other warrants exercisable for an aggregate of 571,906 shares of Common Stock. As of December 31, 2016, we had 12,780 shares of Series B Convertible Preferred Stock outstanding exercisable for an aggregate of 12,780,000 shares of Common Stock. As of December 31, 2016, 2,908,430 options to purchase shares of our Common Stock were issued and outstanding with a weighted average exercise price of $3.42 per share. The sale or even the possibility of sale of the shares of Common Stock, or the exercise of options or

~~warrants to purchase shares of our Common Stock and subsequent sale thereof could substantially reduce the market price for our Common Stock or our ability to obtain future financing.~~

In connection with the sale and issuance of Series B Convertible Preferred Stock to Sabby pursuant to the 2016 Sabby Purchase Agreement, we also amended the 2,702,704 Series D Common Stock Purchase Warrants issued to Sabby under the 2015 Sabby Purchase Agreement. The per share exercise price of the Common Stock underlying the Series D Common Stock Warrants was reduced from $2.46 per share to $1.75 per share. The sale or even the possibility of sale of the Common Stock or the underlying shares of Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock or the Series B Convertible Preferred Stock, or upon exercise of the amended Series D Common Stock Purchase Warrants could substantially reduce the market price for our Common Stock or our ability to obtain future financing.

In addition, on March 7, 2017, as contemplated by the Merger Agreement, we issued 8,333,333 shares of common stock for an investment of $8 million from the completion of the concurrent financing, which shares may, in the future, be available for resale upon the filing of a registration statement that covers such shares and which has been declared effective by the SEC, and issued 2,083,333 shares of common stock for an investment of $2 million from Aspire Capital pursuant to the 2017 Aspire Purchase Agreement. Aspire Capital may ultimately purchase all, some or none of the $17.0 million worth of common stock, of which $2 million was sold on March 7, 2017, issuable under the 2017 Aspire Purchase Agreement, including the 708,333 Commitment Shares. All the shares issued under the Aspire Purchase Agreement are eligible for future resale under a registration statement on Form S-1 on February 1, 2017 that was declared effective by the SEC on February 15, 2017.

As our warrant holders exercise their warrants into shares of our ~~Common Stock,~~common stock, our stockholders will be diluted.

The exercise of some or all of our warrants results in issuance of common ~~shares~~stock that dilute the ownership interests of existing stockholders. Any sales of the ~~Common Stock~~common stock issuable upon exercise of the warrants could adversely affect prevailing market prices of our ~~Common Stock.~~

common stock.

If holders of our warrants elect to exercise their warrants and sell material amounts of our ~~Common Stock~~common stock in the market, such sales could cause the price of our ~~Common Stock~~common stock to decline, and the potential for such downward pressure on the price of our ~~Common Stock~~common stock may encourage short selling of our ~~Common Stock~~common stock by holders of our warrants or other parties.

If there is significant downward pressure on the price of our ~~Common Stock,~~common stock, it may encourage holders of our warrants, or other parties, to sell shares by means of short sales or otherwise. Short sales involve the sale, usually with a future delivery date, of ~~Common Stock~~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,~~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~~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~~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~~common stock declines.

Under certain circumstances we may be required to settle the value of the Series A, Series C, 2017 PIPE Warrants and ~~Series C~~2018 PIPE Warrants in cash.

If, at any time while the Series A, Series C, 2017 PIPE Warrants and ~~Series C~~2018 PIPE Warrants, or the Warrants, are outstanding, we enter into a “Fundamental Transaction” (as defined in the ~~Series A Warrant and Series C Warrant Agreements)~~Warrants), which includes, but is not limited to, a purchase offer, tender offer or exchange offer, a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or other scheme of arrangement), then each registered holder of outstanding ~~Series A Warrants and Series C~~ Warrants as at any time prior to the consummation of the Fundamental Transaction, may elect and require us to purchase the ~~Series A and Series C~~ Warrants held by such person immediately prior to the consummation of such Fundamental Transaction by making a cash payment in an amount equal to the Black Scholes Value of the remaining unexercised portion of such registered holder’s ~~Series A Warrants and Series C~~ Warrants.

We might not be able to maintain the listing of our securities on The NASDAQ Capital Market.

We have listed our ~~Common Stock~~common stock and Series A Warrants on NASDAQ. We might not be able to maintain the listing standards of that exchange, which includes requirements that we maintain our shareholders’ equity, total value of shares held by unaffiliated shareholders, market capitalization above certain specified levels and minimum bid requirement of $1.00 per common share. On October 24, 2016, we received a letter from the Listing Qualifications Department of NASDAQ indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, the Company did not

meet the minimum bid price of $1.00 per share required for continued listing on NASDAQ pursuant to Nasdaq Listing Rule 5550(a)(2). The letter also indicated that we will be provided with a compliance period of 180 calendar days, or until April 24, 2017, in which to regain compliance pursuant to NASDAQ Listing Rule 5810(c)(3)(A). In addition, weWe do not expect to become profitable for some time and there is a risk that our shareholders’ equity could fall below the $2.5 million level required by NASDAQ. If we do not regain compliance with the minimum bid requirement or our ~~shareholders'~~shareholders’ equity falls below $2.5 million, it will cause us to fail to conform to the NASDAQ listing requirements on an ongoing basis, which in turn could cause our ~~Common Stock~~common stock to cease to trade on the NASDAQ exchange, and be required to move to the Over the Counter Bulletin Board or the “pink sheets” exchange maintained by OTC Markets Group, Inc. The OTC Bulletin Board and the “pink sheets” are generally considered to be markets that are less efficient, and to provide less liquidity in the shares, than the NASDAQ market.

Due to the speculative nature of warrants, there is no guarantee that it will ever be profitable for holders of the warrants to exercise the warrants.

The warrants we have issued and outstanding do not confer any rights of ~~Common Stock~~common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of ~~Common Stock~~common stock at a fixed price for a limited period of time. Specifically, holders of Series A Warrants may exercise their right to acquire the ~~Common Stock~~common stock and pay an exercise price of ~~$6.50~~$32.50 per share prior to the expiration of the five-year term on November 12, 2019, after which date any unexercised Series A Warrants will expire and

have no further value. Holders of Series C Warrants may exercise their right to acquire ~~Common Stock~~common stock and pay an exercise price of ~~$6.25~~$31.25 per share prior to the expiration of the five-year term on March 4, 2020. Holders of the 2017 PIPE Warrants are entitled to purchase one share of our common stock at an exercise price equal to $2.00 per share prior to at the earlier of (i) December 15, 2020 or (ii) 30 days following positive Phase III results for DCCR tablet in Prader-Willi syndrome. Holders of the 2018 PIPE Warrants are entitled to purchase one share of our common stock at an exercise price equal to $2.00 per share prior to the expiration of the five-year term on December 21, 2023.

Following the amendment of the Series D Common Stock Purchase Warrants, the holders may exercise their right to acquire ~~Common Stock~~common stock and pay an amended exercise price of ~~$1.75~~$8.75 per share prior to the expiration of the five-year term on October 15, 2020. In certain circumstances, the Series A Warrants, Series C Warrants and Series D Warrants may be exercisable on a cashless basis. There can be no assurance that the market price of the ~~Common Stock~~common stock will ever equal or exceed the exercise price of the warrants, and, consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

The trading market for our ~~Common Stock~~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~~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,~~common stock, thereby depressing the market price of our ~~Common Stock.~~common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors 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:

our Board of Directors 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 of Directors has the right to elect directors to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which will prevent stockholders from being able to fill vacancies on our Board of Directors;

our stockholders are not able to act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock cannot take certain actions other than at annual

stockholders’ meetings or special stockholders’ meetings called by our Board of Directors, the chairman of our board, the chief executive officer or the president;

our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders 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 of Directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential ~~acquiror~~acquirer from conducting a solicitation of proxies to elect the ~~acquiror’s~~acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and

our Board of Directors are able to issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

Our employment agreements with our executive officers may require us to pay severance benefits to any of those persons who are terminated in connection with a change in control of us, which could harm our financial condition or results.

Certain of our executive officers are parties to employment agreements that contain change in control and severance provisions providing for aggregate cash payments ~~of up to approximately $2.3 million~~ for severance and other benefits and acceleration of ~~vesting of~~ stock options ~~with a value of approximately $0.8 million,~~vesting in the event of a termination of employment in connection with a change in control of us. The accelerated vesting of options could result in dilution to our existing stockholders and harm the market price of our ~~Common Stock.~~common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

Because we do not anticipate paying any cash dividends on our ~~Common Stock~~common stock in the foreseeable future, capital appreciation, if any, will be our stockholders’ sole source of gain.

We have never declared or paid cash dividends on our ~~Common Stock.~~common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our ~~Common Stock~~common stock will be our stockholders’ sole source of gain for the foreseeable future.

The sale of our ~~Common Stock~~common stock to ~~Aspire Capital and Sabby~~investors in the 2018 PIPE Offering may cause substantial dilution to our existing stockholders and the sale of ~~Common Stock~~common stock by ~~Aspire Capital and Sabby~~these investors could cause the price of our ~~Common Stock~~common stock to decline.

~~We have registered for sale 9,291,667 shares of Common Stock that~~

On December 19, 2018 , we ~~may sell to Aspire Capital under the 2017 Aspire~~entered into a Securities Purchase Agreement ~~plus 708,333 shares of Common Stock that were commitment shares that we issued to Aspire Capital. It is anticipated that the shares sold to Aspire Capital~~with certain purchasers , pursuant to ~~the 2017 Aspire Purchase Agreement~~which we sold and ~~registered in this offering will be sold over~~issued 10,272,375 units at a ~~period~~price per unit of up$1.61 , for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of our common stock and a warrant to approximately thirty months. The number of shares ultimately offered for sale by Aspire Capital under this prospectus is dependent upon the number of shares we elect to sell to Aspire Capital under the 2017 Aspire Purchase Agreement. Depending upon market liquidity at the time, sales ofpurchase 0.05 shares of our common ~~stock under the Purchase Agreement may cause the trading~~sto ck at an exercise price of ~~our common stock to decline. Aspire Capital may ultimately purchase all, some or none~~$2.00 per share, for an aggregate of the $17.0 million worth of common stock that, including the 708,333 Commitment Shares. Aspire Capital may sell all, some or none of our shares that it holds or comes to hold under the 2017 Aspire Purchase Agreement. Sales by Aspire Capital or any of the purchasers of our Common Stock in the concurrent financing may result in dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our Common Stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of sales of

~~our shares to Aspire Capital, and the 2017 Aspire Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us.~~

We have also registered for sale the shares of Common Stock underlying the Series B Convertible Preferred Stock sold and issued, or available for sale and issuance, to Sabby pursuant to the 2016 Sabby Purchase Agreement. Sabby may sell all, some or none of our shares that it holds under the 2016 Sabby Purchase Agreement. The issuance of of the shares of Common Stock underlying the Series B Convertible Preferred Stock and the amended Series D Common Stock Purchase Warrants to Sabby may cause substantial dilution to our existing stockholders, and the sale of the underlying shares of Common Stock by Sabby could cause the price of our Common Stock to decline. The sale of a substantial number of shares of our Common Stock by Sabby, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. The 2016 Sabby Purchase Agreement also provides Sabby a right to participate in any future sale of our equity securities.

~~In addition, on March 7, 2017, as contemplated by the Merger Agreement, we issued 8,333,333~~10,272,375 shares of common stock ~~for~~and corresponding warrants to purchase an ~~investment~~aggregate of ~~$8 million from~~513,617 shares of common stock , together with the ~~completion~~shares of common stock are referred to as the ~~concurrent financing,~~2018 Re sale Shares. We also granted certain registration rights to these stockholders, pursuant to which, ~~shares may, in~~among other things, we will prepare and file with the ~~future, be available for resale upon the filing of~~SEC a registration statement ~~that covers such shares and which has been declared effective by~~to register for resale the ~~SEC.~~

~~Risks Relating~~2018 Resale Shares prior to ~~the Company after the Merger with Essentialis~~

~~Completion of the transactions, which happened on~~ March ~~7, 2017 (see Note 14), will result in the issuance of a significant amount of additional Capnia common stock, which could depress the trading price of Capnia common stock.~~

The merger and concurrent financing will result in the issuance of a significant amount of Capnia common stock. The Capnia common stock to be issued in the merger and concurrent financing will represent an increase in the outstanding Capnia common stock as of the date of the completion of the merger of up to approximately 172% of the common shares currently outstanding. The issuance of such a significant amount of Capnia common stock could depress the trading price of Capnia common stock and you may lose all or a part of your investment.

Following the completion of the merger, the executive officers, directors and principal stockholders will 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.

Following the completion of the merger, our executive officers, directors and stockholders own a majority of our outstanding Common Stock. Entities associated with Vivo Ventures, Forward Ventures, Technology Partners and our Chairman, Ernest Mario, as of March 7, 2017, own approximately 64.7% of our Common Stock. As a result, the forgoing 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.

~~Failure to retain key employees could diminish the benefits of the merger and concurrent financing transactions.~~

~~The successful acquisition of Essentialis will depend in part on the retention of key personnel at Essentialis,~~

including senior management. There can be no assurances Capnia will be able to retain Essentialis’s key personnel. In addition, no assurance can be given that after the transactions, Capnia and the surviving entity will be able to attract or retain key management personnel and other key employees to the same extent that Capnia and Essentialis have been previously able to attract or retain their own employees.

Essentialis is, and following the completion of the merger, the combined company will be primarily a clinical-stage company with no approved products, which makes assessment of our future viability difficult.

Essentialis is, and following the completion of the merger, the combined company, will be primarily a clinical-stage company, with a relatively limited operating history upon and with no approved therapeutic products or revenues from the sale of therapeutic products. Essentialis’s operations to date have been limited to organizing, staffing and financing, applying for patent rights, undertaking clinical trials of its primary product candidate, DCCR, and engaging in research and development. Essentialis has not yet demonstrated an ability to obtain regulatory approval, manufacture commercial-scale products, or conduct the sales and marketing activities necessary for successful product commercialization. As a result, there is limited

information about Essentialis for investors to use when assessing our future viability as a combined company 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.~~

~~Essentialis is, and following the merger, we, as a combined company will be significantly dependent upon the success of DCCR, our sole therapeutic product candidate.~~

To date, Essentialis has invested, and following the completion of the merger, we, as a combined company expect to continue to invest significant portion of our efforts and financial resources in the development of DCCR for the treatment of PWS, a rare complex genetic neurobehavioral/metabolic disease. Our ability to generate product revenues, which may not occur for the foreseeable future, if ever, will depend heavily on the successful development, regulatory approval, and commercialization of DCCR.

Any delay or impediment in our ability to obtain regulatory approval in any region to commercialize, or, if approved, obtain coverage and adequate reimbursement from third-parties, including government payors, for DCCR 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:

~~obtain a sufficiently broad label that would not unduly restrict patient access;~~

~~receipt of marketing approvals for DCCR in the E.U. and United States;~~

~~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 payors;~~

~~the regulatory approval pathway that we pursue for DCCR in the United States;~~

~~effectively competing with other therapies;~~

~~a continued acceptable safety profile of DCCR following approval;~~

~~obtaining and maintaining patent and trade secret protection and regulatory exclusivity;~~

~~protecting our rights in our intellectual property portfolio; and~~

~~obtaining a commercially viable price for our products.~~

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.

~~If we fail to obtain regulatory approval for DCCR in the United States and the European Union , our business would be harmed.~~

We require 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, and demonstrating efficacy with statistical significance and safety in humans. The results of our current and future clinical trials may not meet the FDA, the European Medicines Agency, or EMA, or other regulatory agencies’ requirements to approve DCCR for marketing under any specific indication, and these regulatory agencies may otherwise determine that our manufacturing processes or facilities are insufficient to support approval. As such, we may need to conduct more clinical trials than we currently anticipate and upgrade our manufacturing processes and facilities, which may require significant additional time and expense, and may delay or prevent approval. If we fail to obtain regulatory approval in a

~~timely manner, our commercialization of DCCR would be delayed and our business would be harmed.~~

If we are unable to implement our sales, marketing, distribution, training and support strategies or enter into agreements with third parties to perform these functions in markets outside of the United States and Europe, we will not be able to effectively commercialize DCCR and may not reach profitability.

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of therapeutic products. To achieve commercial success for DCCR, if and when we obtain marketing approval, we will need to establish a sales and marketing organization.

In the future, we expect to build a targeted sales, marketing, training and support infrastructure to market DCCR in the United States and Europe and to opportunistically establish collaborations to market, distribute and support DCCR outside of the United States and Europe. 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:~~

~~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 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.

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 on time or be completed on schedule, if at all. Clinical trials can be delayed, suspended or terminated for a variety of reasons, including failure to:

~~generate sufficient preclinical, toxicology, or other in vivo or in vitro 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, or 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 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 with new or existing laws or regulations;~~

~~have a sufficient number of clinical trial sites to conduct the trials;~~

~~timely manufacture sufficient quantities of product candidate for use in clinical trials; 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.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the 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 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 following the merger. 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. These regulations differ from country to country. To gain approval to market our product candidates, we must provide 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:

~~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 DCCR receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third party payors and others in the medical community necessary for commercial success.

If DCCR receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third party payors and others in the medical community. If DCCR does not achieve an adequate level of acceptance, we may not generate significant product revenues or any profits from operations. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

~~the efficacy and potential advantages compared to alternative treatments;~~

~~the prevalence and severity of any side effects;~~

~~the ability to offer our product candidates for sale at competitive prices;~~

~~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 of marketing and distribution support and timing of market introduction of competitive products;~~

~~publicity concerning our products or competing products and treatments; and~~

~~sufficient third party coverage or reimbursement.~~

Our ability to negotiate, secure and maintain third party coverage and reimbursement may be affected by political, economic and regulatory developments in the United States, Europe and other jurisdictions. Governments continue to impose cost containment measures, and third party payors are increasingly challenging prices charged for medicines and examining their cost effectiveness, in addition to their safety and efficacy. These and other similar developments could significantly limit the degree of market acceptance of DCCR or any of our other potential product candidates that receive marketing approval.

~~Essentialis’s patent rights may prove to be an inadequate barrier to competition following the completion of the merger.~~

Essentialis is the sole owner of patents and patent applications in the United States with claims covering the compounds underlying its primary product candidate, DCCR. Foreign counterparts of these patents and applications have been issued in Europe, Japan, China, Canada, Australia and Hong Kong. However, the lifespan of any one patent is limited, and each of these patents will ultimately expire and we cannot be sure that pending applications will be granted, or that we will discover new inventions which we can successfully patent. Moreover, any of our granted patents may be held invalid by a court of competent jurisdiction, and any of these patents may also be construed narrowly by a court of competent jurisdiction in such a way that it is held to not directly cover DCCR. Furthermore, even if our patents are held to be valid and broadly interpreted, third parties may find legitimate ways to compete with DCCR by inventing around our patent. Finally, the process of obtaining new patents is lengthy and expensive, as is the process for enforcing patent rights against an alleged infringer. Any such litigation could take years, cost large sums of money and pose a significant distraction to management. Indeed, certain jurisdictions outside of the United States and Europe, where we hope to initially commercialize DCCR have a history of inconsistent, relatively lax or ineffective enforcement of patent rights. In such jurisdictions, even a valid patent may have limited value. Our failure to effectively prosecute our patents would have a harmful impact on our ability to commercialize DCCR in these jurisdictions.

31, 2019.

~~ITEM~~IT EM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. ~~PROPERTIES~~

PROPERTIES

Facilities

Our ~~headquarters are located at 1235 Radio Road, Suite 110,~~principal facilities consist of office space in Redwood City, California, ~~94065, where we lease approximately~~which also contains space for Capnia’s final assembly and calibration facility for CoSense. We currently occupy 8,171 square feet of office space under a non-cancelable operating lease that ~~expires~~terminates in ~~in July~~August 2019. ~~An additional 5,265 square feet of office space became part of the lease agreement on March 1, 2016.~~

We had previously leased 6,033 square feet at 3 Twin Dolphin, Suite 160, Redwood, California 94065 for our corporate headquarters. On January 13, 2016, we entered into an agreement to sublease this space through June 2018, the expiration of our original lease.

We also have operations at 34 and 35 Commerce Drive in Ivyland, Pennsylvania, where we lease approximately 4,800 square feet of office space, under a one year lease that expires in March 2017. The lease agreement provides for an automatic extension of one year, if not terminated 90 days prior to expiration.

We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased on commercially reasonable terms to accommodate any future growth.

ITEM 3. LEGAL PROCEEDINGS

~~On February 16, 2017, a purported stockholder class action lawsuit captioned~~ ~~Garfield v. Capnia, Inc., et al.~~, Case No. C17-00284 was filed in Superior Court of the State of California, County of Contra Costa against us and certain of our officers and directors, or the Lawsuit. The Lawsuit alleged, generally, that our directors breached their fiduciary duties to our stockholders by seeking to sell control of the company through an allegedly defective process, and on unfair terms. The Lawsuit also alleged that defendants failed to disclose all material facts concerning the merger with Essentialis to stockholders. The Lawsuit sought, among other things, equitable relief that would have enjoined the consummation of the merger, compensatory and/or rescissory damages, and attorneys’ fees and costs. We made certain supplemental disclosures in a Current Report on Form 8-K filed with the SEC on February 28, 2017 in connection with the plaintiff’s agreement to voluntarily dismiss plaintiff's claims in the Lawsuit. The stipulation of dismissal is pending with the court.

The Company also agreed to pay $175,000 for dismissal of the lawsuit. This amount was accrued as a current liability on the balance sheet as of December 31, 2016 and recorded as an expense in general and administrative expense on the statement of operations for the year ended December 31, 2016.

We may, from time to time, be party to 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~~

factors.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

~~PART II~~

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 NASDAQ under the symbol ~~“CAPN”,~~“SLNO” and our Series A warrants are quoted on NSADAQ under the symbol ~~“CAPNW.~~“SLNOW.” Our Series C Warrants, ~~and~~ Series D Warrants, 2017 PIPE Warrants and 2018 PIPE Warrants are not traded on a national securities exchange.

The following table sets forth the high and low sales prices per share of the common stock as reported on NASDAQ. Such quotations represent inter dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. Prior to the date of our IPO, there was no public market for our common stock. As a result, we have not set fourth quarterly information with respect to the high and low prices for our common stock for all of the two most recent fiscal years.

High Low
Fiscal 2015
First Quarter 2015 $ 8.75
$ 1.18
Second Quarter 2015 7.45
2.81
Third Quarter 2015 3.15
1.15
Fourth Quarter 2015 2.46
1.51
Fiscal 2016
First Quarter 2016 $ 1.85
$ 1.14
Second Quarter 2016 1.36
1.09
Third Quarter 2016 1.18
0.90
Fourth Quarter 2016 1.03
0.73

As of March ~~10, 2017,~~6, 2019, there were ~~approximately 51~~80 shareholders of record for our common stock. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

Dividend Policy

We have never declared or paid cash dividends on our common stock, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Recent Sales of Unregistered Equity Securities

During the year ended December 31, ~~2016,~~2018, we issued the following unregistered securities:

•

On December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million and net proceeds of $16.3 million . Each unit consisted of one share of our common stock and a warrant to purchase 0.05 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and corresponding warrants to purchase an aggregate of 513,617 shares of common stock , together with the shares of common stock are referred to as the 2018 Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we will prepare and file with the SEC a registration statement to register for resale the 2018 Resale Shares prior to March 31, 2019.

On June 29, 2016, we entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to which the Company agreed to sell to Sabby, in a private placement, an aggregate of up to 13,780 shares of our Series B Convertible Preferred Stock at an aggregate purchase price of $13,780,000, which shares are convertible into 13,780,000 shares of our Common Stock, based on a fixed conversion price of $1.00 per share on an as-converted basis. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. In connection with the 2016 Sabby Purchase Agreement, the Company also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were originally purchased by Sabby under the 2015 Sabby Purchase Agreement and which shares represent 4,205,405 shares of Common Stock on an as-converted basis. The sale of the Series B Convertible

•

On December 11, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 8,141,116 immediately separable units at a price per unit of $1.84, for aggregate gross proceeds of $15.0 million and net proceeds of $13.8 million. Each unit consisted of one share of our common stock and a warrant to purchase 0.74 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 shares of common stock and corresponding warrants to purchase an aggregate of 6,024,425 shares of common stock, together the shares of common stock are referred to as the 2017 Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registration statement with the SEC to register for resale the 2017 Resale Shares. The registration statement was declared effective in February 2018.

Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, the Company received approximately $5.6 million of net proceeds.

Except as outlined above, none of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering. We believe that these transactions were exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the stock certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.

For the year ended December 31, ~~2016,~~2018, we granted to officers, directors, employees, consultants and other service providers options to purchase an aggregate of ~~1,339,259~~756,086 shares of common stock under our 2014 Equity Incentive Plan.

•

For the year ended December 31, 2017, we granted to officers, directors, employees, consultants and other service providers options to purchase an aggregate of 622,755 shares of common stock under our 2014 Equity Incentive Plan.

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering. We believe that these transactions were exempt from the registration requirements of the Securities Act under Rule 701 promulgated under the Securities Act as offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. The recipients of securities in these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the stock certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.

(b) Use of Proceeds

There has been no material change in the planned use of proceeds from the ~~transactions with Aspire Capital and Sabby~~2017 PIPE Offering or 2018 PIPE Offering as described in our final ~~prospectuses~~prospectus filed with the SEC pursuant to Rule 424(b) for ~~each~~ such transaction.

ITEM 6. SELECTED FINANCIAL ~~DATA~~

~~The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis~~INFORMATION

Pursuant to Item 301(c) of ~~Financial Condition and Results of Operations” appearing elsewhere in~~Regulation S-K.as a smaller reporting company, we not required to provide the information required by this Annual Report on Form 10-K. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

We derived the statements of operations data for the fiscal years ended December 31, 2016 and 2015 and the balance sheets data as of December 31, 2016 and 2015 from our audited financial statements appearing elsewhere in this filing. The data should be read in conjunction with the financial statements, related notes, and other financial information included herein.

Year Ended December 31,
Statement of Operations Data: 2016 2015

Revenue $ 1,450,788
$ 607,472
Cost of goods sold 1,509,306
352,683
Gross profit (58,518 ) 254,789
Expenses
Research and development 5,184,803
4,536,244
Sales and marketing 1,630,591
1,737,470
General and administrative 6,736,203
6,140,821
Total expenses 13,551,597
12,414,535
Operating income (loss) (13,610,115 ) (12,159,746 )
Interest and other income (expense)
Other income (expense), net 1,566,601
(3,748,800 )
Loss before provision for income taxes $ (12,043,514 ) $ (15,908,546 )
Provision for deferred taxes 21,700
—
Net loss (12,065,214 ) (15,908,546 )
Loss on extinguishment of convertible preferred stock 3,651,172
—
Net loss applicable to common stockholders $ (15,716,386 ) $ (15,908,546 )
Weighted average common shares outstanding
Basic and diluted 15,507,484
9,425,880
Net loss per share
Basic and diluted $ (1.01 ) $ (1.69 )

item.

December 31
Balance Sheet Data 2016 2015

Cash and cash equivalents $ 2,725,996
$ 5,494,523
Working capital $ 2,093,916
$ 3,211,565
Total assets $ 5,564,852
$ 8,201,195
Total stockholders’ equity $ 3,435,197
$ 3,223,816

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, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” “plan,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of this Annual Report 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~~were initially established as a diversified healthcare company that ~~develops~~developed and ~~commercializes~~commercialized innovative diagnostics, devices and therapeutics addressing unmet medical ~~needs. We have a number of commercial products based on our proprietary technologies, including those~~needs, which ~~utilize precision metering of gas flow. Our most recent product to launch commercially utilizing our~~consisted of: precision metering of gas flow technology ~~is Serenz®~~marketed as Serenz ^® Allergy Relief, or ~~Serenz, which has a CE Mark certification for sale in the E.U. Serenz is a proprietary handheld device that delivers non-inhaled CO~~₂ topically to the nasal mucosa. Serenz is used only when needed, and does not need to be used on a scheduled basis. Pilot commercial sales of Serenz began in the U.K. and Ireland in the second quarter of 2016.

~~We are also selling the CoSense®~~Serenz; CoSense ^® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which measures ETCO and aids in the detection of excessive hemolysis, a condition in which red blood cells degrade ~~rapidly. When present in neonates with jaundice, excessive hemolysis is a dangerous condition~~rapidly and which can lead to adverse neurological ~~outcomes. CoSense is 510(k) cleared for sale in the U.S.~~outcomes; and, received CE Mark certification for sale in the E.U. In addition, through our wholly owned subsidiary NFI, we also develop and globally market assets relating to innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets. NFI’s primary product is the NeoPip T-piece resuscitator and related consumable, which delivers consistent pre-set inspiratory pressure and positive end-expiratory pressures. Other NFI products ~~include~~that included temperature probes, scales, surgical tables, and patient surfaces.

~~Our therapeutic technology consists of the use of nasal, non-inhaled CO~~₂ for the treatment of the symptoms of allergic rhinitis, or AR, as well as for the treatment of pain associated with migraine, cluster headache and trigeminal neuralgia, or TN. Serenz is a treatment for symptoms related to AR, which, when triggered by seasonal allergens, is commonly known as hay fever or seasonal allergies. We are also pursuing new initiatives for the development of our precision metering of gas flow technology for the treatment of trigeminally-mediated pain disorders such as cluster headache and TN. On December 18, 2015, the U.S. Food and Drug Administration, or FDA, granted us orphan drug designation for our nasal, non-inhaled CO₂ ~~technology for the treatment of TN in the U.S. We filed an investigational new drug application, or IND, with the FDA and started enrolling TN patients in a pilot clinical trial in 2016.~~

We continue to focus our research and development efforts on diagnostic products based on our Sensalyze™ Technology Platform, a portfolio of patented and proprietary methods and systems, which enables CoSense to measure ETCO and that can be applied to detect a variety of analytes in exhaled breath, as well as other products for the neonatology market. Our current development pipeline includes proposed diagnostic devices for asthma in children, assessment of blood CO₂ ~~concentration in neonates and malabsorption. We may also license elements of our Sensalyze Technology Platform to other companies that have complementary development or commercial capabilities.~~

~~In July 2015, we commenced enrollment in a pilot, single-center, investigator-sponsored clinical trial evaluating our proprietary nasal, non-inhaled CO~~₂ ~~technology for the treatment of cluster headaches. The primary efficacy endpoint of the trial is the greatest change from pre-treatment headache pain intensity to post treatment.~~

On July 24, 2015, we entered into a Common Stock Purchase Agreement with Aspire Capital, or the 2015 Aspire Purchase Agreement, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire is committed to purchase up to an aggregate of $10.0 million in value of shares of our Common Stock over the 24-month term of the 2015 Aspire Purchase Agreement. Since July 24, 2015, we issued an aggregate of 506,585 shares of Common Stock to Aspire in exchange for approximately $1.4 million.

On October 12, 2015, we entered into the 2015 Sabby Purchase Agreement with Sabby to purchase up to $10 million of Series A Convertible Preferred Stock together with related Series D Warrants to purchase shares of our Common Stock. The sale of the Series Convertible A Preferred Stock occurred in two separate closings. On October 15, 2015, the date of the first closing under the 2015 Sabby Purchase Agreement, we received proceeds of approximately $4.1 million, net of $0.4 million in estimated expenses. On January 8, 2016, the date of the second closing under the 2015 Sabby Purchase Agreement, we received proceeds of approximately $5 million, net of $0.5 million in estimated expenses.

On June 29, 2016, we entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to which we agreed to sell to Sabby, in a private placement, an aggregate of up to 13,780 shares of our Series B Convertible Preferred Stock at an aggregate purchase price of $13,780,000, which shares are convertible into 13,780,000 shares of our Common Stock, based on a fixed conversion price of $1.00 per share on an as-converted basis. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. In connection with the 2016 Sabby Purchase Agreement, we also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were originally purchased by Sabby under the 2015 Sabby Purchase Agreement and which shares represent 4,205,405 shares of Common Stock on an as-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, the Company received approximately $5.6 million of net proceeds.

On December 22, 2016, we entered into the Merger Agreement with Essentialis. Essentialis’s efforts prior to the Merger were focused primarily on developing and testing product candidates that target the ATP-sensitive potassium channel, a metabolically regulated membrane protein whose modulation has the potential to impact a wide range of rare metabolic, cardiovascular, and CNS diseases. Essentialis ~~Inc.~~had tested DCCR as a treatment for PWS, a complex metabolic/neurobehavioral disorder. DCCR has orphan designation for the treatment of PWS in the U.S. as well as in the E.U. Consummation of the ~~merger~~Merger was subject to various closing conditions, including our consummation of a financing of at least $8$8.0 million at, or substantially contemporaneous with, the closing of the ~~merger,~~Merger, which occurred on March 7, ~~207~~2017 and the receipt of stockholder approval of the ~~merger~~Merger at a special meeting of our stockholders, which ~~we received~~was held on March 6, 2017. As a result, we now primarily focus on the development and commercialization of novel therapeutics for the treatment of rare diseases. Our current research and development efforts are primarily focused on advancing our lead candidate, DCCR tablets for the treatment of PWS, into late-stage clinical development.

Subsequent to March 7, 2017, we explored opportunities, and made a decision to divest, sell or otherwise dispose of the CoSense, NFI and Serenz businesses. Accordingly, and pursuant to ASC 205-20-45-10, the assets and liabilities related to the discontinued activities of CoSense, NFI and Serenz businesses are presented separately in the balance sheet as held for sale items, and the related operations reported herein for the CoSense, NFI and Serenz activities are reported as discontinued operations in the statements of operations until the time that the assets were disposed of. Our remaining ownership in Capnia is recorded as an investment and initially measured at fair value.

Our previously wholly-owned subsidiary NFI also marketed innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets. We sold NFI in a stock transaction that was completed on July 18, 2017, pursuant to the NFI Purchase Agreement with Neoforce Holdings, a wholly-owned subsidiary of Flexicare Medical Limited, a privately-held United Kingdom company, for $720,000 and adjustments for inventory and the current cash balances held at NFI (see Note ~~14)~~5).

On December 4, 2017, we and our then wholly-owned subsidiary Capnia, entered into a joint venture with OAHL with the purpose of developing and commercializing CoSense with the intent to transfer ownership of Capnia to OAHL. During October 2018, Capnia issued 1,690,322 shares of its common stock to OAHL, representing 53% of its outstanding shares, after which we no longer hold a controlling interest in Capnia. Accordingly, we deconsolidate Capnia’s financial statements from ours and our remaining minority interest in Capnia is reported as a Minority interest investment in our consolidated balance sheet.

We continue to separately evaluate alternatives for our Serenz portfolio.

On July 27, 2018 the ~~years ended December 31, 2015 and December 31, 2016, we received $0.3 million and $0.1 million, respectively, from~~FDA has granted Fast Track designation to DCCR for the ~~exercise~~treatment of ~~stock options.~~

~~During~~PWS. We are currently conducting a Phase III clinical trial of DCCR for the ~~year ended December 31, 2016, we implemented plans~~treatment of PWS.

We have continued to ~~reduce our operating expenses,~~focus on expense control, including reducing our workforce, ~~eliminating~~reducing outside consultants, reducing legal fees and implementing a ~~plan to allow~~policy providing for Board members to receive common stock in lieu of cash ~~payments.~~

payments as compensation for Board service.

As of December 31, ~~2016,~~2018, we had an accumulated deficit of ~~$98.3~~$127.0 million, primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, potentially including sales of our neonatology products, therapeutic products, other diagnostic products, license fees, milestone payments, and research and development payments in connection with potential future strategic partnerships, we have, to date, generated approximately $2,000 of revenue only from the 2013 license agreement pertaining to Serenz, ~~$1.9~~approximately $2.7 million in revenue from our neonatology products and approximately $0.2 million in government ~~grants.~~grants; these activities are reported as discontinued operations in our accompanying consolidated financial statements. We may never be successful in commercializing our novel therapeutic and in divesting, selling or otherwise disposing of our existing neonatology products ~~therapeutic products~~ or ~~in developing additional~~related therapeutic products. Accordingly, we expect to incur significant losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

Financings

Sabby 2016 Stock Purchase

We issued a total of 13,780 780 shares of Series B Convertible Preferred Stock under the Securities Purchase Agreement entered into on June 29, 2016 with Sabby Healthcare Master Fund Ltd and Sabby Volatility Warrant Fund Ltd, which are funds managed by Sabby Management, ~~believes~~LLC, collectively referred to as Sabby, as amended by Amendment No. 1 dated September 2016, referred to as the 2016 Sabby Purchase Agreement. These shares had a par value of $0.001 and a stated value of $1,000 per share. The aggregate purchase price of the Series B Convertible Preferred shares was $13.8 million, and were convertible to common stock at a rate of 200 shares of common stock for each converted share of Series B Convertible Preferred Stock, for a total of 2,756,000 shares of our common stock, based on a fixed conversion price of $5.00 per share on an as-converted basis. Un der the terms of the Series B Convertible Preferred Stock, in no event shall shares of common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of common stock would result in Sabby having ownership in excess of 4.99%. The Series B Convertible Preferred Stock did not have an expiration date and were not redeemable at the option of the holders. In addition, on the effect date of the 2016 Sabby Purchase Agreement the exercise price of the existing Series D Warrants originally issued in conjunction with the 2015 Sabby Purchase Agreement was reduced from $12.30 to $8.75 per share. In connection with the 2016 Sabby Purchase Agreement, we also were obligated to repurchased the remaining 7,780 outstanding Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7.8 million, which shares were originally purchased by Sabby under the 2015 Sabby Purchase Agreement and which shares represent 841,081 shares of common stock on an as-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. The first closing was on July 5, 2016 and the second closing was on September 29, 2016. Between the two closings, after the repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, we received $5.6 million of net proceeds. During 2016, 2017 and 2018 Sabby converted 1,000, 8,209 and 4,571 shares of Series B Convertible Preferred stock into 200,000, 1,641,800 and 914,200 shares of common stock, respectively. As of December 31, 2018, there were no shares of Series B Convertible Preferred Stock outstanding.

Aspire Stock Purchase

On January 27, 2017, we entered into a Common Stock Purchase Agreement (the “2017 Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the ~~Company has sufficient capital resources~~terms and subject to ~~sustain operations through~~the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $17.0 million in value of shares of our common stock over the 30-month term of the 2017 Aspire Purchase Agreement. We issued Aspire Capital 141,666 shares of common stock as commitment shares under the 2017 Aspire Purchase Agreement. The 2017 Aspire Purchase Agreement was terminated upon the closing of the 2017 PIPE Offering.

2017 PIPE Offering

On December 11, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 8,141,116 immediately separable units at ~~least~~a price per unit of $1.84, for aggregate gross proceeds of $15.0 million. Each unit consisted of one share of our common stock and a warrant to purchase 0.74 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 shares of co mmon stock and corresponding warrants to purchase an aggregate of 6,024,425 shares of common stock, together the ~~next twelve months.~~

shares of common stock are referred to as the 2017

Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we prepared and filed a registration statement with the SEC to register for resale the 2017 Resale Shares. The registration statement was declared effective in February 2018.

2018 PIPE Offering

On December 19, 2018, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which we sold and issued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of our common stock and a wa rrant to purchase 0.05 shares of our common stock at an exercise price of $2.00 per share, for an aggregate of 10,272,375 shares of common stock and corresponding warrants to purchase an aggregate of 513,617 shares of common stock, together with the shares of common stock are referred to as the 2018 Resale Shares. We also granted certain registration rights to these stockholders, pursuant to which, among other things, we will prepare and file with the SEC a registration statement to register for resale the 2018 Resale Shares prior to March 31, 2019.

Financial overview

Summary

We have not generated net income from operations to date, and, at December 31, ~~2016~~2018 and December 31, ~~2015,~~2017, we had an accumulated deficit of ~~approximately $98.3~~$127.0 million and ~~$86.2~~$113.7 million, respectively, primarily as a result of research and development and general and administrative expenses. We may never be successful in commercializing our ~~neonatology~~novel therapeutics products ~~including CoSense, therapeutic products or in developing additional products.~~for the treatment of rare diseases. Accordingly, we expect to incur

significant losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

Revenue recognition

~~We apply~~

To date, we have earned no revenue from the ~~provisions~~commercial development and sale of ~~Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605,~~ ~~Revenue Recognition, to recognize revenue. We begin recognizing~~novel therapeutic products and the revenue ~~when persuasive evidence~~resulting from commercialization and sale of ~~an arrangement exists, such as a contract or purchase order, delivery has occurred, no significant obligations with regard to implementation or integration exist,~~ the ~~fee~~CoSense, Neo Force, Inc. and Serenz products is ~~fixed or determinable, and collectability is reasonably assured.~~

reported in discontinued operations.

Research and development expenses

Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and benefits, professional consultant fees, prototype expenses, certain facility costs and other costs associated with clinical trials, net of reimbursed amounts. Costs to acquire technologies to be used in research and development that have not reached technological feasibility, and have no alternative future use, are expensed to research and development costs when incurred.

Research and development expenses resulting from the development of novel therapeutic products are reported in continuing operations, and research and development expenses resulting from the development of the CoSense, Neo Force, Inc. and Serenz products are reported in discontinued operations.

Sales and marketing expenses

Sales and marketing expenses consist principally of ~~personnel-related costs,~~salaries and benefits, professional ~~fees for~~ consulting ~~expenses,~~fees, and other expenses associated with commercial activities. We anticipate these expenses will increase significantly in future periods, reflecting the increased level of sales and marketing activity necessary for the commercial launch of ~~CoSense.~~

a successful future therapeutic drug candidate. We have to date incurred no sales and marketing expenses related to the sale and commercialization of novel therapeutic products, and the sales and marketing expenses related to the CoSense, Neo Force, Inc. and Serenz products are reported in discontinued operations.

General and administrative expenses

General and administrative expenses consist principally of ~~personnel-related costs,~~salaries and benefits, professional fees for legal, consulting, audit and tax services, insurance, rent, and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure, other administrative expenses and increased professional fees associated with being a public reporting company.

General and administrative expenses incurred in operating all components of our business are classified as continuing operations and are not allocated to specific research and development or sales and marketing activities that have been discontinued. General and administrative expenses, such as rent, that are incurred specifically to directly support research and development and sales and marketing activities for the CoSense, Neo Force, Inc. and Serenz products are reported in discontinued operations.

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 Essentialis stockholders based on our assessment of the expected likelihood of achieving commercial sales milestones of $100.0 million and $200.0 million in future years.

Other income (expense)~~, net~~

Other income (expense)~~, net~~ is primarily comprised of the gain recognized from the transfer of the majority ownership and resulting deconsolidation of Capnia and changes in the fair value of the Series A, Series BC and ~~Series C~~the 2017 and 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 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.

Series BA, Series C, 2017 PIPE Warrants,

We account for the Series B Warrants issued in connection with our IPO in accordance with the guidance in Accounting Standards Codification (ASC) 815-40. The warrants have a cashless exercise provision that allows for exercise of the warrants at any time between four and fifteen months after issuance, on a cashless basis for a number of common shares that increases as the market price of our common stock decreases, and exercisable at a discount to the price of our common stock at the time. The terms of the Series B warrants do not explicitly limit the potential number of shares, thereby the exercise of the B warrants could result in our obligation to deliver potentially unlimited number of shares upon settlement. As such, share settlement in not within our control and as provided under ASC 815-40, the warrants do not meet the criteria for equity treatment and are recorded as a liability. Accordingly, we classified the Series B warrants as liabilities at their fair market value at the date of the IPO and will re-measure the warrants at each balance sheet date until they are exercised or they expire. Any change in the fair value is recognized as other income (expense) in our statement of operations.

The fair value of the warrant liability was determined using a Monte Carlo simulation model. This model is dependent upon several variables such as the warrant’s term, exercise price, current stock price, risk-free interest rate estimated over the

~~expected term, estimated volatility of our stock over the term of warrant~~ and the estimated market price of our stock during the cashless exercise period. The risk-free rate is based on U.S. Treasury securities with similar maturities as the expected terms of the warrants. The volatility is estimated based on blending the volatility rates for a number of similar publicly-traded companies.

~~In accordance with the guidance under ASC 815-40-25, we have evaluated that we have a sufficient number of authorized and unissued shares as December 31, 2015, to settle all existing commitments.~~

~~Series A and Series C~~2018 PIPE Warrants

We account for the Series A, ~~and~~ Series C, 2017 PIPE warrants, and 2018 PIPE warrants, collectively referred to as the Warrants, in accordance with the guidance in ASC 815 Derivatives and Hedging. The ~~Series A and Series C~~ Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. The Warrants also contain a fundamental transactions provision that permits their settlement in cash at fair value at the option of the holder upon the occurrence of a change in control. Such change in control events include tender offers or hostile takeovers, which are not within ~~the~~our sole control ~~of the Company~~ as the issuer of these warrants. Accordingly, the warrants are considered to have a cash settlement feature that precludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would be computed using the Black Scholes Option Pricing Model, which ~~is equivalent to fair value computed using~~approximates the ~~Binomial Lattice Valuation Model.~~

binomial lattice model.

We classified the ~~Series A and Series C~~ Warrants as liabilities at their fair value and ~~will~~ re-measure the warrants at each balance sheet date until they are exercised or expire. Any change in the fair value is recognized as other income (expense) in the ~~our statement~~statements of operations.

~~Series D Warrants~~

~~We account for the Series D Warrants in accordance with the guidance in ASC 815~~ ~~Derivatives and Hedging~~. The Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. They also contain a cashless exercise feature that provides for their net share settlement at the option of the holder in the event that there is no effective registration statement covering the continuous offer and sale of the warrants and underlying shares. We are required to comply with certain requirements to cause or maintain the effectiveness of a registration statement for the offer and sale of these securities. Such change in control events include tender offers or hostile takeovers, which are not within our sole control as the issuer of these warrants. However, the Series D Warrant agreement specifically provides that under no circumstances will we be required to settle any Series D Warrant exercise for cash, whether by net settlement or otherwise. Accordingly, we have classified the value of the Series D Warrants as permanent equity.

~~Series A and Series B Convertible Preferred Stock~~

We classified our Series A and Series B Convertible Stock as permanent equity on our balance sheet in accordance with authoritative guidance for the classification and measurement of hybrid securities and distinguishing liability from equity instruments. The preferred stock is not redeemable at the option of the holder.

~~Further, we evaluated our Series A and Series B Convertible Preferred Stock and determined that it is considered an equity host under ASC 815,~~ ~~Derivatives and Hedging~~. In making this determination, we followed the whole instrument approach which compares an individual feature against the entire preferred stock instrument which includes that feature. Our analysis was based on a consideration of the economic characteristics and risks of each series of preferred stock. More specifically, we evaluated all of the stated and implied substantive terms and features, including (i) whether the preferred stock included redemption features, (ii) how and when any redemption features could be exercised, (iii) whether the holders of preferred stock were entitled to dividends, (iv) the voting rights of the preferred stock and (v) the existence and nature of any conversion rights. As a result, we concluded that the preferred stock represents an equity host, the conversion feature of all series of preferred stock is considered to be clearly and closely related to the associated preferred stock host instrument. Accordingly, the conversion feature in the preferred stock is not considered an embedded derivative that requires bifurcation.

Research and development expense

Research and development costs are ~~expensed~~charged to operations as incurred. Research and development ~~expense includes payroll~~costs consist primarily of salaries and ~~personnel expenses; consulting costs; external contract~~benefits, consultant fees, prototype expenses, certain facility costs and other costs associated with clinical trials, net of reimbursed amounts.

Costs to acquire technologies to be used in research and development ~~expenses;~~that have not reached technological feasibility and ~~allocated overhead, including rent, equipment depreciation and utilities, and relate~~have no alternative future use are expensed to ~~both company-sponsored programs as well as costs incurred pursuant to reimbursement arrangements. Nonrefundable advance payments for goods or services that will be used or rendered for future~~

research and development ~~activities~~costs when incurred.

Certain Research and Development expenses are ~~deferred and capitalized and recognized~~reported as ~~an expense as the goods are delivered or the related services are performed.~~

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing contracts and purchase orders, reviewing the terms of our intellectual property agreements, communicating with our applicable personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees to:

~~contract manufacturers in connection with the production of clinical trial materials;~~

~~contract research organizations and other service providers in connection with clinical studies;~~

~~investigative sites in connection with clinical studies;~~

~~vendors in connection with preclinical development activities; and~~

~~professional service fees for consulting and related services.~~

We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred. However, due to the nature of these estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies or other research activity.

Discontinued Operations.

Stock-based compensation expense

For the years ended December 31, 2016 and December 31, 2015 stock-based compensation expense was $871,270 and $942,369, respectively. As of December 31, 2016 we had $1,553,427 of total unrecognized compensation expense, which we expect to recognize over a period of approximately 2.7 years. The intrinsic value of all outstanding stock options as of December 31, 2016 was approximately zero. We expect to continue to grant equity incentive awards in the future as we continue to expand our number of employees and seek to retain our existing employees, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

Stock-based compensation costs related to stock options granted to employees and directors are measured at the date of grant based on the estimated fair value of the ~~award, net of estimated forfeitures.~~award. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award. Stock options we grant to employees generally vest over four years.

The fair value of an equity award granted to a non-employee generally is determined in the same manner as an equity award granted to an employee. In most cases, the fair value of the equity securities granted is more reliably determinable than the fair value of the goods or services received. In June 2016, we granted 55,000 NSOs to sales representatives of Bemes, Inc. Of the 55,000 options granted, 27,499 options with a fair value of $26,355 vested immediately upon grant. Accelerated vesting of the remaining options were contingent on the satisfaction of certain performance requirements, that were not met. Regardless of not achieving accelerated vesting, the remaining options have a one year cliff vesting. As a result, we recognized $13,502 in expense for the remaining options during 2016, which will vest during the first quarter of 2017. Total expense for the two groups of options reflects the fair value of our common stock on the applicable vesting commencement dates.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share of common stock could have been significantly different. These assumptions include:

Expected volatility: We calculate the estimated volatility rate based on ~~a peer index~~the volatilities of common stock of comparable ~~companies.~~companies in our industry.

Expected term: We do not believe we are able to rely on our historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term for use in estimating the fair value-based measurement of our options. Therefore, we have opted to use the “simplified method” for estimating the expected term of options.

Risk-free rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to liquidity.

Expected dividend yield: We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

~~There were 955,713 options granted~~

Business combinations

Business combinations are recorded in ~~the year ended December 31, 2015. There were 1,339,259 options granted~~accordance with ASC 805. Business combinations are considered, pursuant to ASC 805, to be a purchase of a business entity or a purchase of assets. The guidance established by ASU 2017-01 provides additional guidance in the year ended December 31, 2016. In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our stock-based compensation expense calculations on a prospective basis.

~~Impairment of Goodwill~~

~~Goodwill represents the excess of~~assessing the purchase ~~price~~by providing an initial screen to determine if substantially all of ~~an acquired enterprise or assets over~~ the fair value of the ~~identifiable~~gross assets acquired is concentrated in a single asset or group of similar assets; if the substance of this test is met, the acquisition is treated as a purchase of assets and ~~liabilities assumed. Goodwill is presumed to have an indefinite life and is~~ not ~~subject to amortization. We test for impairment of goodwill on an annual basis in~~ the ~~fourth quarter and at any other time when events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable.~~

Circumstances that could trigger an impairment test include, but are not limited to: a significant adverse change in the business climate or legal factors, an adverse action or assessment by a regulator, change in customer, target market and strategy, unanticipated competition, loss of key personnel, or the likelihood that a reporting unit or significant portionacquisition of a ~~reporting unit will~~business entity.

Our acquisition of Essentialis was determined to be ~~sold or otherwise disposed.~~

~~An assessment of qualitative factors may be performed to determine whether it is necessary to perform~~an asset acquisition, and the ~~two-step quantitative goodwill impairment test. If the result~~total value of the ~~qualitative assessment is that it is more likely than not (i.e. greater than 50% likelihood) that~~purchase consideration was allocated to the ~~fair value of a reporting unit, is less than its carrying amount, then~~asset acquired. The asset acquired was recorded as the ~~quantitative test is required. Otherwise, no further testing is required. At our testing date, we did not perform the qualitative assessment.~~

Under the quantitative test, if the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in the Consolidated Statements of Operations as “Impairment of goodwill.” Measurementsum of the fair value of a reporting unit is based on one or more of the following fair value measures: amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties, using present value techniques of estimated ~~future cash flows, or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.~~

Based on our organizational structure and our financial information during 2016 and 2015, we determined we operate in one segment and two reporting units. The only reporting unit with goodwill was the NeoForce (“NFI”) unit.

During the fourth quarter of 2016, we tested the NFI reporting unit’s goodwill for impairment under the two-step quantitative goodwill impairment test in accordance with authoritative guidance. There were no triggering events during the interim periods of 2016.

~~Under the first step of the authoritative guidance for impairment testing, the~~ fair value of the ~~NFI reporting unit was determined based~~shares issued on the income approach, which estimates fair value based on the future discounted cash flows. We assumed a cash flow period of 5 years, annual revenue growth rates of 38.2% to 63.9%, a discount rate of 20.5%, and a terminal value equivalent to one times final year sales. While projected revenue growth is above average, beginning revenue is quite low and

the acquisition of new customers, mainly hospitals and health plans, is expected to result in relatively large increments of growth. We also performed sensitivity analyses to estimate the effect of significantly lower revenue growth on estimated fair value. We believe the assumptions and rates used in the impairment test are reasonable, but they are judgmental, and variations in anycompletion of the ~~assumptions or rates could result in a materially different calculation of impairment. The determination of~~merger, the estimated fair value of ~~goodwill required~~ the ~~use of significant unobservable inputs which are considered Level 3 fair value measurements. Based on~~shares to be issued under the ~~first step of~~holdback and milestone stock payment provisions in the ~~authoritative guidance on impairment testing, we concluded that~~future, the estimated fair value of the ~~NFI~~contingent consideration to be paid for achieving certain commercial milestones in the future, and the value equivalent to the increase in the liability for deferred taxes resulting from the tax effect of the net assets and liabilities acquired.

Contingent consideration

Contingent consideration elements of a business combination are recorded in accordance with ASC 805 which provides that, when contingent consideration terms provide for future payment obligations, the obligation is measured at its fair value on the acquisition date, and the subsequent increase or decrease of the value of the

estimated amounts of contingent consideration to be paid is be recognized as expense or income, respectively, in the statements of operations.

Our agreement to pay the selling shareholders of Essentialis for achieving certain commercial milestones resulted in the recognition of a contingent consideration, which was recorded at the inception of the transaction, and subsequent changes to estimate of the amounts of contingent consideration to be paid will be recognized as expenses or income in the 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 II through approval in the Federal Drug Administration approval process and then reaching the cumulative revenue milestones.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

We account for the 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 the us a choice of net-cash settlement or settlement in its own 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 ~~unit was~~date to determine whether a change in ~~excess~~classification between equity and liabilities is required. We determined that certain freestanding derivatives, which principally consist of ~~its carrying value.~~

~~The NFI reporting unit was acquired during~~Series A, Series C, the ~~fourth quarter~~2017 PIPE Warrants and 2018 PIPE Warrants, do not satisfy the criteria for classification as equity instruments due to the existence of ~~2015. We had no other goodwill during 2015~~certain cash settlement features that are not within our sole control or ~~2016.~~

variable settlement provision that cause them to not be indexed to our stock.

Income Taxes

We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. ~~Valuation allowances are~~We have provided ~~when necessary~~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.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future. We have recorded a deferred tax asset in jurisdictions where ultimate realization of deferred tax assets is more likely than not to occur.

We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.

We account for uncertainty in income taxes as required by the provisions of ASC Topic 740, Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available 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.”

Continuing operations are reported net of the related tax effects and discontinued operations are reported net of related tax effects in the statements of operations.

Results of Continuing Operations

Comparison of the Years Ended December 31, ~~2016~~2018 and ~~2015~~2017 from continuing operations

	Year Ended December 31,						Increase (decrease)
	2018			2017			Amount			Percentage
	(in thousands)
Operating expenses:
Research and development	$	7,178		$	3,069		$	4,109			134	%
Sales and marketing		—			26			(26	)		100	%
General and administrative		6,556			6,584			(28	)		0	%
Change in fair value of contingent consideration		567			2,492			(1,925	)		77	%
Total operating expenses		14,301			12,171			2,130			18	%
Operating loss		(14,301	)		(12,171	)		(2,130	)		18	%
Other income (expense)
Cease-use income		6			4			2			50	%
Change in fair value of warrants liabilities		522			(685	)		1,207			176	%
Gain on deconsolidation of former subsidiary		1,994			—			1,994		n/a
Interest and other expense, net		(62	)		(590	)		528			89	%
Total other income (expense)		2,460			(1,271	)		3,731			294	%
Loss from continuing operations before provision for tax benefit		(11,841	)		(13,442	)		1,601			12	%
Provision for tax benefit		—			1,650			(1,650	)		100	%
Loss from continuing operations		(11,841	)		(11,792	)		(49	)		0	%
Loss from discontinued operations		(1,494	)		(3,593	)		2,099			58	%
Net loss	$	(13,335	)	$	(15,385	)	$	2,050			13	%

Year Ended
December 31,
Increase (decrease)
2016 2015 Amount Percentage
Revenue $ 1,450,788
$ 607,472
$ 843,316
139 %
Cost of goods sold 1,509,306
352,683
1,156,623
328 %
Gross profit (58,518 ) 254,789
(313,307 ) (123 )%
Operating expenses:
Research and development 5,184,803
4,536,244
648,559
14 %
Sales and marketing 1,630,591
1,737,470
(106,879 ) (6 )%
General and administrative 6,736,203
6,140,821
595,382
10 %
Total 13,551,597
12,414,535
1,137,062
9 %
Income (Loss) from operations (13,610,115 ) (12,159,746 ) (1,450,369 ) 12 %
Other income (expense), net 1,566,601
(3,748,800 ) 5,315,401
(142 )%
Loss before provision for income taxes (12,043,514 ) (15,908,546 ) 3,865,032 (24 )%
Provision for deferred taxes 21,700 —
21,700
— %
Net loss $ (12,065,214 ) $ (15,908,546 ) 3,843,332
(24 )%

Revenue

~~During the year ended~~

We have not commenced commercialization of DCCR, our current sole novel therapeutic product, and accordingly, through December 31, ~~2015, we recognized $220 thousand of government grant~~2018, have generated no revenue from a new grant awarded during the second quarter of 2015, and $388 thousand of product revenue from sales of CoSense, Precision Sampling Sets and NFI products, of which $279,000 related to NFI products subsequent to the acquisition of NeoForce's assets in September 2015. During the year ended December 31, 2016, we recognized $1.5 million of product revenue from sales of CoSense, Precision Sampling Sets and NFI products. Revenue increased by $843 thousand primarily due to the inclusion of a full year of revenue related to NFI products.

continuing operations.

Research and development expense

Research and development expense of $7.2 million for the year ended December 31, ~~2016~~2018 increased ~~$649 thousand as compared~~by $4.1 million over 2017 resulting primarily from efforts directed toward development and commencement, during the quarter ended June 30, 2018, of the Phase III trial of DCCR which we acquired with the Essentialis acquisition on March 7, 2017.

Sales and marketing expense

Sales and marketing expense of approximately $26,000 during 2017 consisted of expense incurred to ~~the year ended December 31, 2015.~~revise our website. We have not yet commenced commercialization of DCCR, our current sole novel therapeutic product, and accordingly, during 2018 have incurred no sales and marketing activities in continuing operations.

General and administrative expense

General and administrative expense of $6.6 million during 2018 decreased by approximately $28,000 from 2017. The ~~increase~~decrease was primarily due to ~~increases~~planned spending reductions in ~~compensation~~2018, specifically including a decrease in employee and consultant-related expenses of approximately $329,000, approximately $275,000 of general cost savings including the sublease of excess facility space, and an approximate $71,000 reduction in legal costs related to our intellectual property. These decreases were largely offset by approximately $355,000 of additional amortization expense of ~~$502 thousand, travel and entertainment~~the intangible patent asset acquired in the March 7, 2017 acquisition of ~~$55 thousand and $92 thousand~~Essentialis, as 2017 had amortization for a portion of ~~outside services.~~

~~Sales and marketing expense~~

~~Sales and marketing expense for~~ the year ended December 31, 2016 decreased $107 thousand over the year ended December 31, 2015 primarily due to the decrease of direct sales personnel concurrent with signing a distributor agreement with Bemes.

~~General and administrative expense~~

~~General and administrative expense for the year ended December 31, 2016 increased $595 thousand as~~ compared to the ~~year ended~~entire period in 2018, and an increase of approximately $288,000 for professional fees and investor communication expenses, primarily related to financing activities and regulatory filings required in 2018

Change in fair value of contingent consideration

We are obligated to make cash payments of up to a maximum of $30 million to Essentialis stockholders upon the achievement of certain future commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of the Essentialis merger agreement. The fair value of the liability for the contingent consideration payable by us achieving the commercial sales milestones of $100 million and $200 million was estimated to be $5.6 million as of December 31, ~~2015.~~2018, an approximate $567,000 increase from the estimate as of December 31, 2017. During 2017 the estimate increased $2.5 million from the initial liability of $2.6 million estimated at the time of the merger.

Other income (expense)

Other income of approximately $2.5 million in 2018 increased $3.7 million from other expense of $1.3 million during 2017. The increase in other income was primarily due to ~~increases in legal expenses~~a $2.0 million gain recognized on the deconsolidation of ~~$284 thousand, $136 thousand of compensation expense and $175 thousand for the settlement of the Lawsuit.~~

~~Other income (expense), net~~

~~Of the $3.7 million expense in 2015, $0.2 million was due to the value of the commitment shares of Common Stock issued to Aspire Capital, $3.1 million was due to~~Capnia upon the issuance of ~~the Series C Warrants which were treated as an inducement~~majority shares to OAHL and ~~the change~~a net decrease in the fair value of warrants liabilities during 2018 compared to a net increase in 2017, resulting in a net increase of $1.2 million. In addition, there was an approximate $528,000 decrease in interest and other expense due primarily to the ~~warrants by $0.5. Other income~~fact that during 2017 there were commitment shares issued to Aspire Capital with a value of approximately $600,000.

Results of Discontinued Operations

Discontinued operations consist of our activities previously dedicated to the development and commercialization of innovative diagnostics, devices and therapeutics addressing unmet medical needs, which consisted of: precision metering of gas flow technology marketed as Serenz^® Allergy Relief, or Serenz; CoSense^® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which measures ETCO and aids in ~~2016~~the detection of excessive hemolysis, a condition in which red blood cells degrade rapidly; and, products that included temperature probes, scales, surgical tables and patient surfaces. In March 2017, we determined to divest, sell or otherwise dispose of the CoSense, Neo Force, Inc., and Serenz businesses in order to focus on the development and commercialization of novel therapeutics for the treatment of rare diseases. The discontinued operations for the development and commercialization of innovative diagnostic devices and therapeutics are summarized below.

	Year Ended December 31,						Increase (decrease)
	2018			2017			Amount			Percentage
	(in thousands)
Product revenue	$	62		$	735		$	(673	)		92	%
Cost of product revenue		32			820			(788	)		96	%
Gross profit (loss)		30			(85	)		115			135	%
Expenses:
Research and development		1,106			2,427			(1,321	)		54	%
Sales and marketing		25			218			(193	)		89	%
General and administrative		393			669			(276	)		41	%
Total expenses		1,524			3,314			(1,790	)		54	%
Operating loss		(1,494	)		(3,399	)		1,905			56	%
Other expense
Loss on sale of assets		—			(186	)		186			100	%
Other expense		—			(8	)		8			100	%
Total other expense		—			(194	)		194			100	%
Net loss from discontinued operations	$	(1,494	)	$	(3,593	)	$	2,099			58	%

Product revenue

Revenue related to our discontinued operations was approximately $62,000 during 2018, an approximate $673,000 decrease from the discontinued operations revenue during 2017. The decrease resulted primarily ~~represented~~from the sale of the NFI business in July 2017 and a decrease in Capnia revenue.

Cost of product revenue

Cost of product revenue related to our discontinued operations has declined in relation to the decrease in ~~warrants~~sales activity.

Research and development expense

Research and development expense related to our discontinued operations decreased by ~~$1.7~~$1.3 million ~~offset by $0.1 million~~from 2017 to 2018. The decrease primarily resulted from the sale of ~~Cease-use~~NFI in July 2017, and the curtailment of spending towards the development of the Serenz product during 2017.

Sales and marketing expense ~~(see Note 4).~~

Sales and marketing expense during 2018 was approximately $25,000, representing an approximate $193,000 decrease from 2017. The decrease is largely attributed to our stopping the promotion and sales of the Serenz product in the second quarter of 2017. The sales and marketing expenses relating to our discontinued operations during 2018 relate only to Capnia’s marketing of its CoSense products.

General and administrative expense

General and administrative expense associated with our discontinued operations was approximately $393,000 during 2018, a decrease of approximately $276,000 from 2017. The decrease was primarily due to the sale of NFI in July 2017.

Other expense

During 2017 we recorded other expense of approximately $194,000, consisting primarily of the loss recorded on the sale of our wholly-owned subsidiary, NFI.

Liquidity and Capital Resources

~~On July 24, 2015, we entered into the 2015 Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms~~

We had a net loss of $13.3 million during 2018 and ~~subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to~~ an ~~aggregate~~accumulated deficit of ~~$10.0~~$127.0 million ~~in value of shares of~~at December 31, 2018 from having incurred losses since our Common Stock over the 24-month term of the purchase agreement. During the quarter ended September 30, 2015, we issued an aggregate of 506,585 shares of Common Stock to Aspire Capital in exchange for approximately $1.4 million.

~~On October 12, 2015, we entered into the 2015 Sabby Purchase Agreement with Sabby to purchase up to $10~~inception. We had $22.8 million of Series A Convertible Preferred Stock together with related Series D Warrants to purchase shares of our Common Stock. The sale of the Series A Convertible Preferred Stock took place in two separate closings. On October 15, 2015, the date of the first closing, we received proceeds of approximately $4.1 million, net of $0.4 million in estimated expenses. On January 8, 2016, the date of the second closing, we received proceeds of approximately $5 million, net of $0.5 million in estimated expenses.

On June 29, 2016, we entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to which we agreed to sell to Sabby, in a private placement, an aggregate of up to 13,780 shares of our Series B Convertible Preferred Stockworking capital at an aggregate purchase price of $13,780,000, which shares are convertible into 13,780,000 shares of our Common Stock, based on a fixed conversion price of $1.00 per share on an as-converted basis. Under the terms of the Series B Convertible Preferred Stock, in no event shall shares of Common stock be issued to Sabby upon conversion of the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. In connection with the 2016 Sabby Purchase Agreement, we also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were originally purchased by Sabby under the 2015 Sabby Purchase AgreementDecember 31, 2018 and which shares represent 4,205,405 shares of Common Stock on an as-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, the Company received approximately $5.6used $11.7 million of ~~net proceeds.~~

~~On December 22, 2016, we entered into the Merger Agreement with Essentialis, Inc. Consummation~~cash in operating activities during 2018. We have financed our operations principally through issuances of ~~the merger was subject~~equity securities.

We have continued to ~~various closing conditions, including our consummation of a financing of at least $8 million at, or substantially contemporaneous with, the closing of the merger, which occurred~~focus on ~~March 7, 2017, and the receipt of stockholder approval of the merger at a special meeting of our stockholders, which we held on March 6, 2017 where we received stockholder approval (see Note 14).~~

On January 27, 2017, we entered into the 201Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $17.0 million in value of shares of our Common Stock over the 30-month term of the purchase agreement. Further, on the date of the closing of the financing, as defined in the Merger Agreement, the Company sold to Aspire Capital, and Aspire Capital shall purchase from the Company an aggregate of $2.0 million of the Company’s common stock. On March 7, 2017, we received the $2.0 million from Aspire Capital (see Note 14).

~~During the year ended December 31, 2016, the Company implemented plans to reduce its expenses,~~expense control, including reducing ~~its~~our workforce, eliminating outside consultants, reducing legal fees and implementing a plan to allow Board members to receive common stock, in lieu of cash payments.

~~At December 31, 2016,~~

The accompanying consolidated financial statements have been prepared under the assumption we ~~had cash~~will continue to operate as a going concern, which contemplates the realization of assets and ~~cash equivalents~~the settlement of ~~$2.7 million,~~liabilities in the normal course of ~~which $2.3 million is invested in~~business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to our ability to continue as a ~~money market fund at an AAA-rated financial institution.~~

going concern.

We expect to continue incurring losses for the foreseeable future and may be required to raise additional capital to complete our clinical trials, pursue product development initiatives and penetrate markets for the sale of our products. We believe that ~~based on our current level of operations, our existing cash resources, including the $10 million in financing that~~ we ~~received on March 7, 2017 (see Note 14), will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.~~

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of Serenz and CoSense products, as well as clinical trials for our therapeutic products. We may continue to require additional financing to develop our future products and fund operations for the foreseeable future. We will continue to ~~seek funds~~have access to capital resources through possible public or private equity orofferings, debt financings, ~~collaborative~~corporate collaborations or other ~~arrangements with corporate sources, or through other sources of financing. We anticipate that we may need~~means, but the access to ~~raise substantial additional~~such capital ~~the requirements of which will depend on many factors, including:~~

~~the rate of progress in the commercialization of our products~~resources is uncertain and ~~the generation of revenue from product sales;~~

~~the degree and rate of market acceptance of any products launched by us or future partners;~~

~~the cost of commercializing our products, including the costs of sales, marketing, and distribution;~~

~~the costs of developing our anticipated internal sales and marketing capabilities;~~

~~the cost of preparing to manufacture our products on a larger scale;~~

~~the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;~~

~~our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements;~~

~~the emergence of competing technologies or other adverse market developments; and,~~

~~the cost of clinical trials for Cluster Headache, TN and Serenz.~~

is not assured. 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. These matters raise ~~additional funds when needed,~~substantial doubt about our ability to ~~complete planned clinical trials~~continue as a going concern within one year from the date of filing this annual report. The consolidated financial statements do not include any adjustments relating to the recoverability and ~~attain commercial success with CoSense,~~classification of asset amounts or ~~our other potential products, may~~the classification of liabilities that might be ~~impaired. We may also~~necessary should we be ~~required~~unable to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or future products or programs that we would prefer to develop and commercialize ourselves.continue as a going concern.

Cash ~~flows~~

Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

	Year Ended December 31,
	2018			2017
	(in thousands)
Net cash used in continuing operating activities	$	(10,322	)	$	(6,919	)
Net cash used in discontinued operating activities		(1,361	)		(3,031	)
Net cash used in operating activities		(11,683	)		(9,950	)
Net cash used in continuing investing activities		(8	)		(562	)
Net cash (used in) provided by discontinued investing activities		(172	)		716
Net cash (used in) provided by investing activities		(180	)		154
Net cash provided by continuing financing activities		16,302			23,945
Net cash provided by discontinued financing activities		1,525			225
Net cash provided by financing activities		17,827			24,170
Net increase (decrease) in cash, cash equivalents and restricted cash
Continuing operations		5,972			16,464
Discontinued operations		(8	)		(2,090	)
Net increase in cash, cash equivalents and restricted cash	$	5,964		$	14,374

Year Ended
December 31,
2016 2015
Cash Flows from Continuing Operations:
Net cash used in operating activities $ (13,497,980 ) $ (10,299,330 )
Net cash used in investing activities (38,680 ) (1,320,777 )
Net cash provided by financing activities 10,768,133
9,157,920
Net decrease in cash and cash equivalents $ (2,768,527 ) $ (2,462,187 )

Continuing Operations

Cash used in operating activities

During ~~the year ended December 31, 2016,~~2018 operating activities used net cash ~~used in operating activities was $13.5~~of $10.3 million, which was primarily due to the ~~net~~ loss from continuing operations of ~~$12.1~~$11.8 million, ~~as well as adjustments~~adjusted for non-cash ~~items including~~expenses of $2.0 million for depreciation and amortization, $1.3 million of expenses paid with common stock or equity awards, $160,000 operating loss on minority interest investment and approximately $45,000 for the ~~$1.7 million~~net change in fair value of common stock warrants and ~~decreases in accounts payable and accrued liabilities~~contingent consideration, all of ~~$0.6 million and inventory of $0.1 million,~~which were partially offset by ~~stock-based compensation~~the non-cash gain of ~~$0.8 million.~~

$2.0 million recognized on the deconsolidation of Capnia upon the issuance of majority shares to OAHL.

During the year ended December 31, ~~2015,~~2017, we used net cash of $6.9 million for continuing operating activities, resulting primarily from the loss from continuing operations of $11.8 million, adjusted for the non-cash items consisting primarily of $1.6 million of depreciation and amortization, $2.5 million of expense for the change in the fair value of contingent consideration for the acquisition of Essentialis, $1.2 million of expenses paid with common stock or equity awards, approximately $602,000 for issuing shares to Aspire Capital, and approximately $685,000 for the change in fair value of the liability for warrants, all of which were partially offset by the non-cash provision for income tax benefit in the amount of $1.7 million.

Cash used in investing activities

Minimal cash was used for investing activities during 2018 and 2017 for the costs of acquiring property and equipment. During 2017 the net cash used in investing activities was primarily a result of approximately $573,000 for the payment of costs associated with the acquisition of Essentialis.

Cash provided by financing activities

During 2018 we obtained $16.5 million of cash from the issuance of common stock and warrants in the 2018 PIPE offering, which proceeds were partially offset by approximately $250,000 of costs. During 2017 we obtained net cash of $23.9 million resulting from the proceeds of $10.0 million from the issuance of common stock immediately upon closing the acquisition of Essentialis together with $15.0 million of proceeds from the issuance of common stock and warrants on common stock resulting from the 2017 PIPE Offering, all of which proceeds were partially offset by $1.1 million of costs paid for the raising and issuance of the related securities offerings.

As of December 31, 2018, we had cash, cash equivalents and restricted cash of $23.1 million.

We do not believe that we have sufficient capital resources to sustain operations through at least the next twelve months from the date of this filing. We expect to continue incurring losses for the foreseeable future and may be required to raise additional capital to pursue our therapeutic product development initiatives. These conditions raise substantial doubt about our ability to continue as a going concern for a period of one year from the date of this report.

Discontinued Operations

Cash used in operating activities

During 2018 we used net cash of $1.4 million for discontinued operating activities, ~~was $10.2~~compared to $3.0 million ~~which~~during 2017. The decrease was primarily due to the ~~net loss~~lower comparative level of ~~$15.9 million, offset~~operating activities for the discontinued operations, reflecting primarily the sale of NFI in July 2017, and to a lesser extent the deconsolidation of Capnia, Inc. upon the transfer of the majority share ownership in October 2018.

Cash provided by $0.5 million change in fair value of warrants, Series C Warrants inducement charge of $3.0 million, $0.9 million of stock based compensation expense, and increases in accounts payable and accrued liabilities of $1.5 million.

~~Cash used in~~(used in) investing activities

~~Cash~~

During 2018 we used inapproximately $172,000 of cash for discontinued investing activities, representing the net cash reduction for the deconsolidation of Capnia, Inc. upon the transfer of the majority share ownership in ~~the year ended December 31, 2016 consisted of investment in equipment~~

October 2018. During ~~the year ended December 31, 2015, we used $1.0 million to acquire NeoForce. Cash used in other~~2017 net cash provided by investing activities was approximately $716,000, resulting primarily from the sale of the NFI operations in ~~the year ended December 31, 2015 consisted primarily of investment in equipment, change in restricted cash and payment to acquire patents.~~

July 2017.

Cash provided by financing activities

~~During the year ended December 31, 2016,~~

Net cash provided by financing activities related to discontinued operations was ~~$10.8~~$1.5 million ~~consisting primarily of $5.1 million, net of costs,~~during 2018 and ~~$13.5 million, net of costs, in proceeds~~approximately $225,000 during 2017, representing the cash received during the respective periods from ~~issuance of Series A~~our joint venture partner.

Contractual Obligations and ~~Series B~~

Convertible Preferred stock, respectively, offset by $7.8 million used to repurchase the outstanding Series A Convertible Preferred stock. $0.1 million was received from the exercise of Common Stock options.

During the year ended December 31, 2015 cash provided by financing activities was $9.2 million, consisting primarily of $4.2 million in proceeds from issuance of Series A Convertible Preferred stock, $3.9 million form the issuance of Common Stock as a result of the exercise of Series A Warrants and Series B Warrants, issuance of Common Stock to Aspire Capital for $1.4 million and the $0.3 million received from the exercise of Common Stock options, offset by payment of IPO costs and Series B transaction costs of $0.6 million and the repayment of the outstanding balance on our line of credit of $0.1 million.

Commitments

As of December 31, ~~2016,~~2018, we had cash and cash equivalents of approximately $2.7 million. We believe that our cash resources, including the $10 million of financing that we received on March 7, 2017 (see Note 14) are sufficient to meet our cash needs for at least the next 12 months.

~~Contractual obligations and commitments~~

~~As of December 31, 2016, we had net~~ lease obligations totaling ~~$1,714,788,~~approximately $335,000, consisting of operating leases for our operating facilities in Redwood City, California. We signed a lease for our current operating facilities at 1235 Radio Road in Redwood City in July 2015, which expires in ~~July~~August of 2019. We ~~had previously signed~~are subleasing a ~~sublease for our prior operating facilities at 3 Twin Dolphins Drive in Redwood City, with an expiration date~~portion of ~~June 2018.~~

this unused space to two separate parties.

The following table summarizes our contractual obligations as of December 31, ~~2016.~~2018 (in thousands).

	Payments due by period
	Less than 1 year		1 to 3 years		4 to 5 years		After 5 years		Total
Lease obligations	$	335	$	—	$	—	$	—	$	335
Total	$	335	$	—	$	—	$	—	$	335

Payments due by period

Less than
1 year

1 to 3
years

4 to 5
years

After 5
years
Total
Lease obligations $ 750,118
$ 964,670
$ —
$ —
$ 1,714,788
Total $ 750,118
$ 964,670
$ —
$ —
$ 1,714,788

We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones. As the amount and timing of sublicense fees and the achievement and timing of these milestones are not probable and estimable, such commitments have not been included on our balance sheet or in the contractual obligations tables above. We are also obligated to make certain payments of deferred compensation to management upon completion of certain types of transactions. As the amount and timing of such payments are not probable and estimable, such commitments have not been included on our balance sheet or in the contractual obligations tables above.

On February 28, 2017, we settled the Lawsuit (see Note 14) by agreeing to pay $175,000 for dismissal of the Lawsuit. This amount was recorded as a current liability on the balance sheet as of December 31, 2016 and recognized as general and administrative expense in the statement of operations for the year ended December 31, 2016. The stipulation of dismissal is pending with the court.

Off-Balance Sheet Arrangements

As of December 31, ~~2016,~~2018, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

Accounting Guidance Update

Recently Issued Accounting Guidance

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date (see Note ~~3 for a detailed discussion)~~3).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling ~~$2.7~~$23.1 million at December 31, ~~2016. These amounts were~~2018. This balance was invested primarily in money market funds and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

ITEM 8. ~~CONSOLIDATED~~CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS AND SUPPLEMENTARY DATA

~~Capnia,~~

Soleno Therapeutics, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm	81 68

Consolidated Balance Sheets	82 69

Consolidated Statements of Operations	83 70

Consolidated Statements of ~~Stockholders' (Deficit)~~Stockholders’ Equity	84 71

Consolidated Statements of Cash Flows	85 72

Notes to Consolidated Financial Statements	86 73

Report of Independent ~~Registered~~Registered Public Accounting Firm

To the ~~Audit Committee of the~~

Shareholders and Board of Directors ~~and Shareholders~~

of ~~Capnia,~~

Soleno Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ~~Capnia,~~Soleno Therapeutics, Inc. (the “Company”) as of December 31, ~~2016~~2018 and ~~2015, and~~2017, the related consolidated statements of operations, stockholders’ equity, ~~(deficit)~~ and cash flows for each of the two years ~~then ended.~~ in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on ~~these~~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 ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material ~~misstatement.~~misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. ~~Our~~As part of our audits ~~included consideration~~we are required to obtain an understanding of internal control over financial reporting ~~as a basis for designing audit procedures that are appropriate in the circumstances,~~ but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. ~~An audit also includes~~

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 ~~supporting~~regarding the amounts and disclosures in the financial ~~statements, assessing~~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 ~~statement presentation.~~statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capnia, Inc., as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Marcum LLP

Marcum LLP

~~New York, NY~~

We have served as the Company’s auditor since 2014.

San Francisco, CA

March ~~15, 2017~~

19, 2019

~~Capnia,~~

Soleno Therapeutics, Inc.

Consolidated Balance Sheets

(in thousands except share and per share data)

	December 31, 2018			December 31, 2017
Assets
Current assets
Cash and cash equivalents	$	23,099		$	17,100
Restricted cash		—			35
Prepaid expenses and other current assets		529			343
Due from related party		64			—
Minority interest investment in former subsidiary		978			—
Current assets held for sale		—			516
Total current assets		24,670			17,994
Long-term assets
Property and equipment, net		12			23
Other assets		—			126
Intangible assets, net		18,469			20,413
Long-term assets held for sale		—			466
Total assets	$	43,151		$	39,022
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	934		$	633
Accrued compensation and other current liabilities		943			973
Current liabilities held for sale		—			127
Total current liabilities		1,877			1,733
Long-term liabilities
Series A warrant liability		49			70
Series C warrant liability		—			6
2017 PIPE Warrant liability		4,563			5,076
2018 PIPE Warrant liability		600			—
Contingent liability for Essentialis purchase price		5,649			5,082
Other liabilities		—			13
Long-term liabilities held for sale		—			225
Total liabilities		12,738			12,205
Commitments and contingencies (Note 7)
Stockholders’ equity
Preferred Stock, $.001 par value, 10,000,000 shares authorized:
Series B convertible preferred stock, 13,780 shares designated at December 31, 2018 and December 31, 2017; zero and 4,571 shares issued and outstanding at December 31, 2018 and at December 31, 2017, respectively. Liquidation value of zero.		—			—
Common stock, $0.001 par value, 100,000,000 shares authorized, 31,755,169 and 19,238,972 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively.		32			19
Additional paid-in-capital		157,413			140,495
Accumulated deficit		(127,032	)		(113,697	)
Total stockholders’ equity		30,413			26,817
Total liabilities and stockholders’ equity	$	43,151		$	39,022

December 31, 2016 December 31, 2015
Assets
Current assets
Cash and cash equivalents $ 2,725,996
$ 5,494,523
Accounts receivable 133,337
156,127
Restricted Cash 35,000
35,000
Inventory 660,391
551,008
Prepaid expenses and other current assets 246,570
167,642
Total current assets 3,801,294
6,404,300
Long-term assets
Property and equipment, net 102,560
85,745
Goodwill 718,003
718,003
Other intangible assets, net 817,465
916,807
Other assets 125,530
76,340
Total assets $ 5,564,852
$ 8,201,195
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 537,891
$ 695,056
Accrued compensation and other current liabilities 1,169,487
1,632,679
Series B warrant liability —
865,000
Total current liabilities 1,707,378
3,192,735
Long-term liabilities
Series A warrant liability 194,048
1,212,803
Series C warrant liability 85,490
462,437
Other liabilities 142,739
109,404
Total liabilities 2,129,655
4,977,379
Commitments and contingencies (Note 7)

Stockholders’ equity
Preferred Stock, $.001 par value, 10,000,000 shares authorized:
Series A convertible preferred stock, 10,000 shares designated; zero and 4,555 issued and outstanding at December 31, 2016 and December 31, 2015, respectively. Liquidation value of zero. —
5
Series B convertible preferred stock, 13,780 and zero shares designated at December 31, 2016 and December 31, 2015, respectively; 12,780 and zero shares issued and outstanding at December 31, 2016 and at December 31, 2015, respectively. Liquidation value of zero. 13
—
Common stock, $0.001 par value, 100,000,000 shares authorized, 16,786,952 and 14,017,909 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively. 16,786
14,018
Additional paid-in-capital 101,730,285
89,456,466
Accumulated deficit (98,311,887 ) (86,246,673 )
Total stockholders’ equity 3,435,197
3,223,816
Total liabilities and stockholders’ equity $ 5,564,852
$ 8,201,195

See accompanying notes to consolidated financial statements

~~Capnia,~~

Soleno Therapeutics, Inc.

Consolidated Statements of Operations

(in thousands except share and per share data)

	For the Years Ended December 31,
	2018			2017
Operating expenses
Research and development	$	7,178		$	3,069
Sales and marketing		—			26
General and administrative		6,556			6,584
Change in fair value of contingent consideration		567			2,492
Total operating expenses		14,301			12,171
Operating loss		(14,301	)		(12,171	)
Other income (expense)
Cease-use income		6			4
Change in fair value of warrants liabilities		522			(685	)
Gain on deconsolidation of former subsidiary		1,994			—
Interest and other expense, net		(62	)		(590	)
Total other income (expense)		2,460			(1,271	)
Loss from continuing operations before provision for income tax benefit		(11,841	)		(13,442	)
Provision for income tax benefit from continuing operations		—			1,650
Loss from continuing operations		(11,841	)		(11,792	)
Loss from discontinued operations:
Operating loss		(1,494	)		(3,399	)
Other expense		—			(194	)
Total		(1,494	)		(3,593	)
Net loss	$	(13,335	)	$	(15,385	)
Loss per common share from continuing operations, basic and diluted	$	(0.56	)	$	(1.31	)
Loss per common share from discontinued operations, basic and diluted		(0.07	)		(0.40	)
Net loss per common share, basic and diluted	$	(0.64	)	$	(1.71	)
Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share		20,975,479			8,977,795

For the Years Ended
December 31,
2016 2015

Product revenue $ 1,450,788
$ 387,555
Government grant revenue —
$ 219,917
Total revenue 1,450,788
607,472
Cost of goods sold 1,509,306
352,683
Gross profit (58,518 ) 254,789

Expenses
Research and development 5,184,803
4,536,244
Sales and marketing 1,630,591
1,737,470
General and administrative 6,736,203
6,140,821
Total expenses 13,551,597
12,414,535
Operating loss (13,610,115 ) (12,159,746 )
Interest and other income (expense)
Other expense (6,767 ) (183,565 )
Cease-use expense (93,749 ) —
Change in fair value of warrants liabilities 1,667,117
(515,860 )
Inducement charge for Series C warrants —
(3,049,375 )
Total other income (expense) 1,566,601
(3,748,800 )
Loss before provision for income tax (12,043,514 ) (15,908,546 )
Provision for deferred taxes 21,700
—
Net loss (12,065,214 ) (15,908,546 )
Loss on extinguishment of convertible preferred stock 3,651,172
—
Net loss applicable to common stockholders $ (15,716,386 ) $ (15,908,546 )
Basic and diluted net loss per share applicable to common stockholders $ (1.01 ) $ (1.69 )
Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share 15,507,484
9,425,880

See accompanying notes to consolidated financial statements.

Soleno Therapeutics, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands except share data)

	Series B Convertible Preferred Stock						Common Stock					Additional Paid-In			Accumulated			Total Stockholders’
	Shares			Amount			Shares			Amount		Capital			Deficit			Equity
Balances at January 1, 2017		12,780		$	—			3,357,387		$	3	$	101,744		$	(98,312	)	$	3,435
Stock-based compensation													1,000						1,000
Issuance of common stock on conversion of series B convertible preferred shares		(8,209	)		(—	)		1,641,800			2		(2	)					—
Issuance of common stock to board members in lieu of cash payments for quarterly board fees								90,306			—		278						278
Issuance of common stock to acquire Essentialis								3,783,388			4		17,243						17,247
Sale of shares under the 2017 Aspire Purchase Agreement								2,083,333			2		9,998						10,000
Issuance of shares to Aspire Capital in lieu of commitment fees								141,666			—		602						602
Rounding adjustment resulting from 1 for 5 reverse split								(24	)		—		—						—
Sale of shares to investors in the 2017 PIPE, net of costs of $1,172								8,141,116			8		13,819						13,827
Fair value at transaction date of warrants to purchase common stock under the 2017 PIPE													(4,187	)					(4,187	)
Net loss																(15,385	)		(15,385	)
Balances at December 31, 2017		4,571			—			19,238,972			19		140,495			(113,697	)		26,817
Stock-based compensation													829						829
Issuance of common stock on conversion of series B convertible preferred shares		(4,571	)		(—	)		914,200			1		(1	)					—
Issuance of restricted common stock for bonuses								99,217			—		159						159
Issuance of common stock to board members in lieu of cash payments for quarterly board fees								146,371			—		275						275
Issuance of common stock held back on acquisition of Essentialis								1,084,034			1		(1	)					—
Sale of shares to investors in the 2018 PIPE, net of costs of $250								10,272,375			11		16,239						16,250
Fair value at transaction date of warrants to purchase common stock under the 2018 PIPE													(582	)					(582	)
Net loss																(13,335	)		(13,335	)
Balances at December 31, 2018		—		$	—			31,755,169		$	32	$	157,413		$	(127,032	)	$	30,413

~~CAPNIA, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY~~

Series A Convertible
Preferred Stock Series B Convertible
Preferred Stock Common Stock Additional
Paid-In
Capital Accumulated
Deficit Total
Stockholders’
(Deficit) Equity
Shares Amount Shares Amount Shares Amount
Balances at January 1, 2015 —
—
—
—
6,769,106
$ 6,769
$ 59,141,405
$ (70,338,127 ) $ (11,189,953 )
Stock based compensation

942,369

942,369
Issuance of common stock for stock option exercises

83,848
84
293,489

293,573
Issuance of common stock for Series A warrant exercises

24,000
24
155,976

156,000
Issuance of common stock for Series B warrant exercises (net of transaction costs of $306,116)

619,512
619
3,720,094

3,720,713
Issuance of common stock for Series B warrant cashless exercises

5,879,560
5,880
416,660

422,540
Issuance of common stock for 2010/2012 warrant cashless exercises

13,407
13
(13 )

—
Contribution of Series B warrants

3,332

3,332
Derecognition of Series A warrant liability upon exercise

42,000

42,000
Derecognition of Series B warrant liability upon exercise

18,853,215

18,853,215
Issuance of shares in conjunction with BDDI asset purchase

50,000
50
112,350

112,400
Issuance of shares to Aspire Capital

71,891
72
183,250

183,322
Sales of shares through Aspire ATM vehicle

506,585
507
1,433,687

1,434,194
Issuance of Series A Convertible Preferred shares(net of transaction costs of $396,343) 4,555
5

4,158,652

4,158,657
Net loss

(15,908,546 ) (15,908,546 )
Balances at December 31, 2015 4,555
5
—
—
14,017,909
14,018
89,456,466
(86,246,673 ) 3,223,816
Stock based compensation

871,270

871,270
Issuance of common stock for stock option exercises

58,419
58
70,044

70,102
Issuance of common stock for Series B warrant cashless exercises

485,202
485
593,099

593,584
Issuance of common stock on conversion of Series A Convertible Preferred shares (2,220 ) (2 )

1,200,000
1,200
(1,198 )

—
Issuance of Series A Convertible Preferred shares(net of transaction costs of $374,661) 5,445
5

5,070,334

5,070,339
Repurchase of Series A Convertible Preferred shares (7,780 ) (8 )

(7,779,992 )

(7,780,000 )
Issuance of Series B Convertible Preferred shares(net of transaction costs of $353,105)

13,780
14

13,426,881

13,426,895
Issuance of common stock on conversion of Series B Convertible Preferred shares

(1,000 ) (1 ) 1,000,000
1,000
(999 )

—
Issuance of common stock to board members in lieu of cash payments for quarterly board fees

25,422
25
24,380

24,405
Net loss

(12,065,214 ) (12,065,214 )
Balances at December 31, 2016 —
—
12,780
$ 13
16,786,952
$ 16,786
101,730,285
$ (98,311,887 ) $ 3,435,197

See accompanying notes to consolidated financial statements

~~Capnia,~~

Soleno Therapeutics, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	For the Years Ended December 31,
	2018			2017
Cash flows from operating activities:
Net loss	$	(13,335	)	$	(15,385	)
Loss from discontinued operations		(1,494	)		(3,593	)
Loss from continuing operations		(11,841	)		(11,792	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization		1,963			1,611
Stock-based compensation expense		988			880
Income tax benefit		—			(1,651	)
Board fees paid with common stock		275			278
Change in fair value of stock warrants		(522	)		685
Change in fair value of contingent consideration		567			2,492
Non-cash expense of issuing shares to Aspire Capital		—			602
Gain on deconsolidation of former subsidiary		(1,994	)		—
Operating loss of minority interest investment		160			—
Change in operating assets and liabilities:
Prepaid expenses, other current assets and other assets		(60	)		(97	)
Due from related party		(64	)		—
Accounts payable		249			191
Accrued compensation and other current liabilities		(43	)		(78	)
Other long-term liabilities		—			(40	)
Net cash used in continuing operating activities		(10,322	)		(6,919	)
Net cash used in discontinued operating activities		(1,361	)		(3,031	)
Net cash used in operating activities		(11,683	)		(9,950	)
Cash flows from investing activities:
Costs of Essentialis acquisition paid		—			(573	)
Security deposit on sublease		—			13
Purchases of property and equipment		(8	)		(2	)
Net cash used in continuing investing activities		(8	)		(562	)
Net cash (used in) provided by discontinued investing activities		(172	)		716
Net cash (used in) provided by investing activities		(180	)		154
Cash flows from financing activities:
Proceeds from issuance of common stock		—			10,000
Proceeds from sale of common stock and common stock warrants		16,500			15,008
Cash paid for the issuance of common stock and common stock warrants		(198	)		(1,063	)
Net cash provided by continuing financing activities		16,302			23,945
Net cash provided by discontinued financing activities		1,525			225
Net cash provided by financing activities		17,827			24,170
Net increase in cash, cash equivalents and restricted cash from continuing operations		5,972			16,464
Net decrease in cash, cash equivalents and restricted cash from discontinued operations		(8	)		(2,090	)
Net increase in cash, cash equivalents and restricted cash		5,964			14,374
Net increase in cash and cash equivalents included in current assets held for sale		—			—
Cash, cash equivalents and restricted cash, beginning of period		17,135			2,761
Cash, cash equivalents and restricted cash, end of period	$	23,099		$	17,135
Supplemental disclosures of non-cash investing and financing information
Issuance of common stock in Essentialis acquisition	$	—		$	17,246
Contingent consideration of Essentialis acquisition	$	—		$	2,590
Accrued liability for cost of issuing common stock	$	52		$	—
Warrants issued in connection with sale of common stock	$	582		$	4,187

For the Years Ended
December 31,
2016 2015
Cash flows from operating activities:
Net loss $ (12,065,214 ) $ (15,908,546 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 131,640
108,228
Stock-based compensation expense 871,270
942,369
Board fees paid with common stock 24,404
—
Provision for deferred taxes 21,700
—
Change in fair value of stock warrants (1,667,117 ) 515,860
Loss on disposition of equipment 768
—
Inducement charge for Series C warrants —
3,049,375
Noncash expense of issuing shares to Aspire Capital —
183,322
Change in operating assets and liabilities:
Accounts receivable 22,790
(156,127 )
Inventory (109,383 ) (441,672 )
Prepaid expenses and other assets (78,928 ) 84,630
Other long-term assets (49,190 ) (76,340 )
Accounts payable (149,163 ) 211,945
Accrued compensation and other current liabilities (463,192 ) 1,187,626
Other long-term liabilities 11,635
—
Net cash used in operating activities (13,497,980 ) (10,299,330 )
Cash flows from investing activities:
Acquisition of Neoforce assets —
(1,000,000 )
Acquisition of BDDI asset (patent) —
(250,000 )
Increase in restricted cash —
(15,000 )
Purchase of property and equipment (38,680 ) (55,777 )
Net cash used in investing activities (38,680 ) (1,320,777 )
Cash flows from financing activities:
Proceeds from exercise of common stock options 70,102
293,573
Proceeds from exercise of Series A warrants —
156,000
Proceeds from exercise of Series B warrants —
3,720,713
Proceeds from issuance of common stock to Aspire Capital —
1,434,194
Net proceeds from issuance of Series A Convertible Preferred 5,070,339
4,230,150
Net proceeds from issuance of Series B Convertible Preferred 13,479,185
—
Redemption of Series A Convertible Preferred stock in conjunction with issuance of Series B Convertible Preferred stock (7,780,000 ) —
Series A Convertible Preferred transaction costs paid (71,493 ) —
Repayment of credit line —
(101,529 )
Initial Public Offering costs paid —
(575,181 )
Net cash provided by financing activities 10,768,133
9,157,920
Net decrease in cash and cash equivalents (2,768,527 ) (2,462,187 )
Cash and cash equivalents, beginning of period 5,494,523
7,956,710
Cash and cash equivalents, end of period $ 2,725,996
$ 5,494,523
Supplemental disclosures of noncash investing and financing information
Conversion of Series A preferred to common stock $ 1,200,000
$ —
Conversion of Series B preferred to common stock $ 1,000,000
$ —
Series A preferred convertible stock transaction costs included in Accounts Payable $ —
$ 71,493
Series B preferred convertible stock transaction costs included in Accounts Payable $ 52,290
$ —
Fixed asset purchases included in Accounts Payable $ 11,200
$ —
De-recognition of Series B warrant liability through cash exercise $ —
$ 6,747,765
De-recognition of Series B warrant liability through cashless exercise $ 593,584
$ 12,527,991
De-recognition of Series A warrant liability through cash exercise $ —
$ 42,000
BDDI patent purchase consideration included in accrued liabilities $ —
$ 200,000
Shares issued as consideration for BDDI patent purchase $ —
$ 112,400
Cashless exercise of 2010 and 2012 warrants $ —
$ 13
Contribution of Series B warrants $ —
$ 3,332

See accompanying notes to consolidated financial statements.

~~Capnia,~~

Soleno Therapeutics, Inc.

December 31, ~~2016~~

2018

Notes to Consolidated Financial Statements

Note 1. ~~Description of Business~~

~~Capnia,~~Overview

Soleno Therapeutics, Inc. (the “Company” or “Soleno”) was incorporated in the State of Delaware on August 25, 1999, and is located in Redwood City, California. On May 8, 2017, Soleno received stockholder approval to amend its Amended and Restated Certificate of Incorporation to change its name from “Capnia, Inc.” to “Soleno Therapeutics, Inc.” The Company ~~develops~~was initially established as a diversified healthcare company that developed and ~~commercializes neonatology~~commercialized innovative diagnostics, devices and ~~diagnostics. The Company also has a~~ therapeutics ~~platform based on its proprietary technology for precision metering of gas flow.~~

On September 2, 2015, the Company established NeoForce, Inc. ("NFI"), a wholly owned subsidiary incorporated in the State of Delaware. On September 8, 2015, NFI, acquired substantially all of the assets of an unrelated privately held company NeoForce Group, Inc. ("NeoForce") in exchange for an upfront cash payment of $1.0 million and royalties on future sales. NeoForce develops innovative pulmonary resuscitation solutions for the inpatient and ambulatory neonatal markets that the Company is now marketing through NFI.

On April 27, 2015, the Company established Capnia UK Limited, a wholly owned foreign subsidiary in the United Kingdom. The functional currency of the U.K. subsidiary is the British pound. There have been no significant activities for this entity to date.

~~The Company's most recent product to launch commercially utilizing~~addressing unmet medical needs, which consisted of: precision metering of gas flow technology ~~is Serenz®~~marketed as Serenz ^® Allergy Relief, or ~~Serenz,~~Serenz; CoSense ^® End-Tidal Carbon Monoxide (ETCO) Monitor, or CoSense, which ~~has a CE Mark certification for sale~~measures ETCO and aids in the European Union ("E.U.") Serenz is a proprietary handheld device that delivers non-inhaled CO2 topically to the nasal mucosa. Serenz is used only when needed, and does not need to be used on a scheduled basis. Pilot commercial sales of Serenz began in the U.K. and Ireland in the second quarter of 2016.

~~The Company also sells CoSense®, which aids in diagnosis~~detection of excessive hemolysis, a condition in which red blood cells degrade ~~rapidly. When present in neonates with jaundice, hemolysis is a dangerous condition~~rapidly and which can lead to adverse neurological ~~outcomes. CoSense has 510(k) clearance for sale in the U.S. with a specific Indication for Use related to hemolysis issued,~~outcomes; and, ~~has received CE Mark certification for sale in the E.U. CoSense is commercially available in the U.S. In addition, the Company is applying its research~~products that included temperature probes, scales, surgical tables, and development efforts to additional diagnostic products based on its Sensalyze Technology Platform, a portfolio of proprietary methods and devices which enables CoSense and can be applied to detect a variety of analytes in exhaled breath and other products for the neonatology market.

~~Note 2. Liquidity, Financial Condition and Management’s Plans~~

patient surfaces.

The Company had a net loss of $12.1 million for the year ended December 31, 2016 and has an accumulated deficit of approximately $98.3 million at December 31, 2016 from having incurred losses since its inception. The Company has approximately $2.1 million of working capital at December 31, 2016 and used approximately $13.5 million of cash in its operating activities during the year ended December 31, 2016. The Company has financed its operations principallyCompany’s previously wholly-owned subsidiary, NeoForce, Inc. or NFI, through ~~issuances of equity securities.~~

On July 24, 2015, the Company entered into the 2015 Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million in value of shares of the Company’s Common Stock over the 24-month term of the Aspire Purchase Agreement. During the quarter ended September 30, 2015, the Company issued an aggregate of 506,585 shares of Common Stock to Aspire Capital in exchange for approximately $1.4 million.

On October 12, 2015, the Company entered into a 2015 Purchase Agreement with Sabby to purchase up to $10 million worth of Series A Convertible Preferred Stock (the “Preferred Stock”). The sale of the Preferred Stock took place in two separate closings. On October 15, 2015, the date of the first closing, the Company received proceeds of approximately $4.1 million, net of $0.4 million in estimated expenses. Upon the second closing, which closed on January 8, 2016, the Company received proceeds of approximately $5.0 million, net of $0.5 million in estimated expenses.

~~On June 29, 2016, the Company entered into the 2016 Sabby Purchase Agreement with Sabby, pursuant to~~ which the Company agreed to sell to Sabby, in a private placement, an aggregate of up to 13,780 shares of our Series B Convertible Preferred Stock at an aggregate purchase price of $13,780,000, which shares are convertible into 13,780,000 shares of our Common Stock, based on a fixed conversion price of $1.00 per share on an as-converted basis. Under the termsacquired substantially all of the ~~Series B Convertible Preferred Stock, in no event shall shares~~assets of ~~Common stock be issued to Sabby upon conversion of~~an unrelated privately-held company, NeoForce Group, Inc., or NeoForce, also marketed innovative pulmonary resuscitation solutions for the Series B Convertible Preferred Stock to the extent such issuance of shares of Common Stock would result in Sabby having ownership in excess of 4.99%. In connection with the 2016 Sabby Purchase Agreement, theinpatient and ambulatory neonatal markets.

The Company ~~also repurchased an aggregate of 7,780 shares of Series A Convertible Preferred Stock held by Sabby for an aggregate amount of $7,780,000, which shares were~~

originally purchased by Sabby under the 2015 Sabby Purchase Agreement and which shares represent 4,205,405 shares of Common Stock on an as-converted basis. The sale of the Series B Convertible Preferred Stock occurred in two separate closings. On July 5, 2016, the date of the first closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $1.3 million, net of $0.1 million in estimated expenses. On September 29, 2016, the date of the second closing under the 2016 Sabby Purchase Agreement, the Company received proceeds of approximately $4.4 million, net of $0.3 million in estimated expenses. After repurchase of the Series A Convertible Preferred Stock and estimated transaction expenses, the Company received approximately $5.6 million of net proceeds (see Note 8).

~~On December 22, 2016, the Company entered into~~acquired Essentialis, Inc., or Essentialis, through a merger, or the Merger, on March 7, 2017, pursuant to Agreement and Plan ~~with Essentialis.~~of Merger dated December 22, 2016. Essentialis’s efforts prior to the Merger were focused primarily on developing and testing product candidates that target the ATP-sensitive potassium channel, a metabolically regulated membrane protein whose modulation has the potential to impact a wide range of rare metabolic, cardiovascular, and CNS diseases. Essentialis has tested Diazoxide Choline Controlled Release Tablet, or DCCR, as a treatment for Prader-Willi Syndrome, or PWS, a complex metabolic/neurobehavioral disorder. DCCR has orphan designation for the treatment of PWS in the United States, or U.S., as well as in the European Union, or E.U. Consummation of the ~~merger~~Merger was subject to various closing conditions, including ~~our~~the Company’s consummation of a financing of at least $8$8.0 million at, or substantially contemporaneous with, the closing of the ~~merger,~~Merger, which occurred on March 7, 2017 and the receipt of stockholder approval of the ~~merger~~Merger at a special meeting of ~~our~~its stockholders, which ~~the Company received~~was held on March 6, ~~2017 (see Note 14).~~

~~On January 27, 2017,~~2017.

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

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

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

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

The Company continues to separately evaluate alternatives for its Serenz portfolio.

Restatement of prior periods

During the preparation of the condensed consolidated financial statements as of September 30, 2018 and for the related three and nine months then ended, the Company determined that ~~upon~~an error had been made in certain previously reported consolidated balance sheets and statements of operations for the ~~terms~~valuation and ~~subject to~~resultant reporting of fair value for the ~~conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $17.0 million~~Company’s Series A Warrants, resulting in the value of ~~shares of our Common Stock over~~ the ~~30-month term~~warrant liability being overstated. The Company adjusted the prior period information reported in the September 30, 2018 interim condensed consolidated financial statements. The Company determined that the error was not material to any of the ~~purchase agreement. Further, on~~previously reported periods in which the ~~date~~error occurred and has not amended any previously issued consolidated financial statements.

The following table (in thousands, except share and per share amounts) sets forth the effects of the ~~closing of the financing, as defined in the Merger Agreement, the Company shall sell to Aspire Capital, and Aspire Capital shall purchase from the Company an aggregate of $2.0 million of~~restatement on affected items within the Company’s ~~common stock (see Note 14).~~

~~During~~previously reported consolidated balance sheets and statements of operations for the ~~year~~periods ended December 31, ~~2016,~~2017, March 31, 2018, and June 30, 2018, had the adjustments been made in the corresponding quarters.

	As of December 31, 2017									As of March 31, 2018									As of June 30, 2018									As of June 30, 2018
	As Previously Reported			Correction of error			As Restated			As Previously Reported			Correction of error			As Restated			As Previously Reported			Correction of error			As Restated			As Previously Reported			Correction of error			As Restated
Series A Warrant liability	$	352		$	(282	)	$	70		$	291		$	(233	)	$	58		$	1,015		$	(812	)	$	203		$	1,015		$	(812	)	$	203
Total liabilities		12,487			(282	)		12,205			13,312			(233	)		13,079			17,507			(812	)		16,695			17,507			(812	)		16,695
Accumulated deficit		(113,979	)		282			(113,697	)		(117,734	)		233			(117,501	)		(125,371	)		812			(124,559	)		(125,371	)		812			(124,559	)

	Year Ended December 31, 2017									Quarter Ended March 31, 2018									Quarter Ended June 30, 2018								Six Months Ended June 30, 2018
	As Previously Reported			Correction of error			As Restated			As Previously Reported			Correction of error			As Restated			As Previously Reported			Correction of error		As Restated			As Previously Reported			Correction of error		As Restated
Change in fair value of warrant liabilities		(967	)		282			(685	)		212			(49	)		163			(3,834	)		579		(3,255	)		(3,622	)		530		(3,092	)
Total other income (expense)		(1,553	)		282			(1,271	)		234			(49	)		185			(3,801	)		579		(3,222	)		(3,567	)		530		(3,037	)
Pro Forma net loss per common share	$	(1.75	)	$	(0.04	)	$	(1.71	)	$	(0.19	)	$	—		$	(0.19	)	$	(0.38	)	$	0.03	$	(0.35	)	$	(0.57	)	$	0.03	$	(0.54	)

Note 2. Going Concern and Management’s Plans

The Company ~~implemented plans~~had a net loss of $13.3 million during 2018 and has an accumulated deficit of $127.0 million at December 31, 2018 resulting from having incurred losses since its inception. The Company had $22.8 million of working capital at December 31, 2018 and used $11.7 million of cash in its operating activities during 2018. The Company has financed its operations principally through issuances of equity securities.

The Company has continued to ~~reduce its expenses,~~focus on expense control, including reducing its workforce, ~~eliminating~~reducing outside consultants, reducing legal fees and implementing a ~~plan to allow~~policy providing for Board members to receive common stock in lieu of cash ~~payments.~~payments for Board service compensation.

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

The accompanying consolidated financial statements have been prepared under the assumption the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

The Company expects to continue incurring losses for the foreseeable future and may be required to raise additional capital to complete its clinical trials, pursue product development initiatives and penetrate markets for the sale of its products. Management believes that the Company's commercial products, including CoSense, the other neonatology products and Serenz, and the distribution strategies implemented will begin to generate meaningful revenue and corresponding cash. In addition, the Company has been successful over the last 12 months in raising additional capital including the completed closings pursuant to the 2015 Sabby Purchase Agreement, the 2016 Sabby Purchase Agreement on June 29, 2016 and the financing completed as part of the merger with Essentialis. Management believes that the Company will continue to have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other ~~means.~~means, but the Company’s access to such capital resources is uncertain and is not assured. If the Company is unable to secure additional capital, it may be required to curtail its clinical trials and development of new products and take additional measures to reduce ~~costs~~expenses in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays in the ~~Company's~~Company’s efforts to complete its clinical trials and commercialize its products, which is critical to the realization of its business plan and the future operations of the Company.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should it be unable to continue as a going concern.

Management believes that the Company ~~has~~does not have sufficient capital resources ~~after considering the $10 million of financing that the Company received on March 7, 2017 (see Note 14)~~ to sustain operations through at least the next twelve months from the date of this filing.

Additionally, in view of the Company’s expectation to incur significant losses for the foreseeable future it will be required to raise additional capital resources in order to fund its operations, although the availability of, and the Company’s access to such resources is not assured. Accordingly, management believes that there is substantial doubt regarding the Company’s ability to continue operating as a going concern within one year from the date of filing these financial statements.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, ~~(“GAAP”)~~or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, ~~(“SEC”).~~

~~Principles of Consolidation~~

or SEC.

The consolidated financial statements ~~have been prepared in accordance with GAAP and~~ include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Certain amounts from prior periods have been reclassified to conform to the current period presentation, consisting of certain line items within the Consolidated Statements of Cash Flows.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of expenses in the financial statements and accompanying notes. Actual results could differ from those estimates. Key estimates included in the financial statements include the valuation of deferred income tax assets, the valuation of financial instruments, stock-based compensation, value and life of acquired intangibles, and ~~allowances~~the valuation of contingent liabilities for ~~accounts receivable and inventory.~~

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 ~~two~~one U.S. commercial ~~banks~~bank that management believes ~~are~~is of high credit quality. Cash and cash equivalents deposited with these commercial banks exceeded the Federal Deposit Insurance Corporation insurable limit at December 31, ~~2016~~2018 and ~~December 31, 2015.~~2017. The Company expects ~~this to~~the maintenance of balances in excess of insurable limits will continue.

Segments

The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting, making operating decisions, and assessing financial performance. All long-lived assets are maintained in the United States of America.

Cash and Cash Equivalents

The Company considers all highly liquid investments, including its money market fund, purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are held in institutions in the U.S. and the U.K. and include deposits in a money market fund which was unrestricted as to withdrawal or use. Restricted cash iswas security of the Company credit card.

Accounts Receivable

Accounts receivable as of December 31, ~~2016~~2017 consist of balances due from customers in the normal course of ~~business.~~business and are classified as Assets Held for Sale (See Note 9). The Company did not record an allowance for doubtful accounts as this balance was deemed fully collectible.

There were no accounts receivable as of December 31, 2018.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of payments primarily related to insurance and short-term deposits. Prepaid expenses are initially recorded upon payment and are expensed as goods or services are received.

Inventory

Inventory ~~as of December 31, 2016 consisted~~consists of raw materials to be used in the assembly of ~~our products. As of December 31, 2016,~~ the Company’s ~~inventory includes approximately $382 thousand of raw material, $101 thousand of work-in-process~~products, work-in-progress and ~~$177 thousand of~~ finished goods. Inventory is stated at the lower of cost or ~~market~~net realizable value under the first-in, first-out (FIFO) method.

As of December 31, 2017, the Company’s inventory included approximately $213,000 of raw materials, approximately $30,000 of work-in-progress, and approximately $177,000 of finished goods and was classified as Assets Held for Sale (See Note 9). There was no inventory balance as of December 31, 2018.

Patent

On ~~June 30, 2015,~~May 11, 2010, the Company entered into an ~~amendment of~~Asset Purchase Agreement with BioMedical Drug Development, Inc., or BDDI, pursuant to which BDDI agreed to sell certain technology to us and BDDI received and was entitled to receive, among other consideration, certain royalty payments related to the technology. In June 2015, the Company and BDDI amended the BDDI Asset Purchase Agreement, ~~under~~pursuant to which the Company committed to pay aggregate cash payments of $450,000 and issued ~~40,000~~8,000 shares of ~~Common Stock~~common stock to an affiliate of BDDI. With respect to the aggregate cash payments of $450,000, the Company paid an affiliate of BDDI an initial sum of $150,000 on July 1, 2015, and is obligated to pay $100,000 on each of the six, twelve and eighteen-month anniversaries of the signing of the amended agreement. The Company made the final installment of $100,000 on December 22, 2016. Under the original Asset Purchase Agreement dated June 11, 2010, the Company purchased a patent for Breath End Tidal Gas Monitor. The patent was issued on June 19, 2003 and expires on August 1, 2027. The Company ~~has~~ capitalized the fair value of the patent purchased as an intangible asset on its consolidated balance sheet and ~~is amortizing~~amortized the fair value over the remaining useful life of the patent.

The BDDI patent is reported as an Intangible Asset and classified as Assets Held for Sale as of December 31, 2017. (See Note 9.)

In March 2017, the Company completed the acquisition of Essentialis, Inc., a Delaware corporation, or Essentialis in accordance with the Merger Agreement by and between Soleno Therapeutics and Essentialis dated December 22, 2016. The merger transaction has been accounted for as an asset acquisition under the acquisition method of accounting and accordingly, the value of asset acquired in the amount of $22.0 million was assigned to the identifiable intangible asset relating to the patent for DCCR, which patent expires in June 2028.

Business Combinations

For business combinations the Company utilizes the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. These standards require that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies. Acquisition costs are expensed as incurred.

The Company recognizes separately from goodwill the fair value of assets acquired and the liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the acquisition date fair values of the assets acquired, and liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may retroactively record adjustments to the fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of

the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

Property and Equipment, Net

Property and equipment are stated at cost net of accumulated depreciation and amortization calculated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

Certain property and equipment were classified as Assets Held for Sale as of December 31, 2017. (See Note 9.)

Equity Method Investment

Equity method investments are equity securities in investees not controlled by the Company, but over which the Company has the ability to exercise significant influence. The Company’s equity method investment is measured at fair value minus impairment, if any, plus or minus the Company’s share of equity method investee income or loss.

The Company’s equity method investment in Capnia, Inc. is classified as Minority interest investment in former subsidiary in the consolidated balance sheet as of December 31, 2018 and was initially measured at fair value. (See Note 9.) The Company expects to divest of its investment within one year of the balance sheet date.

Long-Lived Assets

The Company reviews its long-lived assets for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount and the fair value of the ~~assets and fair value.~~

assets.

Intangible Assets

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives ~~which range in term from 5 to 12~~of 11 years. The useful life of the intangible asset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life.

Intangible Assets in the amount of approximately $447,000 consisting of the patent acquired in the BDDI acquisition were classified as Assets Held for Sale as of December 31, 2017. (See Note 9.)

Intangible assets consist of the following at December 31, ~~2016:~~2018 (in thousands).

Amount

Accumulated

Amortization

Net

Amount

Useful

Lives

(years)

Patents and merger costs

22,003

(3,534

)

18,469

Total

22,003

(3,534

)

18,469

Amount Accumulated Amortization Net Amount Useful Lives (years)
Patents and trademarks $ 697,890
$ (105,524 ) $ 592,366
5-12
Customer contracts 259,730
(34,631 ) 225,099
10
Total $ 957,620
$ (140,155 ) $ 817,465

Future amortization expense for intangible assets over their remaining useful lives is as ~~follows:~~follows (in thousands).

Year ending December 31	Patents and trademarks
2019	$	1,944
2020		1,944
2021		1,944
2022		1,944
2023		1,944
2024 and thereafter		8,749
Total	$	18,469

Year ending December 31: Patents and trademarks Customer contracts Total Amortization
2017 $ 73,370
$ 25,973
$ 99,343
2018 73,370
25,973
99,343
2019 73,370
25,973
99,343
2020 64,310
25,973
90,283
2021 46,192
25,973
72,165
2022 and thereafter 261,754
95,234
356,988
Total $ 592,366
$ 225,099
$ 817,465

Amortization expense for the years ended December 31, ~~2016~~2018 and ~~December 31, 2105~~2017, was ~~$99,343~~$1.9 million and ~~40,813,~~$1.7 million, respectively.

~~Goodwill~~

The Company tests its goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its reporting unit’s carrying value to its implied fair value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances. The Company did not perform the qualitative assessment, but made its determination using the quantitative approach for goodwill impairment. Using the quantitative approach, the Company determined that there was no impairment of goodwill for the year ended December 31, 2016.

~~Revenue Recognition~~

The Company began recognizing sales of CoSense during the year ended December 31, 2015. In addition, the Company began recognizing sales of NFI pulmonary resuscitation products after the acquisition of Neoforce's assets in September 2015.

~~The Company recognizes revenue when all of the following criteria are met:~~

~~persuasive evidence of an arrangement exists;~~

~~the sales price is fixed or determinable;~~

~~collection of the relevant receivable is probable at the time of sale; and~~

~~delivery has occurred or services have been rendered.~~

For a majority of sales, where the Company delivers its product to hospitals or medical facilities, the Company recognizes revenue upon delivery, which represents satisfaction of the required revenue recognition criteria. The Company does not offer rights of return or price protection and it has no post-delivery obligations. The Company offers a limited one-year warranty to most customers. Estimated warranty obligations are recorded at the time of sale and to date, warranty costs have been insignificant.

The Company also recognized revenue related to a government grant awarded during the year ended December 31, 2015. There were no government grants awarded during the year ended December 31, 2016. Government grants provide funds for certain types of expenditures in connection with research and development activities over a contractually defined period. Revenue related to government grants is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable performance obligations under the government grants have been met. Funds received under government grants are recorded as revenue if the Company is deemed to be the principal participant in the contract arrangements because the activities under the contracts are part of the Company’s development programs. If the Company is not the principal participant, the funds from government grants are recorded as a reduction to research and development expense. Funds received from government grants are not refundable and are recognized when the related qualified research and development expenses are incurred and when there is reasonable assurance that the funds will be received.

Research and Development

Research and development costs are charged to operations as incurred. Research and development costs consist primarily of salaries and benefits, consultant fees, prototype expenses, certain facility costs and other costs associated with clinical trials, net of reimbursed amounts.

Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are expensed to research and development costs when incurred.

Certain Research and Development expenses are reported as Discontinued Operations. (See Note 9.)

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.

The loss from discontinued operations is reported net of the related effect for income taxes in the statements of operations.

Convertible Preferred Stock and other Hybrid Instruments

The ~~Company's~~Company’s convertible preferred stock was classified as permanent equity on its consolidated balance sheet in accordance with authoritative guidance for the classification and measurement of hybrid securities and distinguishing liability from equity instruments. The preferred stock is not redeemable at the option of the holder.

Further, the Company evaluated its Series A and Series B Convertible Preferred Stock and determined that it is considered an equity host under ASC 815, Derivatives and Hedging. In making this determination, the ~~Company's~~Company’s analysis followed the whole instrument approach which compares an individual feature against the entire preferred stock instrument which includes that feature. The ~~Company's~~Company’s analysis was based on a consideration of the economic characteristics and risks of each series of preferred stock. More specifically, the Company evaluated all of the stated and implied substantive terms and features, including (i) whether the preferred stock included redemption features, (ii) how and when any redemption features could be exercised, (iii) whether the holders of preferred stock were entitled to dividends, (iv) the voting rights of the preferred stock and (v) the existence and nature of any conversion rights. As a result of the ~~Company's~~Company’s conclusion that the preferred stock represents an equity host, the conversion feature of all series of preferred stock is considered to be clearly and closely related to the associated preferred stock host instrument. Accordingly, the conversion feature in the preferred stock is not considered an embedded derivative that requires bifurcation.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies ~~Common Stock~~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 ~~assets~~equity and liabilities is required. The Company determined that certain freestanding derivatives, which principally consist of Series A, Series B,C, the 2017 PIPE Warrants and ~~Series C warrants to purchase Common Stock,~~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.

Stock-Based Compensation

~~For~~

Stock-based compensation costs related to stock options granted to employees and directors are measured at the ~~Company recognizes compensation expense for all stock-based awards~~date of grant based on the estimated fair value onof the award. We estimate the grant date ~~of grant.~~fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of ~~the portion of the award that is ultimately expected to vest~~stock-based awards is recognized ~~as expense ratably~~on a straight-line basis over the requisite service ~~period.~~ period, which is generally the vesting period of the award. Stock options we grant to employees generally vest over four years.

The ~~fair value of stock options is determined using the~~ Black-Scholes ~~option pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing~~option-pricing model requires ~~management~~the use of highly subjective assumptions to ~~make certain assumptions regarding a number of complex and subjective variables.~~

~~Stock-based compensation expense related to stock options granted to non-employees is recognized based on~~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: The Company calculates the estimated volatility rate based on the volatilities of common stock ~~options, determined using~~of comparable companies in its industry.

Expected term: The Company does not believe it is able to rely on its historical exercise and post-vesting termination activity to provide accurate data for estimating the ~~Black-Scholes option pricing model,~~expected term for use in estimating the fair value-based measurement of our options. Therefore, the Company has opted to use the “simplified method” for estimating the expected term of options.

Risk-free rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to liquidity.

Expected divided yield: The Company has never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, it used an expected dividend yield of zero.

The Company accounts for forfeitures as they ~~are earned. The awards generally vest over the time period the Company expects to receive services from the non-employee.~~

occur.

Recent Accounting ~~Pronouncements~~

~~From time to time, new accounting pronouncements are issued by~~Standards

Recently Adopted Accounting Standards

In November 2016, the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

~~In January 2017, the Financial Accounting Standard Board (the “FASB”)~~ issued Accounting Standards Update, ~~(ASU) 2017-04:~~ ~~“Intangibles - Goodwill and Other (Topic 350): Simplifying~~or the ~~Test for Goodwill Impairment ”~~ (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company expects that this new guidance will have an impact on its financial positions or results of operations, but the impact will not be material.

~~In January 2017, the FASB issued ASU 2017-01~~ ~~“Business Combinations (Topic 805): Clarifying the Definition of a Business”,~~which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its financial position, results of operations or financial statement disclosures.

~~In November 2016, the FASB issued~~ ASU 2016-18, ““Statement of Cash ~~Flows (Topic 230):~~Flows: Restricted ~~Cash”~~ Cash“(ASU 2016-18”). The update is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The purpose of Update No. 2016-18 is to clarify guidance and presentation related to restricted cash in the statement of cash flows. The amendment”, which requires ~~beginning-of-period and end-of-period total amounts shown on the~~that a statement of cash flows ~~to include~~explain the change during the period in the total of cash, ~~and~~ cash equivalents ~~as well~~and amounts generally described as restricted cash ~~and~~or restricted cash equivalents. ~~The Company is in the process of determining the effect that the adoption will have on its financial position, results of operations or financial statement disclosures.~~

~~In October 2016, the FASB issued updated guidance related to the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. This guidance will be~~These standards are effective for ~~the first quarter of tax year 2018; however, early adoption is permitted. The Company is evaluating the impact that this guidance will have its consolidated~~ financial ~~statements.~~

~~In August 2016, the FASB~~statements issued ~~ASU 2016-15,~~ ~~“Statement of Cash Flows (Topic 230)”~~ (“ASU 2016-15”), which seeks to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For public entities, Update 2016-15 becomes effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal ~~years, with~~years. The Company adopted these standards in the first quarter of 2018 utilizing the retrospective transition method. There was no material impact on the Company’s consolidated financial statements resulting from the adoption of this guidance.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective beginning after December 15, 2017 and early adoption is permitted. The Company ~~is currently evaluating~~adopted the ~~provisions~~standard in the first quarter of ~~Update 2016-15~~2018. The adoption did not have a material impact on the Company’s consolidated financial position and ~~assessing~~results of operations.

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”, to add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118, or SAB 118, to ASC 740 “Income Taxes”. SAB 118 was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. tax reform under the “Tax Cuts and Jobs Act”, or the Tax Act, which became effective for the Company on January 1, 2018. The Company has adopted ASU 2018-09, and adoption of this ASU has no significant impact ~~if any, it may have~~ on its consolidated financial ~~position, results of operations, cash flows or financial statement disclosures.~~

statements.

Recently Issued Accounting Standards

In ~~March~~February 2016, the FASB issued ASU ~~2016-09,~~2016-02: “~~Compensation - Stock Compensation~~Leases (Topic ~~718)~~842)” (“. ASU ~~2016-09”), which seeks~~2016-02 provides new comprehensive lease accounting guidance that supersedes existing lease guidance. Upon adoption of ASU 2016-02, the Company will be required to ~~simplify accounting for share-based payment transactions including income tax consequences, classification~~recognize most leases on its balance sheet at the beginning of ~~awards~~the earliest comparative period presented with a corresponding adjustment to stockholders’ equity. ASU 2016-02 requires the Company to capitalize most current operating lease obligations as ~~either equity or liabilities, and the classification~~right-of-use assets with a corresponding liability based on the ~~statement~~present value of ~~cash flows. For~~future operating lease obligations. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital leases and operating leases in existing lease guidance. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. Topic 842 includes a number of optional practical expedients that the Company may elect to apply. Expanded disclosures with additional qualitative and quantitative information will also be required. The adoption will include

updates as provided under ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. Topic 842 is effective for public entities ~~Update 2016-09 becomes effective~~with fiscal years beginning after December 15, 2018 and for all other entities for fiscal years beginning after December 15, ~~2016, including~~2019, and interim periods within those fiscal years, with early adoption permitted. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-09 will have on its financial position, results of operations or financial statement disclosures.

In March 2016, the FASB issued guidance that involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance will be effective for the first quarter of tax year 2017; however, early adoption is permitted. The Company is evaluating the impact that this guidance will have on its consolidated financial statements.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases.~~ The new standard provides guidance intended to improve financial reporting about leasing transaction. The ASU affects all companies that lease assets such as real estate, airplanes and manufacturing equipment. The ASU will require companies that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new standard will take effect for fiscal years,

~~and interim periods with those~~ fiscal years beginning after December 15, ~~2018. Early adoption~~2020. As the Company is ~~permitted. We have not determined~~an emerging growth company and elected to use the ~~potential effects of this ASU on our consolidated~~extended transition period for complying with any new or revised financial ~~statements.~~

~~In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Liabilities"(“ASU 2016-01”). ASU 2016-01 requires equity investments (excluding equity method investments and investments that are consolidated)~~accounting standards provided pursuant to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost, adjusted for impairment and observable price changes. The ASU also simplifies the impairment assessment of equity investments, eliminates the disclosureSection 13(a) of the assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at cost on the balance sheet and requires the exit price to be used when measuring fair value of financial instruments for disclosure purposes. Under ASU 2016-01, changes in fair value (resulting from instrument-specific credit risk) will be presented separately in other comprehensive income for liabilities measured using the fair value option and financial assets and liabilities will be presented separately by measurement category and type either on the balance sheet or in the financial statement disclosures. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has not yet determined the effect that ASU 2016-01 will have on its financial position, results of operations, or financial statement disclosures.

~~In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern~~." The amendments is this ASU are intended to provide guidance on the responsibility of reporting entity management. Specifically, this ASU provides guidance to management related to evaluating whether there is substantial doubt about the reporting entity’s ability to continue as a going concern and about related financial statement note disclosures. Although the presumption that a reporting entity will continue to operate as a going concern is fundamental to the preparation of financial statements, prior to the issuance of this ASU, there was no guidance in U.S. generally accepted accounting principles (U.S. GAAP) related to the concept. Due to the lack of guidance in U.S. GAAP, practitioners and their clients often faced challenges in determining whether, when, and how a reporting entity should disclose the relevant information in its financial statements. As a result, the FASB issued this guidance to require management evaluation and potential financial statement disclosures. This ASU will be effective for financial statements with periods ending after December 15, 2016. The Company adopted the ASU during the year and performed going concern evaluations for its 2016 calendar year-end financial statements.

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606)”~~ ~~(“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC~~Exchange Act, Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, "Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09842 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was issued by the FASB in August 2015 and extended the original effective date by one year.2020, although early adoption is permitted. The Company is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements and the additional transition method under ASU 2018-11, which allows the Company to recognize Topic 842’s cumulative effect within retained earnings in the period of adoption.

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. The amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act, this ASU 2017-11 will be effective for the Company beginning in fiscal 2020, although early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its consolidated financial statements and related disclosures.

In February 2018, the ~~available methodologies~~FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, or ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for the Company beginning in 2019, with early adoption permitted, and shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the corporate income tax rate in the Tax Act is recognized. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the income statement. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. As the Company is an emerging growth company and elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act, this ASU 2018-07 will be effective for the Company beginning in fiscal 2020. Early adoption is permitted, including in an interim period. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. This ASU is effective for the Company beginning in 2020. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU ~~2014-09~~No. 2018-13 and ~~2015-14 upon its financial statements in future reporting periods.~~delay adoption of the additional disclosures until their effective date. The Company has not yet ~~selected~~evaluated the impact of adoption of this ASU on its consolidated financial statements disclosures.

In August 2018, SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a ~~transition method.~~note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company ~~is in the process of evaluating~~plans to apply the new ~~standard against~~guidance to its ~~existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its~~consolidated financial statements ~~and what changes~~during the first quarter of 2019.

In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to ~~systems and controls may be warranted.~~Related Party Guidance for Variable Interest Entities

~~There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08,~~ ~~"Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)~~”," ~~was issued in March, 2016 to clarify certain aspects of~~ which modifies the ~~principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10,~~ ~~"Identifying Performance Obligations and Licensing,"~~ ~~issued in April 2016, amends other sections of ASU 2014-09 including clarifying~~ guidance related to ~~identifying performance obligations~~indirect interests held through related parties under common control for determining whether fees paid to decision makers and ~~licensing implementation.~~service providers are variable interest. This ASU ~~2016-12,~~ ~~"Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients"~~ provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, ~~“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,”~~ ~~was issued in~~is effective for public business entities for fiscal years beginning after December ~~2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also~~

makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.

15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The ~~Company has considered all other recently issued accounting pronouncements and does not believe the~~ adoption of ~~such pronouncements will~~this ASU is not expected to have a material impact on ~~its~~the Company’s consolidated financial statements.

Note 4. Fair Value of Financial Instruments

The carrying value of the Company’s cash, ~~and~~restricted cash, cash equivalents ~~restricted cash,~~and accounts ~~receivable, accounts~~ payable, ~~and accrued liabilities,~~ approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level I — Unadjusted quoted prices in active markets for identical assets or liabilities;

Level II — Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III — Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):.

	Fair Value Measurements at December 31, 2018
	Total		Level 1		Level 2		Level 3
Liabilities
Series A warrant liability	$	49	$	49	$	—	$	—
Series C warrant liability		—		—		—		—
2017 PIPE warrant liability		4,563		—		—		4,563
2018 PIPE warrant liability		600		—		—		600
Essentialis purchase price contingency liability		5,649		—		—		5,649
Total common stock warrant and contingent consideration liability	$	10,861	$	49	$	-	$	10,812

	Fair Value Measurements at December 31, 2017
	Total		Level 1		Level 2		Level 3
Liabilities
Series A warrant liability	$	70	$	70	$	—	$	—
Series C warrant liability		6		—		—		6
2017 PIPE warrant liability		5,076		—		—		5,076
Essentialis purchase price contingency liability		5,082		—		—		5,082
Total common stock warrant and contingent consideration liability	$	10,234	$	70	$	-	$	10,164

Fair Value Measurements at December 31, 2016
Total Level 1 Level 2 Level 3
Assets
Money market fund $ 2,563,247
$ 2,563,247
—
—

Liabilities
Series A warrant liability 194,048
194,048
—
—
Series C warrant liability 85,490
—
—
85,490
Total common stock warrant liability $ 279,538
$ 194,048
—
$ 85,490

Fair Value Measurements at December 31, 2015
Total Level 1 Level 2 Level 3
Assets
Money market fund $ 3,803,929
$ 3,803,929
—
—

Liabilities
Series A warrant liability 1,212,803
1,212,803
—
—
Series B warrant liability 865,000
—
—
865,000
Series C warrant liability 462,437
—
—
462,437
Total common stock warrant liability $ 2,540,240
$ 1,212,803
—
$ 1,327,437

The Series A Warrant is a registered security that trades on the open ~~market. The~~market and the fair value of the Series A Warrant liability is based on the publicly quoted trading price of the warrants which is listed on and obtained from NASDAQ. Accordingly, the fair value of Series A Warrants is a Level 1 measurement. The fair value ~~measurements~~measurement of the Series ~~B and Series~~ C Warrants ~~are~~is based on significant inputs that are unobservable and thus represent Level 3 measurements. The Company’s estimated fair value of the Series B Warrant liability is calculated using a Monte Carlo simulation. Key assumptions include the volatility of the Company’s stock, the expected warrant term, expected dividend yield and risk-free interest rates. (see Note 6) The Company’s estimated fair value of the Series C Warrant liability is calculated using the Black-Scholes valuation model, which is equivalent to fair value computed using the Binomial Lattice Option Model. Key assumptions include the volatility of the Company’s stock, the expected warrant term, expected dividend yield and risk-free interest rates. The Company’s estimated fair value of the 2017 PIPE Warrants and the 2018 PIPE Warrants was calculated using a Monte Carlo simulation of a geometric Brownian motion model. The Monte Carlo simulation pricing model requires the input of highly subjective assumptions including the expected stock price volatility, the expected term, the expected dividend yield and the risk-free interest rate. The fair value of the Essentialis purchase price contingent liability is estimated using scenario-based methods based upon the Company’s analysis of the likelihood of obtaining specified approvals from the Federal Drug Administration as well as reaching cumulative revenue milestones (see Note 6)8). The Level 3 estimates are based, in part, on subjective assumptions.

The agreement to pay the annual royalty in the NeoForce acquisition resulted in the recognition of a contingent consideration, which was recognized on the acquisition date. Subsequent changes to estimates of the amount of contingent consideration to be paid will be recognized as charges or credits in the statement of operations. The fair value of the contingent consideration is based on preliminary cash flow projections, growth in expected product sales and other assumptions. Based on the assumptions, the fair value of the royalty obligation was determined to be $153 thousand at the date of acquisition and $136 thousand as of December 31, 2016. The fair value of the royalty obligation was determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate of 20% commensurate with the Company's cost of capital and expectation of the revenue growth for products at their life cycle stage. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.

On January 13, 2016 we entered into an agreement to sublease our excess space located in Redwood City. By the end of February we removed all equipment, furniture and fixtures being stored in this excess space and ceased use of this space. The fair value of the cease-use liability was calculated using the remaining lease payments, offset by future sub-lease payments, offset by deferred rent amortization, and discounted to present value using our current cost of capital of 20%. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.

During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the periods presented.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 1 and Level 3 ~~financial instruments,~~warrants, which are treated as liabilities ~~as follows:~~(dollars in thousands).

	Series A Warrant					Series C Warrant					2017 PIPE Warrants					2018 PIPE Warrants				Purchase Price
	Number of Warrants		Liability			Number of Warrants		Liability			Number of Warrants		Liability			Number of Warrants		Liability		Contingent Liability
Balance at January 1, 2018		485,121	$	70			118,083	$	6			6,024,425	$	5,076			—	$	—	$	5,082
Change in value of Series A Warrants		—		(21	)		—		—			—		—			—		—		—
Change in value of Series C Warrants		—		—			—		(6	)		—		—			—		—		—
Change in value of 2017 PIPE Warrants		—		—			—		—			—		(513	)		—		—		—
Issuance of 2018 PIPE Warrants		—		—			—		—			—		—			513,617		582		—
Change in value of 2018 PIPE Warrants		—		—			—		—			—		—			—		18		—
Change in value of contingent liability		—		—			—		—			—		—			—		—		567
Balance at December 31, 2018		485,121	$	49			118,083	$	—			6,024,425	$	4,563			513,617	$	600	$	5,649

Series A Warrant Series B Warrant Series C Warrant
Number of Warrants Liability Number of Warrants Liability Number of Warrants Liability
Balance at December 31, 2015 2,425,605
$ 1,212,803
116,580
$ 865,000
590,415
$ 462,437
Change in value of Series A Warrants —
(1,018,755 ) —
—
—
—
De-recognition of Series B Warrant liability upon cashless exercise of warrants (485,202 shares issued) —
—
(102,300 ) (593,584 ) —
—
De-recognition of Series B Warrant liability upon expiration —
—
(14,280 ) —
—
—
Change in value of Series B Warrants —
—
—
(271,416 ) —
—
Change in value of Series C Warrants —
—
—
—
—
(376,947 )
Balance at December 31, 2016 2,425,605
$ 194,048
—
$ —
590,415
$ 85,490

Note 5. Property and Equipment, Net

Property and equipment ~~consisted of~~are summarized in the ~~following:~~following table (in thousands).

	December 31, 2018			December 31, 2017
Computer hardware	$	67		$	61
Computer software		2			—
Furniture and fixtures		23			23
Leasehold improvements		13			13
		105			97
Less accumulated depreciation and amortization		(93	)		(74	)
Total	$	12		$	23

December 31, 2016 December 31, 2015
Furniture and fixtures $ 182,257
$ 236,366
Computer hardware 66,810
52,112
Leasehold improvements 12,849
9,117
261,916
297,595
Less accumulated depreciation and amortization (159,356 ) (211,850 )
Total $ 102,560
$ 85,745

Depreciation expense was ~~$32,298~~approximately $19,000 and ~~$67,415~~$44,000 for the ~~fiscal~~ years ended December 31, ~~2016~~2018 and December 31, ~~2015, respectively.~~

2017, respectively

Note 6. Warrant Liabilities

~~Warrants terms~~

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

Accounting Treatment

The Company accounts for the Warrants in accordance with the guidance in ASC 815. As indicated above, the Company may be obligated to settle Warrants in cash in the case of a Fundamental Transaction.

The Company classified the Warrants, with a term greater than one year, as long-term liabilities at their fair value and will re-measure the warrants at each balance sheet date until they are exercised or expire. Any change in the fair value is recognized as other income (expense) in the Company’s consolidated statements of operations.

Series A Warrants

The Company has issued 489,921 Series ~~B and~~A Warrants to purchase shares of its common stock at an exercise price of $32.50 per share in connection with the unit offering offered in the Company’s initial public offering, or the IPO, in November 2014. The Series CA Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. They also contain a cashless exercise feature that provides for their net share settlementare exercisable at any time prior to the ~~option~~expiration of the ~~holder in~~five-year term on November 12, 2019.

Upon the ~~event that there is no effective registration statement covering the continuous offer and sale~~completion of the ~~warrants and underlying shares.~~IPO, the Series A Warrants started trading on the NASDAQ under the symbol SLNOW. As the Series A Warrants are publicly traded, the Company uses the closing price on the measurement date to determine the fair value of the Series A Warrants. The ~~Company is required to comply with certain requirement to cause or maintain the effectiveness of a registration statement for the offer and sale of these securities. The Warrant contracts~~Series A Warrants contract further provide for the payment of liquidated damages at an amount per month equal to 1% of the aggregate volume weighted average price, or VWAP, of the shares into which each Warrant is convertible into in the event that the Company is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registration payment arrangement stipulated in the terms of these securities and determined that it is probable that the Company will maintain an effective registration statement and has therefore not allocated any portion of the ~~IPO or Private Transaction~~ proceeds related to the warrant financings to the registration payment arrangement. The Warrants also contain a fundamental transactions provision that permits their settlement in cash at fair value at the option of the holder upon the occurrence of a change in control. Such change in control events include tender offers or hostile takeovers, which are not within the sole control of the Company as the issuer of these warrants. Accordingly, the ~~warrants~~Warrants are considered to have a cash settlement feature that precludes their classification as equity instruments. Settlement at fair value upon the occurrence of a fundamental transaction would be computed using the Black Scholes Option Pricing Model, which ~~is equivalent to fair value computed using~~approximates the ~~Binomial Lattice Option Model.~~

~~Accounting Treatment~~

~~The Company accounts for the Warrants in accordance with the guidance in ASC 815~~ ~~Derivatives and Hedging. As indicated above, the Company may be obligated to settle Warrants in cash in the case of a Fundamental Transaction.~~

The Company classified the Warrants, with a term greater than one year, as long term liabilities at their fair value and will re-measure the warrants at each balance sheet date until they are exercised or expire. Any change in the fair value is recognized as other income (expense) in the Company’s statement of operations. The Series B Warrant liability was classified as a current liability in the year ended December 31, 2015, as the Warrants were set to expire on February 12, 2016.

Under ASC 815-40-35, the Company adopted a sequencing policy that reclassifies contracts, with the exception of stock options, from equity to assets or liabilities for those with the latest inception date first. Future issuance of securities will be evaluated as to reclassification as a liability under our sequencing policy of latest inception date first until either all of the Series B Warrants are settled or expire. The Series B Warrants expired on February 12, 2016.

~~Series A Warrants~~

The Company has issued 2,449,605 Series A Warrants to purchase shares of its Common Stock at an exercise price of $6.50 per share in connection with the unit offering offered in the Company's initial public offering ("IPO") in November 2014. The Series A Warrants are exercisable at any time prior to the expiration of the five-year term on November 12, 2019.

Upon the completion of the IPO, the Series A Warrants started trading on the NASDAQ under the symbol CAPNW. As the Series A Warrants are publicly traded, the Company uses the closing price on the measurement date to determine the fair value of these the Series A Warrants.

binomial lattice model.

Since their issuance, a total of ~~24,000~~4,800 Series A Warrants have been exercised. As of December 31, ~~2016,~~2018, the fair value of the ~~2,425,605~~485,121 outstanding Series A Warrants was approximately ~~$194 thousand,~~$49,000, and the decrease of ~~$1 million~~approximately $21,000 in fair value during the year ended December 31, ~~2016~~2018 was recorded as other income (expense) in the ~~statement~~consolidated statements of operations.

~~Series B Warrants~~

~~The Company issued 2,449,605 Series B Warrants to purchase shares of its Common Stock at an exercise price of $6.50 per share in connection with the IPO.~~

Between January 1, 2016 and the expiration date of the Series B Warrants of February 12, 2016, certain holders of Series B warrants cashless exercised a total of 102,300 Series B Warrants resulting in the issuance of 485,202 shares of Common Stock and the derecognition of approximately $593 thousand in Series B Warrant liability. The remaining Series B Warrant liability was reduced to zero upon expiration resulting in the recording of $272 thousand in other income in the statement of operations. The remaining Series B Warrants expired unexercised on February 12, 2016.

As of February 12, 2016 and December 31, 2015 the Company used a Monte Carlo simulation to calculate the fair value of its Series B Warrant liability. This model is dependent upon several variables such as the warrant’s term, exercise price, current stock price, risk-free interest rate estimated over the contractual term, estimated volatility of our stock over the term of the warrant and the estimated market price of our stock during the cashless exercise period. The risk-free rate is based on U.S. Treasury securities with similar maturities as the expected terms of the warrants. The volatility is estimated based on blending the volatility rates for a number of similar publicly-traded companies. The Company used the following inputs:

February 12, 2016
December 31,
2015
Volatility 90 % 90 %
Expected Term (years) 0.00
0.12
Expected dividend yield — % — %
Risk-free rate 0.65 % 0.65 %

In addition to the assumptions above, the Company’s estimated fair value of the Series B Warrant liability is calculated using other key assumptions. Management, with the assistance of an independent valuation firm, makes these subjective determinations based on available current information; however, as such information changes, so might management’s determinations and such changes could have a material impact on future operating results.

Series C Warrants

On March 5, 2015, the Company entered into separate agreements with certain Series B Warrant holders, who agreed to exercise their Series B Warrants to purchase an aggregate of ~~589,510~~117,902 shares of the Company’s ~~Common Stock~~common stock at an exercise price of ~~$6.50~~$32.50 per share, resulting in the de-recognition of $6.7 million of the previously issued Series B Warrant liability and gross proceeds to the Company of ~~approximately~~ $3.8 million based on the exercise price of the Series B Warrants. In connection with this exercise of the Series B Warrants, the Company issued to each investor who exercised Series B Warrants, new Series C Warrants for the number of shares of the Company’s ~~Common Stock~~common stock underlying the Series B Warrants that were exercised. Each Series C Warrant is exercisable at ~~$6.25~~$31.25 per share and will expire on March 5, 2020. The Series C Warrants contract further provide for the payment of liquidated damages at an amount per month equal to 1% of the aggregate volume weighted average price, or VWAP, of the shares into which each Warrant is convertible into in the event that the Company is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registration payment arrangement stipulated in the terms of these securities and determined that it is probable that the Company will maintain an effective registration statement and has therefore not allocated any portion of the proceeds related to the warrant financings to the registration payment arrangement. The Warrants also contain a fundamental transactions provision that permits their settlement in cash at fair value at the option of the holder upon the occurrence of a change in control. Such change in control events include tender offers or hostile takeovers, which are not within the sole control of the Company as the issuer of these warrants. Accordingly, the Warrants are considered to have a cash settlement feature that precludes their classification as equity instruments. Settlement at fair value upon the occurrence of a

fundamental transaction would be computed using the Black Scholes Option Pricing Model, which approximates the binomial lattice model.

In April 2015, the Company issued a tender offer to the remaining holders of Series B Warrants to induce the holders to cash exercise the outstanding Series B Warrants in exchange for new Series C Warrants with an exercise price of ~~$6.25~~$31.25 per share that expire on March 5, 2020. The tender offer was extended to Series B Warrant holders under a registration statement filed with the SEC on Form S-4, which was declared effective on June 25, 2015 and expired on July 24, 2015. During July 2015, certain Series B Warrant holder(s) tendered their Series B Warrants under the tender offer, which resulted in the issuance of ~~905~~181 shares of the ~~Company's Common Stock,~~Company’s common stock, the issuance of ~~905~~181 Series C Warrants and proceeds to the Company of ~~$5,882.~~

approximately $6,000.

The Series C Warrants are exercisable into ~~590,415~~118,083 shares of the Company’s ~~Common Stock.~~common stock. As of December 31, ~~2016,~~2018, the fair value of the Series C Warrants was determined to be ~~$85,490.~~zero. The decline in the fair value of the liability for the Series C Warrants of ~~$376,947 in~~approximately $6,000 during the year ended December 31, ~~2016~~2018 was recorded as other income (expense) in the consolidated ~~statement~~statements of operations.

The Company has calculated the fair value of the Series C Warrants using a Black-Scholes pricing ~~model, which is equivalent to the fair value computed using the Binomial Lattice Option Model.~~model. The Black-Scholes pricing model requires the input of highly subjective assumptions including the expected stock price volatility. The Company used the following ~~inputs:~~inputs.

	December 31, 2018			December 31, 2017
Volatility		90	%		90	%
Contractual term (years)		1.17			2.17
Expected dividend yield		—	%		—	%
Risk-free rate		2.60	%		1.57	%

Warrants Issued as Part of the Units in the 2017 PIPE Offering

The 2017 PIPE Warrants were issued on December 15, 2017 in the 2017 PIPE Offering, pursuant to a Warrant Agreement with each of the investors in the 2017 PIPE Offering, and entitle the holder to purchase one share of the Company’s common stock at an exercise price equal to $2.00 per share, subject to adjustment as discussed below, at any time commencing upon issuance of the 2017 PIPE Warrants and terminating at the earlier of December 15, 2020 or 30 days following positive Phase III results for the DCCR tablet in PWS.

The exercise price and number of shares of common stock issuable upon exercise of the 2017 PIPE Warrants may be adjusted in certain circumstances, including in the event of a stock split, stock dividend, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price of the 2017 PIPE Warrants will not be reduced below $1.72.

In the event of a change of control of the Company, the holders of unexercised warrants may present their unexercised warrants to the Company, or its successor, to be purchased by the Company, or its successor, in an amount equal to the per share value determined by the Black Scholes methodology.

As of December 31, 2018, the fair value of the 2017 PIPE Warrants was estimated at $4.6 million. The decrease in the fair value of the liability for the 2017 PIPE Warrants of approximately $513,000 during the year ended December 31, 2018 was recorded as other income (expense) in the consolidated statements of operations.

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

	December 31, 2018			December 31, 2017
Volatility		75	%		67	%
Contractual term (years)		0.8			0.8
Expected dividend yield		—	%		—	%
Risk-free rate		2.51	%		1.76	%

Warrants Issued as Part of the Units in the 2018 PIPE Offering

The 2018 PIPE Warrants were issued on December 19, 2018 in the 2018 PIPE Offering, pursuant to a Warrant Agreement with each of the investors in the 2018 PIPE Offering, and entitle the holders of each of the 10,272,375 units to purchase 0.05 shares of the Company’s common stock at an exercise price equal to $2.00 per share, subject to adjustment as discussed below, at any time commencing upon issuance of the 2018 PIPE Warrants and terminating on December 21, 2023.

The exercise price and number of shares of common stock issuable upon exercise of the 2018 PIPE Warrants may be adjusted in certain circumstances, including in the event of a stock split, stock dividend, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price of the 2018 PIPE Warrants will not be reduced below $2.00.

As of December 31, 2018, the fair value of the 2018 PIPE Warrants was estimated at approximately $600,000. The approximate $18,000 increase in the fair value of the liability for the 2018 PIPE Warrants since they were issued was recorded as other income (expense) in the consolidated statements of operations.

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

The following summarizes certain key assumptions used in estimating the fair values.

	December 31, 2018			December 19, 2018 (date of issue)
Volatility		75	%		75	%
Contractual term (years)		5.0			5.0
Expected dividend yield		—	%		—	%
Risk-free rate		2.51	%		2.62	%

The Monte Carlo simulation of a geometric Brownian motion model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. These assumptions include the following estimates.

Volatility: The Company calculates the estimated volatility rate based on the volatilities of common stock of comparable companies in its industry.

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

December 31, 2016
December 31,
2015
Volatility 90 % 90 %
Expected Term (years) 3.17
4.17
Expected dividend yield — % — %
Risk-free rate 1.51 % 1.76 %

Expected dividend yield: The Company has never declared or paid any cash dividends and does not currently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero.

Risk-free rate: The risk-free interest rate is based on the U.S. Treasury rate for similar periods as those of expected volatility.

Note 7. Commitments and Contingencies

Facility Leases

On July 1, 2015 the Company executed a new ~~four year~~four-year non-cancelable operating lease agreement for 8,171 square feet of office space for its headquarters facility. The lease agreement provides for monthly lease payments of ~~$23,300~~approximately $23,000 beginning in September of 2015, with increases in the following three years. An additional 5,265 square feet of office space became part of the new lease agreement on March 1, ~~2016.~~

2016, and in December 2017 the Company subleased this additional space to a third party through the end of the lease term. The lease and the sublease both expire in August 2019.

The Company ~~leases~~also leased office space under a non-cancelable operating lease agreement ~~which~~that was set to expire in May ~~2015. On~~2015, and in February 2, 2015 the Company signed an amendment to its lease agreement, extending the lease through June 2018. The amendment ~~provides~~provided for monthly lease payments of approximately $22,000 beginning in June 2015, with increases in the following two years. The Company subleased this facility in January 2016.

~~The Company also leases approximately 2,100 square feet for its operations in Ivyland, Pennsylvania under a month-to-month lease.~~

Minimum rental commitments under all noncancelable leases with an initial term in excess of one year as of December 31, ~~2016~~2018 were ~~as follows:~~

Year ending December 31: Operating Leases
2017 750,118
2018 629,923
2019 334,747
Total $ 1,714,788

~~The table above does~~approximately $344,000 during 2019 and none thereafter, not ~~consider~~including the impact of ~~lease~~sublease payments the Company will receive under ~~the sublease executed in January 2016.~~

its existing sublease.

Rent expense was ~~$595,000~~approximately $323,000 and ~~$375,000~~$514,000 during the years ended December 31, ~~2016~~2018 and ~~2015,~~2017, respectively.

Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.

Note 8. Acquisition of Essentialis Inc.

On March 7, 2017, the Company acquired Essentialis through the merger of the Company’s wholly-owned subsidiary Company E Merger Sub, Inc., a Delaware corporation (“Merger Sub”), whereby Merger Sub merged into Essentialis, with Essentialis surviving the merger as a wholly owned subsidiary of the Company.

The transaction was accounted for as an asset acquisition under the acquisition method of accounting. The amendments in ASU 2017-01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets and activities is not a business.

In ~~connection~~consideration, the Company issued 3,783,388 shares of common stock to stockholders of Essentialis on March 7, 2017. Pursuant to the terms of the Merger Agreement, the Company held back shares of common stock as partial recourse to satisfy indemnification claims. Effective March 7, 2018, on the one-year anniversary of the closing of the merger, the Company issued 180,667 shares for the previously held back amount. In the second quarter of 2018 there were 903,367 additional shares of common stock issued upon the achievement of a development milestone. In total, 4,867,422 shares of common stock were issued to Essentialis stockholders. Additionally, upon the achievement of certain commercial milestones associated with the ~~acquisition~~sale of Essentialis’ product in accordance with the terms of the ~~assets of NeoForce,~~Merger Agreement, the Company ~~agreed~~is obligated to ~~pay~~make cash earnout payments of up to a maximum of $30.0 million to Essentialis stockholders. The merger consideration described above will be reduced by any such shares of common stock issuable, or cash earnout payments payable, to Essentialis’ management carve-out plan participants and other service providers of Essentialis, in each case, in accordance with the ~~former NeoForce shareholder~~terms of the Merger Agreement.

Since the acquisition was determined to be an ~~annual royalty payment for~~asset acquisition, the total value of the purchase consideration was allocated to the asset acquired. The fair value of the shares issued on the completion of the merger and of the contingent shares to be issued in the future was based on the stock price of the Company on the date of completion of the merger. In addition, the trading history of the Company was reviewed to assess the reliability of the implied consideration value. The Company trades on the NASDAQ, a ~~period~~major U.S. stock exchange, and has significant average daily trading volume with tight intraday bid-ask spreads. These characteristics indicate Soleno’s shares are actively traded and provide a reliable indication of ~~36 months.~~ value. On March 7, 2017, the date of the transaction close, the Company’s stock was trading at $3.85 per common share. Additionally, the average closing price of the stock in the 30 calendar days leading up to the close was also approximately $3.85. Accordingly, the fair value of the shares issued on March 7, 2017 and the estimated fair value of the contingent shares to be issued in the future are based on this stock price.

The agreement to pay cash upon the ~~annual royalty resulted~~achievement of the commercial milestones results in the recognition of a contingent consideration. The fair value of the contingent cash consideration is based on the Company’s analysis of the likelihood of the drug indication moving from Phase II through approval in the Federal Drug Administration approval process and then reaching the cumulative revenue milestones. In determining the likelihood of this occurring, the analysis relied on 2016 research published by BIO, Biomedtraker, & Amplion titles “Clinical Development Success Rates 2006-2015.” Based on management’s assessment, a 56% probability of achieving each milestone was determined to be reasonable. Additionally, the Company anticipated at the time of the merger that it could reach the commercial milestones of $100.0 million and $200.0 million in applicable revenue in 2023 and 2025, respectively.

The Company recorded the acquisition pursuant to the guidance in ASC 805, which ~~is recognized~~provides that not all of the relevant information needed to complete acquisition-date measurements may be obtainable or known at the time of closing the acquisition and in time for issuance of interim or annual financial statements. Therefore, ASC 805 provides for a “measurement period” during which adjustments to the provisional valuation amounts initially recorded can be made in order to reflect information, existing at the acquisition date, but of which management subsequently obtains or becomes aware. ASC 805 provides that the measurement period can extend for up to, but not exceed, one year.

Management engaged independent professional assistance and advice in order to assess the fair value of the contingent stock and cash consideration as of March 7 and December 31, 2017. During the process of determining the fair value of the contingent consideration at December 31, 2017, the Company became aware that certain of the subjective assumptions made at the time of the initial valuation should be modified based upon management’s increased understanding of the commercial capabilities of the DCCR drug of which it became aware subsequent to the acquisition. Accordingly, the Company determined that it was appropriate to adjust the provisional valuation amounts recorded for the contingent stock and cash consideration made at the inception in March 2017. As a result, the value of the ~~transaction,~~contingent cash consideration to be paid upon completing successive sales milestones increased and the value of the contingent stock consideration payable upon timing milestones was reduced; the resulting combined

change to the total contingent consideration was not material. The initial valuation of the contingent consideration determined the fair value of the contingent stock consideration to be $4.2 million and the fair value of the contingent cash consideration to be $1.1 million, for the combined value of $5.3 million for the total of the stock and cash contingent consideration. The revision of the initial valuation of the contingent consideration, made within the measurement period, determined the fair value of the contingent stock consideration to be $2.7 million and the fair value of the contingent cash consideration to be $2.6 million, for the combined value of $5.3 million for the total of the contingent stock and cash consideration.

Also subsequent ~~changes~~ to March 7, 2017 and prior to reporting the balance sheet and results of operations as of December 31, 2017, and for the year then ended, the Company completed its assessment of the tax effect on the net assets acquired by obtaining the independent study and report regarding the change in control in the previously outstanding stock of Essentialis. As a result of completing the study, the Company determined that, pursuant to Section 382 of the Internal Revenue Code, the utilization of Essentialis’s federal and state operating loss carryforwards were limited, which required the Company to record a net deferred tax liability in the amount of $1.7 million, deferred to future periods, as an element of the assets acquired. As a consequence of recording the net deferred tax liability, the Company’s valuation allowance was reduced by $1.7 million, which resulted in the provision for income tax benefit and an increase in the value of the intangible asset acquired.

The probability weighted milestone payments were discounted to determine the present value of future cash payments. The analysis utilized the weighted average cost of capital (WACC) discount rate. The WACC used for the first and second milestones were 30% and 21%, respectively.

The aggregate purchase price consideration was as follows (in thousands).

Fair value of stock consideration	$	17,246
Fair value of contingent consideration		2,590
Total purchase price consideration	$	19,836

The fair value of the asset acquired is as follows (in thousands).

Patents		$	19,836
Net assets acquired		$	19,836

As an asset acquisition, the Company also capitalized approximately $573,000 of total costs incurred to complete the acquisition consisting of legal fees of approximately $469,000, printing fees of approximately $75,000 and accounting and other fees of approximately $29,000. Additionally, the Company recorded as part of the purchase price consideration the value equivalent to the deferred tax liability that resulted from acquiring the assets in the amount of $1.7 million. The total intangible asset of $22.0 million was recorded on the balance sheet and is being amortized ratably over the life of the patents through June 30, 2028.

The acquisition of Essentialis assets was completed in March 2017 and the purchase price was established at the date of closing based upon consideration paid at closing and an estimate of the ~~amounts of~~future contingent consideration to be paid. Subsequent to the acquisition date and prior to reporting the balance sheet and results of operations as of December 31, 2017, and for the year then ended, the Company completed and finalized its assessments of the fair value of consideration paid ~~will be recognized as charges or credits~~and of the tax effect on the net assets acquired resulting from the change in control in the ~~statement~~previously outstanding stock of ~~operations.~~Essentialis. As a result of completing the study of the fair value of the consideration paid, the Company revised the initial estimate of the fair value paid at closing and of the future contingent consideration to be paid; accordingly, the initial purchase cost of the asset acquired was adjusted as of March 2017 and the change in amortization of the related intangible asset was recorded in the fourth quarter of 2017. As a result of completing the study of the tax effect, the Company determined that, pursuant to Section 382 of the Internal Revenue Code, the utilization of Essentialis’s operating loss carryforwards were limited, which required the Company to record a tax liability in the amount of $1.6 million, deferred to future periods, for the assets acquired for which the cost was recorded as an element of the of assets required. Accordingly, the initial purchase cost of the asset acquired was adjusted as of March 2017 and the increase in amortization of the related intangible asset was recorded in the fourth quarter of 2017.

The fair value of the liability for the contingent consideration payable by the Company achieving the commercial sales milestones of $100.0 million and $200.0 million was initially established as $2.6 million at the time of the merger. The fair value of the contingent consideration ispayable increased to $5.1 million at December 31, 2017 and to $5.6 million at December 31, 2018, based on ~~preliminary cash flow projections, growth~~the Company’s assessment that it could reach the commercial sales milestones of in ~~expected product sales~~2024 and ~~other assumptions. Based on the assumptions, the~~2026, respectively. The changes in fair value of the ~~Royalty~~contingent consideration payable after the time of the merger are recognized as income or expense in the line titled Change in fair value of contingent consideration in the Company’s consolidated statements of operations.

Note 9. Discontinued Operations and Assets Held for Sale

(i) Assets held for sale and discontinued operations

Subsequent to the merger with Essentialis described above, the Company explored opportunities divest, sell or dispose of the CoSense, Neo Force, Inc. and Serenz businesses.

Under ASC 205-20-45-10, during the period in which a component meets the assets held for sale and discontinued operations criteria, an entity must present the assets and liabilities of the discontinued operation separately in the asset and liability sections of the balance sheet for the comparative reporting periods. The prior period balance sheet should be reclassified for the held for sale items. For income statements, the current and prior periods should report the results of operations of the component in discontinued operations when comparative income statements are presented.

The components of the Consolidated Balance Sheet accounts presented as assets and liabilities held for sale as of December 31, 2017 follow (in thousands). There were no assets or liabilities held for sale as of December 31, 2018 after the deconsolidation of Capnia.

	December 31, 2017
Current assets
Accounts receivable	$	50
Inventory		420
Prepaid expenses and other current assets		46
Total current assets held for sale	$	516
Long-term assets
Property and equipment, net	$	20
Other intangible assets		446
Total long-term assets held for sale	$	466
Current liabilities
Accounts payable	$	51
Accrued compensation and other current liabilities		76
Total current liabilities for sale	$	127
Long-term liabilities
Other long-term liabilities	$	225
Total long-term liabilities held for sale	$	225

The components of the Consolidated Statements of Operations presented as discontinued operations follow (in thousands).

	Year Ended December 31,
	2018			2017
Product revenue	$	62		$	735
Cost of product revenue		32			820
Gross profit (loss)		30			(85	)
Expenses
Research and development		1,106			2,427
Sales and marketing		25			218
General and administrative		393			669
Total expenses		1,524			3,314
Operating loss		(1,494	)		(3,399	)
Other expense
Loss on sale of assets		—			(186	)
Other expense		—			(8	)
Total other expense		—			(194	)
Net loss from discontinued operations	$	(1,494	)	$	(3,593	)

Stock-based compensation expense of approximately $76,000 and $120,000 was ~~determined~~classified in discontinued operations for the years ended December 31, 2018 and 2017, respectively.

(ii) NFI Sale

On September 2, 2015, the Company established NeoForce, Inc. (“NFI”), a wholly owned subsidiary of the Company and through NFI, acquired substantially all of the assets of an unrelated privately held company NeoForce Group, Inc.(“NeoForce”).

On July 18, 2017, the Company completed the sale of stock of its 100% wholly-owned subsidiary, NFI, primarily related to ~~be $153,000~~the Company’s portfolio of neonatology resuscitation business pursuant to a Stock Purchase Agreement (the “Purchase Agreement”), dated as of July 18, 2017, with NeoForce Holdings, Inc. (“Holdings”), a 100% owned subsidiary of Flexicare Medical Limited, a privately held United Kingdom company, for $720,000 and adjustments for inventory and the current cash balances held at NFI. The Company also received the total outstanding accounts receivable and inventory held by NFI at the date of ~~acquisition (see Note 11).~~

Assale, as it was collected or sold, respectively. The transactions contemplated by the Purchase Agreement are a continuation of ~~December 31, 2016,~~a process previously disclosed by the Company ~~updated the cash flow~~of evaluating strategic alternatives and ~~revenue projections. Based~~focusing on the ~~updated assumptions,~~Company’s rare disease therapeutic business. The Purchase Agreement includes customary terms and conditions, including an adjustment to the ~~fair~~purchase price based on inventory and accounts receivables, and provisions that require the Company to indemnify Holdings, to the maximum of $250,000, for certain losses that it incurs as a result of a breach by the Company of its representations and warranties in the Purchase Agreement and certain other matters, which indemnification obligation terminates once the statute of limitations expires. Proceeds from the sale are payable to the Company as follows: (1) a $720,000 payment to the Company in cash on July 18, 2017, (2) the value of outstanding accounts receivable as it is collected by NFI following July 18, 2017, payable on a monthly basis, and (3) the ~~net unpaid Royalty was determined to be $136,000. As~~value of inventory as it is sold following July 18, 2017, payable on a ~~result,~~monthly basis. The Purchase Agreement contains customary representations and warranties of each of the ~~Company recognized $15,000 of general and administrative expense in the statement of operations.~~

~~On February 28,~~parties.

(iii) CoSense Joint Venture Agreement

In December 2017, the Company ~~settled the Lawsuit (see Note 14)~~entered into a joint venture with OAHL with respect to its CoSense product by agreeing to ~~make additional supplemental disclosures~~sell shares of Capnia, its wholly-owned subsidiary, to OAHL. CoSense was Soleno’s first Sensalyze Technology Platform product to receive 510(k) clearances from the FDA and ~~agreeing~~CE Mark certification. CoSense measures CO, which can be elevated due to ~~pay $175,000~~endogenous causes such as excessive breakdown of red blood cells, or hemolysis, or exogenous causes such as CO poisoning and smoke inhalation. The first target market for ~~dismissal~~CoSense is for the use of ETCO measurements to aid in detection of hemolysis in neonates, a disorder in which CO and

bilirubin are produced in excess as byproducts of the ~~Lawsuit. This amount~~breakdown of red blood cells. The Company’s entry into the joint venture results from a comprehensive review of strategic alternatives for its legacy products and product candidates following its transition to a primarily therapeutic drug product company. The terms of the Joint Venture Agreement provide that OAHL will invest up to a total of $2.2 million in Capnia’s common shares on an incremental quarterly basis commencing in December 2017. Going forward, OAHL will be responsible for funding a portion of the Capnia operations. The Joint Venture Agreement provided that Capnia would issue shares of common shares to OAHL based on a negotiated price of $1.00 per share when the cumulative investment made by OAHL equaled or exceeded $1.2 million. For financial reporting purposes, Capnia’s assets, liabilities and results of operations have historically been consolidated with those of the Company.

During October 2018, the Company and OAHL determined and agreed that the cumulative investment made by OAHL exceeded $1.2 million during the quarter ended September 30, 2018. Accordingly, on October 16, 2018, Capnia issued 1,690,322 shares of its common stock to OAHL, representing 53% of its outstanding shares. After the share issuance the Company no longer holds a controlling interest in Capnia and resulted in the deconsolidation of Capnia’s financial statements with those of the Company and a $2.0 million gain was ~~recorded~~recognized in the fourth quarter of 2018 as a ~~current liability~~result of the deconsolidation. Of this amount, $1.2 million relates to the remeasurement of the Company's retained interest in the joint venture to fair value which was measured based on the ~~balance sheet~~negotiated price of $1.00 per share for Soleno’s remaining ownership of 1,480,000 shares less a 23% discount for lack of control over Capnia. The total gain is included in other income from continuing operations on the Company's consolidated statements of operations. The remaining 47% investment in Capnia is classified as ~~of December 31, 2016~~an equity method investment and ~~recognized~~presented as ~~general and administrative expense~~a Minority interest investment in former subsidiary in the ~~statement of operations for the year ended December 31, 2016. The stipulation of dismissal is pending with the court.~~

consolidated balance sheet.

Note ~~8. Stockholders'~~10. Stockholders’ Equity

Convertible Preferred Stock

The Company is authorized to issue 10,000,000 shares of Preferred Stock.

The Company issued a total of 10,000 Series A Convertible Preferred Stock under the 2015 Sabby Purchase Agreement, with a par value of $0.001 and a stated value of $1,000 per share. The Series A Convertible Preferred Stock did not have an expiration date and were not redeemable at the option of the holders. During the three months ended March 31, 2016 and June 30, 2016 the holders of the Series A Convertible Preferred Stock converted 1,665 and 555, respectively, shares of Series A Convertible Preferred Stock resulting in the issuance of 900,000 and 300,000 shares of Common Stock, respectively. Under the 2016 Sabby Purchase Agreement, the remaining 7,780 shares of Series A Convertible Preferred Stock were repurchased.

~~The Company has~~had issued a total of 13,780 shares of Series B Convertible Preferred Stock ~~under~~pursuant to the ~~2016 Sabby~~Securities Purchase Agreement entered into on June 29, 2016 with ~~a par value~~Sabby Management, LLC. As of ~~$0.001 and a stated value of $1,000 per share (see Note 2). During the year ended~~ December 31, ~~2016, the holders~~2018, there were no shares of ~~the~~ Series B Convertible Preferred Stock outstanding as all such previously issued shares had been converted ~~1,000~~to common shares.

Common Stock

On December 22, 2016, the Company entered into the Merger Agreement with Essentialis. Consummation of the Merger was subject to various closing conditions, including the Company’s consummation of a financing of at least $8.0 million at, or substantially contemporaneous with, the closing of the Merger, which occurred on March 7, 2017 and the receipt of stockholder approval of the Merger at a special meeting of stockholders, which the Company received on March 6, 2017.

On March 7, 2017, the Company completed the Merger with Essentialis and issued 3,783,388 shares of ~~the Series B Convertible Preferred Stock resulting in the issuance~~common stock to shareholders of ~~1,000,000 shares of Common Stock. Under~~Essentialis. Pursuant to the terms of the ~~Series B Convertible Preferred Stock, in no event shall~~Merger Agreement, the Company held back shares of ~~Common~~common stock beas partial recourse to satisfy indemnification claims. Effective March 7, 2018, on the one-year anniversary of the closing of the merger, the Company issued 180,667 shares for the previously held back amount. In the second quarter of 2018 there were 903,367 additional shares of common stock issued upon the achievement of a development milestone. In total, 4,867,422 shares of common stock were issued to ~~Sabby~~Essentialis stockholders. Additionally, upon ~~conversion~~the achievement of certain commercial milestones associated with the sale of Essentialis’ product in accordance with the terms of the ~~Series B Convertible Preferred Stock~~Merger Agreement, the Company is obligated to make cash earnout payments of up to a maximum of $30.0 million to Essentialis stockholders. The merger consideration described above will be reduced by any such shares of common stock issuable, or cash earnout payments payable, to Essentialis’ management carve-out plan participants and other service providers of Essentialis, in each case, in accordance with the terms of the Merger Agreement.

On January 27, 2017, the Company entered into the 2017 Aspire Purchase Agreement with Aspire Capital, which provided that, upon the terms and subject to the ~~extent such issuance~~conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $17.0 million in value of shares of ~~Common Stock would result in Sabby having ownership in excess of 4.99%. The Series B Convertible Preferred Stock do not have an expiration date and are not redeemable at~~ the ~~option~~Company’s common stock over the 30-month term of the ~~holders. In connection with each close~~purchase agreement. Additionally, on the date of the ~~Series B Convertible Preferred Stock,~~closing of the financing, as defined in the Merger Agreement, the Company ~~was obligated~~issued to ~~repurchase~~Aspire Capital, and Aspire Capital purchased from the ~~remaining outstanding Series A Convertible Preferred Stock~~Company an aggregate of $2.0 million of the Company’s common stock.

On December 11, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers, pursuant to which the Company sold and issued 8,141,116 immediately separable units at a price per unit of $1.84 for aggregate gross proceeds of $15.0 million. Each unit consisted of one share of the ~~original issuance price. In addition,~~Company’s common stock and a warrant to purchase 0.74 shares of the Company’s common stock at an exercise price of $2.00 per share, for an aggregate of 8,141,116 shares of common stock and corresponding warrants to purchase an aggregate of 6,024,425 shares of common stock, together the ~~existing Series D Warrants originally issued in conjunction~~shares of common stock are referred to as the 2017 Resale Shares. The Company also granted certain registration rights to these stockholders, pursuant to which, among other things, the Company prepared and filed a registration statement with the ~~2015 Sabby~~SEC to register for resale the 2017 Resale Shares. The registration statement was declared effective in February 2018.

On December 19, 2018, the Company entered into a Securities Purchase Agreement ~~was reduced from $2.46~~with certain purchasers, pursuant to ~~$1.75~~which the Company sold and issued 10,272,375 units at a price per unit of $1.61, for aggregate gross proceeds of $16.5 million. Each unit consisted of one share of the Company’s common stock and a warrant to purchase 0.05 shares of the Company’s common stock at an exercise price of $2.00 per share, onfor an aggregate of 10,272,375 shares of common stock and corresponding warrants to purchase an aggregate of 513,617 shares of common stock, together with the ~~effective date~~shares of common stock are referred to as the ~~2016 Sabby Purchase Agreement.~~

2018 Resale Shares. The Company ~~has recognized~~also granted certain registration rights to these stockholders, pursuant to which, among other things, the ~~repurchase of~~Company will prepare and file with the ~~Series A Convertible Preferred Stock as an extinguishment of~~SEC a registration statement to register for resale the Series A Convertible Preferred Stock. The Company compared the fair value of the Series B Convertible Preferred Stock immediately after the two close dates under the 2016 Sabby Purchase Agreement to the carrying value of the Series A Convertible Preferred Stock immediately2018 Resale Shares prior to the two close dates under the 2016 Sabby Purchase Agreement. The Company recorded the excess of the aggregate fair value of the Series B Convertible Preferred Stock, $3.4 million, as a loss on extinguishment. In addition, the Company estimated the effect of modifying the exercise price on the existing Series D warrants to be $203 thousand. The Company therefore recorded a total of $3.7 million extinguishment loss to net loss applicable to common stockholders.

~~Stock Option Plan~~

March 31, 2019.

Equity Incentive Plans

The Company has adopted the 1999 Incentive Stock Plan, the 2010 Equity Incentive Plan, and the 2014 Equity Incentive Plan, ~~(together,~~or the ~~Plans).~~2014 Plan, and together, the Plans. The 1999 Incentive Stock Plan expired in 2009, and the 2010 Equity Incentive Plan has been closed to new issuances. ~~Therefore,~~Under the 2014 Plan the Company may ~~issue~~grant stock options, ~~to purchase~~stock appreciation rights, restricted stock, restricted stock units, performance units or performance shares ~~of common stock~~ to employees, directors, advisors, and ~~consultants only under the 2014 Equity Incentive Plan.~~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. ~~NSOs may be granted to employees, directors, advisors, and consultants.~~

The Board of Directors has the authority to determine to whom stock options will be granted, the number of options, the term, and the exercise price.

Options are to be granted at an exercise price not less than fair ~~value for an ISO or 85% of fair value for an NSO.~~value. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise price of an option will not be less than 110% of fair value. The vesting period is normally monthly over a period of 4 years from the vesting date. The contractual term of an option is no longer than five years for ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options.

The terms and conditions governing restricted stock units is at the sole discretion of the Board. As of December 31, 2018, a total of 1,150,961 shares are available for future grant under the 2014 Plan.

The Company recognized stock-based compensation expense related to options and restricted stock units granted to employees, directors and consultants for the ~~fiscal~~ years ended December 31, ~~2016~~2018 and ~~2015~~2017 of ~~$871,270~~approximately $988,000 and ~~$942,369,~~$1.0 million, respectively, of which approximately $76,000 and $120,000 and was recorded in discontinued operations in 2018 and 2017, respectively. The compensation expense is allocated on a

departmental basis, based on the classification of the option holder. No income tax benefits have been recognized in the statements of operations for stock-based compensation arrangements ~~as of~~during the year ended December 31, ~~2016~~2018 and December 31, ~~2015.~~2017.

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

	Year ended
	December 31, 2018		December 31, 2017
Research and development	$	205	$	93
General and administrative		707		787
Total	$	912	$	880

Year ended
December 31, 2016 December 31, 2015
Research & Development $ 165,154
$ 148,948
Sales & Marketing 30,418
62,533
General & Administrative 675,698
730,888
Total $ 871,270
$ 942,369

Stock Options

The Company granted options to purchase ~~1,339,259~~756,086 and ~~955,713~~622,755 of the Company’s common stock in ~~2016~~2018 and ~~2015.~~2017, 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 for the year ended December 31, 2016:~~assumptions.

	Year Ended
	December 31, 2018	December 31, 2017
Expected life (years)	5.5-6.0	5.5-6.1
Risk-free interest rate	2.7%-2.8%	1.9%-2.2%
Volatility	70%-71%	61%-69%
Dividend rate	— %	— %

Year Ended
December 31, 2016 December 31, 2015
Expected life (years) 6.1 6.1
Risk-free interest rate 1.3% - 1.7% 1.6%-1.7%
Volatility 65% - 73% 56% - 66%
Dividend rate —% —%

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:~~

include the following estimates:

Expected ~~volatility:~~ ~~The estimated volatility rate based on a peer index of common stock of comparable companies in the Company's industry.~~

~~Expected term:~~life: The expected life of stock options represents the average of the contractual term of the options and the weighted-average vesting period, as permitted under the simplified method. The Company does not believe it is able to rely on historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term for use in estimating the fair value-based measurement of stock options. Therefore, it has ~~elected~~opted to use the ~~simplified method, as the Company does not have enough historical exercise experience to provide a reasonable basis upon which to estimate~~“simplified method” for estimating the expected term ~~and the stock option grants are considered “plain vanilla”~~of options.

Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to liquidity.

~~Expected dividend yield:~~Volatility: The estimated volatility rate based on the volatilities of common stock of comparable companies in the Company’s industry.

Dividend rate: The Company has never declared or paid any cash dividends and dodoes 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, ~~2016~~2018 and ~~2015~~2017 as issued under the ~~Plans:~~Plans.

	Shares Available			Number of Options			Weighted- Average Exercise Price per		Weighted Average Remaining Contractual Term
	for Grant			Outstanding			Share		(in years)
Balance at January 1, 2017		191,770			581,687		$	17.10		8.48
Additional shares authorized		134,295
Amendment to plan to authorize additional shares		1,785,837
Options granted		(622,755	)		622,755		$	3.04
Options exercised		—			—			—		—
Options canceled/forfeited		177,455			(177,455	)	$	8.84		—
Balance at December 31, 2017		1,666,602			1,026,987		$	9.99		7.94
Additional shares authorized		223,742
Shares allocated to grants of restricted stock units		(99,217	)
Options granted		(756,086	)		756,086		$	1.68
Options exercised		—			—			—		—
Options canceled/forfeited		115,920			(115,920	)	$	12.72		—
Balance at December 31, 2018		1,150,961			1,667,153		$	6.03		8.27
Options vested at December 31, 2018					820,422		$	9.85		7.64
Options vested and expected to vest at December 31, 2018					1,667,153		$	6.03		8.27

Shares Available for Grant Number of Options Outstanding Weighted-Average Exercise Price per Share Weighted Average Remaining Contractual Term
(in years)
Balance at December 31, 2014 606,061
1,072,011
$ 6.34

   Additional shares authorized 270,764
—
—

   Options granted (955,713 ) 955,713
3.08

   Options exercised

(83,848 ) 3.50

   Options canceled/forfeited 85,037
(85,037 ) 5.03

Balance at December 31, 2015 6,149
1,858,839
4.82
8.75
   Additional shares authorized 560,717
—
—

   Amendment to plan to authorize additional shares 1,500,000
—
—

   Options granted (1,339,259 ) 1,339,259
1.36

   Options exercised —
(58,419 ) 1.20

   Options canceled/forfeited 231,249
(231,249 ) 3.09

Balance at December 31, 2016 958,856
2,908,430
$ 3.42
8.48

Options vested at December 31, 2016 —
1,450,033
$ 4.12
8.13
Options vested and expected to vest at December 31, 2016 —
2,908,430
$ 3.42
8.48

The weighted-average grant date fair value of employee options granted was ~~$1.66~~$1.08 and ~~$0.81~~$1.88 per share for the year ended December 31, ~~2016~~2018 and December 31, ~~2015,~~2017, respectively. At December 31, ~~2016~~2018 total unrecognized employee stock-based compensation was ~~$1,553,427,~~$1.2 million, which is expected to be recognized over the weighted-average remaining vesting period of ~~2.7~~2.5 years. As of December 31, ~~2016,~~2018, the outstanding stock options had an intrinsic value of ~~zero.~~

approximately $71,000.

The fair value of an equity award granted to a ~~non-employee~~nonemployee generally is determined in the same manner as an equity award granted to an employee. In most cases, the fair value of the equity securities granted is more reliably determinable than the fair value of the goods or services received. Stock-based compensation related to its grant of options to non-employees has not been material to date.

~~In June 2016,~~

Restricted Stock Units

There were 99,217 restricted stock units granted by the Company ~~granted 55,000 NSOs~~during the year ended December 31, 2018 to ~~sales representatives of Bemes, Inc. Of~~employees and nonemployees. The shares were 100% vested on the ~~55,000 options granted, 27,499 options~~grant date and were valued based on the Company’s common stock price on the grant date, with ~~a fair value of $26,355 vested immediately upon grant. Accelerated vesting~~approximately $159,000 of the ~~remaining options were contingent on the satisfaction of certain performance requirements,~~related stock-based compensation expense recognized at that were not met. Regardless of not achieving accelerated vesting, the remaining options have a one year cliff vesting. As a result, the Company recognized $13,502 in expense for the remaining options during 2016, which will vest during the first quarter of 2017. Total expense for the two groups of options reflects the fair value of the Company's common stock on the applicable vesting commencement dates.

time.

2014 Employee Stock Purchase Plan

~~Our~~

The Company’s board of directors and stockholders have adopted the 2014 Employee Stock Purchase Plan, or the ESPP. The ESPP has become effective, and ~~our~~the board of directors will implement commencement of offers thereunder in its discretion. A total of ~~139,839~~27,967 shares of ~~our Common Stock~~the Company’s common stock has been made available for sale under the ESPP. In addition, ~~our~~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 ~~our~~the board of directors authorizes commencement, equal to the least of:

1.0% of the outstanding shares of ~~our Common Stock~~the Company’s common stock on the first day of such year; ~~279,680~~

55,936 shares; or

such amount as determined by ~~our~~the board of directors.

As of December 31, ~~2016~~2018, there were no purchases by employees under this plan.

Series D Warrants

The Company ~~has~~ issued ~~1,280,324~~256,064 Series D Warrants in October 2015, which are exercisable into 586,182 shares of the Company’s common stock, with an exercise price of ~~$2.46~~$12.30 and a term of five years expiring on October 15, 2020. The Company’s Series D Warrants contain standard anti-dilution provisions for stock dividends, stock splits, subdivisions, combinations and similar types of recapitalization events. They also contain a cashless exercise feature that provides for their net share settlement at the option of the holder in the event that there is no effective registration statement covering the continuous offer and sale of the warrants and underlying shares. The Company is required to comply with certain ~~requirement~~requirements to cause or maintain the effectiveness of a registration statement for the offer and sale of these securities. The Series D Warrant agreement further provides for the payment of liquidated damages at an amount per month equal to 1% of the aggregate VWAP of the shares into which each Series D Warrant is convertible into in the event that the Company is unable to maintain the effectiveness of a registration statement as described herein. The Company evaluated the registration payment arrangement stipulated in the terms of this securities agreement and determined that it is probable that the Company will maintain an effective registration statement and has therefore not allocated any portion of the proceeds to the registration payment arrangement. The Series D Warrant agreement specifically provides that under no circumstances will the Company be required to settle any Series D Warrant exercise for cash, whether by net settlement or otherwise.

Accounting Treatment

The Company accounts for the Series D Warrants in accordance with the guidance in ASC 815 Derivatives and ~~Hedging~~Hedging.. As indicated above, the Company is not required under any circumstance to settle any Series D Warrant exercise for cash. The Company has therefore classified the value of the Series D Warrants as permanent equity.

Other Common Stock Warrants

As of December 31, ~~2016,~~2018, the Company had ~~480,147 Common Stock~~102,070 common stock warrants outstanding from the 2010/2012 convertible notes, with an exercise price of ~~$4.87~~$24.35 and a term of 10 years expiring in November 2024. ~~During the year ended December 31, 2015, 43,720 Common Stock warrants were cashless exercised resulting in the issuance of 13,407 shares of the Company’s Common Stock.~~ The Company also ~~has~~had outstanding ~~9,259 Common Stock~~1,851 common stock warrants issued in 2009, with an exercise price of ~~$21.60~~$108.00 and a term of 10 years, ~~expiring~~which expired in January 2019 and ~~82,500 Common Stock~~16,500 common stock warrants issued to the underwriter in ~~our~~the Company’s IPO, with an exercise price of ~~$7.14~~$35.70 and a term of 10 years, expiring in November 2024.

Note 9.11. Income Taxes

~~Due to net losses in 2016 and 2015, the Company had no material current, deferred, or total income tax expense in the years ended December 31, 2016 and 2015.~~

The geographical distribution of ~~income (loss)~~loss before income taxes are summarized ~~below:~~below (in thousands).

	December 31,
	2018			2017
United States	$	(11,830	)	$	(13,707	)
Foreign		(11	)		(17	)
Income (loss) before income taxes	$	(11,841	)	$	(13,724	)
Income (loss) resulting from discontinued operations	$	(1,494	)	$	(3,593	)
Taxes allocated to discontinued operations		—			—

December 31,
2016 2015
United States $ (11,807,891 ) $ (11,908,546 )
Foreign (235,623 ) —
Total $ (12,043,514 ) $ (11,908,546 )

~~A reconciliation~~

The components of the provision for income tax ~~expense with amounts determined~~benefit follows (in thousands).

	December 31,
	2018		2017
Current:
Federal	$	—	$	—
State		—		1
Foreign		—		—
		—		1
Deferred
Federal		—		(1,578	)
State		—		(73	)
Foreign		—		—
		—		(1,651	)
Total provision for income taxes benefit	$	—	$	(1,650	)

The provision for income tax benefit differs from the amount estimated by applying the statutory ~~U.S.~~ federal income tax rate to ~~income before income taxes is as follows:~~the operating loss from continuing operations due to the following (in thousands).

	December 31,
	2018			2017
Tax on the loss before income tax expense computed at the federal statutory rate	$	(2,486	)	$	(4,666	)
State tax (benefit) at statutory rate, net of federal benefit		(187	)		(67	)
Tax reform		—			10,613
Foreign rate differential		2			3
Change in valuation allowance		4,143			(8,485	)
Change in research and development credits		(99	)		(121	)
Stock based compensation—ISOs		143			295
Change in fair value of warrants		(110	)		343
Change in fair value of contingent consideration		119			—
Gain on deconsolidation		(4	)		—
Disallowance of loss on discontinued operations		(426	)		—
Acquisition costs		—			203
Change in NOL true up		(590	)		—
Change in temporary difference true up		(456	)		—
Loss on sale of NFI		—			(677	)
Other		(49	)		909
Provision for income tax benefit	$	—		$	(1,650	)

December 31,
2016 2015
Tax on the loss before income tax expense computed at the federal statutory rate of 34% $ (4,094,922 ) $ (5,408,551 )
State tax (benefit) at statutory rate, net of federal benefit (266,258 ) (928,107 )
Foreign Rate Differential 35,343
—
Change in Valuation Allowance 4,260,571
4,199,154
Change in research and development credits (129,974 ) (60,991 )
Stock Based Compensation - ISO 323,537
—
Change in fair value of warrants (619,067 ) 1,493,215
Change in state tax rate 345,172
—
Other 167,298
705,280
Provision for deferred taxes $ 21,700
$ —
Effective income tax rate — % — %

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, ~~2016~~2018 and ~~2015:~~2017 (in thousands).

	December 31,
	2018			2017
Non-Current Deferred Tax Assets:
Federal and state net operating loss carryforwards	$	28,532		$	25,486
Research and other credits		2,037			1,807
Reserves and accruals		52			145
Assets held for sale		15			17
Fixed assets		67			—
Capital loss carryover		425			459
Stock based compensation		70			36
Other deferred tax assets		542			—
Gross non-current deferred tax assets		31,740			27,950
Intangible Assets		(4,062	)		(4,414	)
Fixed Assets		—			(3	)
Total non-current deferred tax liabilities		(4,062	)		(4,417	)
Total deferred tax assets		27,678			23,533
Valuation allowance		(27,678	)		(23,533	)
Net deferred tax assets	$	—		$	—

December 31,
2016 2015
Non-Current Deferred Tax Assets:
Reserves and accruals $ 212,479
$ 287,850
Net Operating Loss Carryforwards 30,291,080
26,174,912
Research and development credits 1,580,253
1,381,296
Intangible Assets (68,894 ) (74,113 )
Fixed Assets 2,978
9,080
Total Non-Current Deferred Tax Assets 32,017,896
27,779,025
Valuation Allowance (32,039,596 ) (27,779,025 )
Net Deferred Tax Liability $ (21,700 ) $ —

The Company has recorded a full valuation allowance against its net deferred tax assets due to the uncertainty as ~~it believes that it is more likely than not that~~to whether such assets will ~~not~~ be realized. The valuation allowance increased by ~~$4,260,571~~$4.1 million from December 31, ~~2015~~2017 to December 31, ~~2016~~2018 primarily due to the generation of current year net operating losses and research and development credits claimed.

As of December 31, ~~2016,~~2018, the Company had ~~$80~~$129.8 million of federal, ~~$52~~$51.4 million of state and ~~$235 thousand~~approximately $264,000 of ~~United Kingdom~~foreign net operating losses available to offset future taxable income. The federal net operating loss carryforwards begins to expire in 2019, the state net operating loss carryforwards will begin to expire in ~~2017~~2028 and the foreign net operating loss carryforward can be carried forward ~~indefinitely.~~indefinitely, if not utilized. As of December 31, ~~2016,~~2018, the Company also had ~~$1.5~~$1.2 million of federal and ~~$1.2 million~~approximately $798,000 of state research and development credit carryforwards. The federal research and development credit carryforward ~~begins~~begin to expire in 2024 and the state research and development credit can be carried forward indefinitely.

~~In addition,~~

Utilization of the ~~Company has determined that the use of~~ net operating loss and tax credit ~~carryforwards will be limited~~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 in process of completing an analysis of whether there was an ownership change, as adefined under Section 382 of the Internal Revenue Code, resulting from the issuance of new shares during 2018 and, as such, is not able at this time to determine the impact on the NOL carryforwards, if any, as of the date of these consolidated financial statements as result of the ~~changes in~~2018 share issuances. Once the ~~stock ownership of~~analysis is completed, the Company ~~during~~will make any appropriate adjustments to the ~~year ended December 31, 2016.~~balances of NOLs to be carried forward and thus adjust the NOL deferred tax asset accordingly, if required.

United States taxes and foreign withholding taxes have not been provided on undistributed earnings for certain non-United States subsidiaries as of December 31, ~~2016,~~2018, as the earnings, if any, are intended to be indefinitely reinvested.

The following tables summarize the activities of gross unrecognized tax ~~benefits:~~benefits (in thousands).

	December 31,
	2018		2017
Beginning balance	$	854	$	795
Increases (decreases) related to prior year tax positions		23		(4	)
Increase related to current year tax positions		87		63
Ending Balance	$	964	$	854

December 31,
2016 2015
Beginning balance 691,697
673,247
Increase related to prior year tax positions —
—
Decreases related to prior year tax positions 35,804
(13,207 )
Increase related to current year tax positions 67,461
31,657
Decreases related to current year tax positions —
—
Ending Balance $ 794,962
$ 691,697

~~The amount of~~

There were no unrecognized tax benefits that would impact the effective tax rate ~~were approximately none and none~~ as of December 31, ~~2016~~2018 and December 31, ~~2015, respectively.~~2017. As of December 31, ~~2016, $794,962 of~~2018, unrecognized tax benefits of approximately $964,000 would be offset by a change in valuation allowance.

The Company files income tax returns in the U.S. federal jurisdiction, certain state jurisdictions and ~~the~~ United Kingdom. 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 1999 forward remain open to examination, in the state tax jurisdiction, years ~~2005~~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 ~~local~~foreign jurisdiction.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result, we previously provided provisional estimates of the effect of the Tax Act in our financial statements. In the fourth quarter of 2018, we completed our analysis to determine the effect of the Tax Act and determined that no further adjustments were needed.

The Jobs Act also establishes global intangible low-taxed income, or “GILTI,” provisions that impose a tax on foreign income in excess of a deemed return on intangible assets of foreign corporations. The Company’s accounting policy for the income tax effects of GILTI will be to recognize those taxes as expenses in the period incurred. In 2018, the Company’s foreign subsidiary realized a tested loss for the period and therefore, the Company did not have a GILTI inclusion for the year.

The Company uses the “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement criteria for income tax benefits. The Company has determined it has no material unrecognized assets or liabilities related to uncertain tax positions as of December 31, ~~2016.~~2018. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as a component of other expense.

Note ~~10.~~12. Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted-average number of ~~Common Stock~~common stock actually outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of ~~Common Stock~~common stock outstanding and dilutive potential ~~Common Stock~~common stock that would be issued upon the exercise of ~~Common Stock~~common stock warrants and options. For the ~~year~~years ended December 31, ~~2016~~2018 and ~~2015,~~2017, the effect of issuing the potential common stock is anti-dilutive due to the net losses in those periods and the number of shares used to compute basic and diluted earnings per share are the same in each of those periods.

The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported (in ~~Common Stock~~common stock equivalent shares):.

	As of December 31,
	2018		2017
Convertible preferred stock		—		914,200
Warrants issued to 2010/2012 convertible note holders to purchase common stock		102,070		102,070
Options to purchase common stock		1,667,153		1,026,987
Warrants issued in 2009 to purchase common stock		1,851		1,851
Warrants issued to underwriter to purchase common stock		16,500		16,500
Series A warrants to purchase common stock		485,121		485,121
Series C warrants to purchase common stock		118,083		118,083
Series D warrants to purchase common stock		586,162		586,162
2017 PIPE warrants		6,024,425		6,024,425
2018 PIPE warrants		513,617		—
Total		9,514,982		9,275,399

As of December 31,
2016 2015
Convertible preferred stock 12,780,000
2,462,162
Warrants issued to 2010/2012 convertible note holders to purchase common stock 480,147
480,147
Options to purchase common stock 2,908,430
1,858,839
Warrants issued in 2009 to purchase common stock 9,259
9,259
Warrants issued to underwriter to purchase common stock 82,500
82,500
Series A warrants to purchase common stock 2,425,605
2,425,605
Series B warrants to purchase common stock —
116,580
Series C warrants to purchase common stock 590,415
590,415
Series D warrants to purchase common stock 2,930,812
1,280,324

Note ~~11. NeoForce Group, Inc. Acquisition~~

On September 8, 2015, the Company through its wholly owned subsidiary Neoforce, Inc ("NFI"), acquired substantially all of the assets of NeoForce in exchange for an upfront cash payment of $1.0 million. In addition, the Company agreed to pay the former NeoForce shareholder an annual royalty payment for a period of 36 months (“Royalty”) in the low

~~single digits based on net sales of NeoForce products that were acquired by the Company. As of December 31, 2016, the Company recorded $11,142 of Royalty payable.~~

The acquisition of NeoForce strengthens the Company’s commitment to leveraging technology to address unmet needs in neonatology, which is a high growth segment in the healthcare business. The Company plans to leverage the expertise and hospital relationships of NeoForce to accelerate the adoption of CoSense.

The transaction has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed have been recorded at fair value, with the remaining purchase price recorded as goodwill. The fair values of current assets and liabilities approximated their book value. The fair values of acquired assets and liabilities are based on preliminary cash flow projections and other assumptions. The fair values of acquired intangible assets were determined using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.

The agreement to pay the annual Royalty resulted in the recognition of a contingent consideration, which is recognized at the inception of the transaction, and subsequent changes to estimate of the amounts of contingent consideration to be paid will be recognized as charges or credits in the statement of operations. The fair value of the contingent consideration is based on preliminary cash flow projections, growth in expected product sales and other assumptions. Based on the assumptions, the fair value of the Royalty was determined to be $153,000 at the date of acquisition and at December 31, 2015. The fair value of the royalty was determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate of 20% commensurate with the Company’s cost of capital and expectation of the revenue growth for products at their life cycle stage. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance.

~~The aggregate purchase price consideration was as follows:~~

Cash consideration $ 1,000,000
Fair value of contingent consideration 153,000
Total purchase price consideration $ 1,153,000

~~The fair values of assets acquired at the transaction date are summarized below:~~

Net tangible assets acquired $ 39,377
Customer contracts 259,730
Patents 135,890
Goodwill 718,003
Net Assets Acquired $ 1,153,000

~~Net tangible assets acquired consisted primarily of equipment, furniture and fixtures.~~

Goodwill is an unidentifiable asset and, as such, can only be measured as a residual. A significant component of the NeoForce goodwill, which did not meet the criteria for separate recognition as an intangible asset was a skilled and assembled workforce. The founder of NeoForce, who became the General Manager of Neonatology at the Company, brings 25 years of medical device sales, operations and product development experience at neonatology focused companies. The Company plans to use his expertise and broad relationships with top tier hospitals across the United States to accelerate the adoption of CoSense. The Company also expects to achieve synergies in the areas of accounting, informational technology, sales & marketing and other general administration expenses through the combination.

~~Pro Forma Financial Information (Unaudited)~~

The following table presents the unaudited pro forma results of Capnia, Inc. (including the operations of Neoforce) for the year ended December 31, 2015. The unaudited pro forma financial information combines the results of operations of Capnia and NeoForce as though the companies had been combined as of the beginning of the fiscal period presented. As of September 8, 2015, the date of the acquisition, the results of NFI have been combined with Capnia as a wholly-owned subsidiary. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the consolidated results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2015. In addition, the unaudited pro forma financial information does not attempt to project the future consolidated results of operations.

December 31,
2015
Pro forma total revenues $ 1,168,846
Pro forma net loss $ (16,002,126 )
Pro forma net loss per share – basic and diluted $ (1.70 )
Pro forma weighted-average shares-basic and diluted 9,425,880

~~The unaudited pro forma financial information above reflects the following:~~

the increase of amortization expense of $53,000 in the year ended December 31, 2015 related to the estimated fair value of intangible assets from the purchase price allocation which are being amortized over their estimated useful lives through 2028. The change in depreciation expense related to the change in estimated fair value of property and equipment from the book value at the time of the acquisition was not material.

~~For the year ended December 31, 2015, NFI revenue and net income included in the Company’s Consolidated Statement of Operations and Net Loss were $279,000 and $76,000, respectively.~~

~~Note 12.~~13. Compensation Plan for Board Members

~~The~~

In 2017, the Compensation Committee of the Board of Directors ~~of the Company~~ recommended, and the Board approved a ~~new~~revised compensation plan ~~for the payment of quarterly Board fees. At the election of each Board member, beginning with the third quarter of 2016, they had the option~~pursuant to ~~either receive cash payments or to be~~which all board fees are paid in common stock of the Company. ~~For~~Payment to the ~~third quarter~~Board of ~~2016, two~~Directors in shares of the Company’s common stock is made after the close of the quarter in which the compensation is earned. During 2018 and 2017, the Company issued 146,371 and 90,306 shares, respectively, of common stock to its Board members ~~elected to be paid in common stock of the Company resulting in the issuance of 25,422 shares of common stock.~~

for fees earned.

Note ~~13.~~14. Defined Contribution Plan

The Company sponsors a 401(k) Plan, which stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations of eligible compensation. The Company may match employee contributions in amounts to be determined at the Company’s sole discretion. To date, the Company has not made any matching contributions.

Note ~~14.~~15. Subsequent Events

On ~~December 22, 2016,~~February 4, 2019 the Company ~~entered into the Merger Agreement with Essentialis. Consummation of the merger was subject to various closing conditions, including the Company's consummation of~~formed a ~~financing of at least $8 million at, or substantially contemporaneous with, the closing of the Merger and the receipt of stockholder approval of the Merger at a special meeting of stockholders.~~

On March 6, 2017, the Company held a special shareholder meeting and received approval for issuance of the merger shares under the Merger Agreement with Essentialis, issuance of the shares of common stock for the $8 million of concurrent financing and issuance of the shares of common Stock for the $2 million investment by Aspire Capital.

On March 7, 2017, the Company completed the merger with Essentialis and issued 18,916,940 shares of common stock to shareholders of Essentialis. The Company held back 913,379 shares of common stock as partial recourse to satisfy indemnification claims, and such shares will be issued to Essentialis stockholders on the 1 year anniversary of the closing of the merger. The Company is also obligated to issue an additional 4,566,948 shares of common stock to Essentialis stockholders upon the achievement of a development milestone. Assuming that we issues all of the shares of our common stock held back and the development milestone is achieved, we would issue a total of 24,397,267 shares of common stock to Essentialis stockholders. Additionally, upon the achievement of certain commercial milestones associated with the sale of Essentialis’ productnew wholly owned subsidiary in ~~accordance with the terms of the Merger Agreement, we are obligated to make cash earnout payments of up to a~~

Ireland named Soleno Therapeutics Europe Limited.

maximum of $30 million to Essentialis stockholders. The merger consideration described above will be reduced by any such shares of common stock issuable, or cash earnout payments payable, to Essentialis’ management carve-out plan participants and other service providers of Essentialis, in each case, in accordance with the terms of the Merger Agreement.

In addition, the Company issued 8,333,333 shares of common stock for an investment of $8 million from the completion of the concurrent financing and issued 2,083,333 shares of common stock for an investment of $2 million from Aspire Capital.

On February 28, 2017, in regards the Lawsuit mentioned below, the Company agreed to make additional supplemental disclosures and pay $175,000 for dismissal of the lawsuit. This amount was accrued as a current liability on the balance sheet as of December 31, 2016 and recorded as an expense in general and administrative expense on the statement of operations for the year ended December 31, 2016.

~~On February 16, 2017, the Lawsuit captioned~~ ~~Garfield v. Capnia, Inc., et al.~~, Case No. C17-00284 was filed in Superior Court of the State of California, County of Contra Costa against the Company and certain of its officers and directors. The Lawsuit alleged, generally, that the Company's directors breached their fiduciary duties to the Company's stockholders by seeking to sell control of the Company through an allegedly defective process, and on unfair terms. The Lawsuit also alleged that defendants failed to disclose all material facts concerning the proposed merger with Essentialis to stockholders. The Lawsuit sought, among other things, equitable relief that would have enjoined the consummation of the proposed merger, compensatory and/or rescissory damages, and attorneys' fees and costs. The Company made certain supplemental disclosures in a Current Report on Form 8-K filed with the SEC on February 28, 2017 in connection with plaintiff's agreement to voluntarily dismiss plaintiff's claims in the Lawsuit. The stipulation of dismissal is pending with the court.

~~On January 4th, 10th, 12th and 18th of January 2017, the two funds managed by Sabby converted an aggregate of 601 shares of their Series B Convertible Stock into 601,000 shares of Common Stock.~~

On January 27, 2017, the Company entered into the 2017 Aspire Purchase Agreement with Aspire Capital Fund, LLC, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $17.0 million in value of shares of our Common Stock over the 30-month term of the purchase agreement. The Company issued Aspire Capital 708,333 shares of Common Stock as commitment shares under the 2017 Aspire Purchase Agreement. Further, on the date of the closing of the financing, as defined in the Merger Agreement, the Company sold to Aspire Capital, and Aspire Capital purchased from the Company an aggregate of $2.0 million of the Company’s common stock.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ~~ACCOUNTANTS~~ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission, or SEC, rules and forms, and that such information is accumulated and communicated to our management to 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~~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~~

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 ~~ony~~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 inInternal ~~Control -~~ Control—Integrated Frameworkissued 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, ~~2016.~~

2018.

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, ~~2016~~2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

~~None.~~

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 ~~2017~~2019 Annual Meeting of Stockholders. The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by 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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,

AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

~~PART IV~~

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1.
1.	Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K

2.
2.	Financial Schedules: All schedules have been omitted because the information called for is not required or is shown either in the financial statements or in the notes thereto.

3.
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.

EXHIBIT INDEX

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

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

2.1

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

2.1

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

2.2

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

2.3

3.1

Amended and Restated Certificate of Incorporation of Soleno Therapeutics, Inc.

S-1/A

August 7, 2014

3.2

Amended and Restated Bylaws of Soleno Therapeutics, Inc.

S-1/A

July 1, 2014

3.4

3.3

Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock.

8-K

October 15, 2015

3.1

3.4

Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock

8-K

July 6, 2016

3.1

3.5

Certificate of Amendment

8-K

May 11, 2017

3.1

3.6

Certificate of Amendment to the Certificate of Incorporation

8-K

October 6, 2017

3.1

4.1

Form of the common stock certificate.

S-1/A

August 5, 2014

4.1

4.2

Amended And Restated Investors’ Rights Agreement, dated March 20, 2008, by and among Soleno Therapeutics, Inc. and certain holders of the Soleno Therapeutics, Inc.’s capital stock named therein.

S-1/A

July 1, 2014

4.2

4.3

Form of Series A Warrant Agreement.

S-1/A

August 5, 2014

4.3

4.4

Form of the Series A Warrant certificate.

S-1/A

August 5, 2014

4.4

4.5

Form of Underwriters’ Compensation Warrant.

S-1/A

August 5, 2014

4.5

4.6

Form of Convertible Promissory Note issued in February 2010 and March 2010 in connection with the 2010 convertible note financing.

S-1

June 10, 2014

4.6

~~SIGNATURES~~

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

4.7

Form of Warrant to Purchase Shares issued in February 2010 and March 2010 in connection with the 2010 convertible note financing.

S-1

June 10, 2014

4.7

4.8

Form of Convertible Promissory Note issued in November 2010 in connection with the 2010 convertible note financing.

S-1

June 10, 2014

4.8

4.9

Form of Warrant to Purchase Shares issued in November 2010 in connection with the 2010 convertible note financing.

S-1

June 10, 2014

4.9

4.10

Form of Convertible Promissory Note issued in January 2012 in connection with the 2012 convertible note financing.

S-1

June 10, 2014

4.10

4.11

Form of Warrant to Purchase Shares issued in January 2012 in connection with Soleno Therapeutics, Inc.’s 2012 convertible note financing.

S-1

June 10, 2014

4.11

4.12

Form of Convertible Promissory Note issued in July 2012 and August 2012 in connection with the 2012 convertible note financing.

S-1

June 10, 2014

4.12

4.13

Form of Warrant to Purchase Shares issued in July 2012 and August 2012 in connection with the 2012 convertible note financing.

S-1

June 10, 2014

4.13

4.14

Form of Convertible Promissory Note issued in April, August and October 2014 in connection with the 2014 convertible note financing.

S-1

June 10, 2014

4.14

4.15

Form of Warrant to Purchase Shares issued in April, August and October 2014 in connection with the 2014 convertible note financing.

S-1

June 10, 2014

4.15

4.16

Form of unit certificate.

S-1/A

August 5, 2014

4.16

4.17

Form of Series B Warrant Agreement.

S-1/A

November 4, 2014

4.17

4.18

Form of the Series B Warrant certificate.

S-1/A

November 4, 2014

4.18

4.19

Form of the Series C Warrant Agreement.

S-4

April 1, 2015

4.19

4.20

Form of the Series C Warrant certificate.

S-4

April 1, 2015

4.20

4.21

Form of Series D Common Stock Purchase Warrant.

8-K

October 15, 2015

4.1

4.22

Form of Placement Agent Warrant.

8-K

October 15, 2015

4.2

4.23

Form of Series D common stock Warrant Certificate.

8-K

October 15, 2015

4.3

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

4.24

Form of Series A Convertible Preferred Stock Certificate.

8-K

October 15, 2015

4.4

4.25

Form of Placement Agent Warrant.

8-K

July 6, 2016

4.1

4.26

Form of Series B Convertible Preferred Stock Certificate.

8-K

July 6, 2016

4.2

4.27

Form of Common Stock Purchase Warrant

8-K

December 13, 2017

4.1

4.28

Form of Common Stock Purchase Warrant

8-K

December 19, 2018

4.1

9.10

Form of Voting Agreement.

8-K

October 15, 2015

9.1

9.20

Form of Voting Agreement.

8-K

July 6, 2016

9.1

9.30

Form of Voting Agreement.

8-K

December 27, 2016

10.1

Form of Indemnification Agreement between the Registrant and each of its directors and executive officers.

S-1/A

June 10, 2014

10.1

10.2

1999 Incentive Stock Plan and forms of agreements thereunder.

S-1/A

June 10, 2014

10.2

10.3

2010 Equity Incentive Plan and forms of agreements thereunder.

S-1/A

June 10, 2014

10.3

10.4

2014 Equity Incentive Plan and forms of agreements thereunder.

S-1/A

July 1, 2014

10.4

10.5

2014 Employee Stock Purchase Plan and forms of agreements thereunder.

S-1/A

July 1, 2014

10.5

10.6

Offer Letter, dated June 22, 2007, by and between Soleno Therapeutics, Inc. and Ernest Mario, Ph.D.

S-1

June 10, 2014

10.6

10.7

Employment Agreement, dated April 6, 2010, by and between Soleno Therapeutics, Inc. and Anish Bhatnagar.

S-1

June 10, 2014

10.7

10.8

Offer Letter, dated May 29, 2013, between Soleno Therapeutics, Inc. and Anthony Wondka.

S-1

June 10, 2014

10.8

10.9

Offer Letter, dated April 17, 2014, by and between Soleno Therapeutics, Inc. and Antoun Nabhan.

S-1

June 10, 2014

10.9

10.10

Asset Purchase Agreement dated May 11, 2010, by and between Soleno Therapeutics, Inc. and BioMedical Drug Development Inc.

S-1

June 10, 2014

10.10

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

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

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.

S-1

June 10, 2014

10.12

10.13

Amendment No. 2 to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated January 17, 2012, by and among Soleno Therapeutics, Inc. and the investors named therein.

S-1

June 10, 2014

10.13

10.14

Convertible Note and Warrant Purchase Agreement, dated January 16, 2012, by and among Soleno Therapeutics, Inc. and the investors named therein.

S-1

June 10, 2014

10.14

10.15

Omnibus Amendment to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated July 31, 2012, by and among Soleno Therapeutics, Inc. and the investors named therein.

S-1

June 10, 2014

10.15

10.16

Omnibus Amendment to Convertible Promissory Notes and Warrants to Purchase Shares, dated April 28, 2014, by and among Soleno Therapeutics, Inc. and the investors named therein.

S-1

June 10, 2014

10.16

10.17

Convertible Note and Warrant Purchase Agreement, dated
April 28, 2014, by and among Soleno Therapeutics, Inc. and the investors named therein.

S-1

June 10, 2014

10.17

10.18

Omnibus Amendment to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated May 5, 2014, by and among Soleno Therapeutics, Inc. and the investors named therein.

S-1

June 10, 2014

10.18

10.19

Sublease, dated May 20, 2014, by and among Soleno Therapeutics, Inc. and Silicon Valley Finance Group.

S-1/A

July 1, 2014

10.19

10.20

Offer Letter, dated June 24, 2014, by and between Soleno Therapeutics, Inc. and David D. O’Toole.

S-1/A

July 22, 2014

10.20

10.21

Loan Agreement by and between Soleno Therapeutics, Inc. and the investors named therein, dated September 29, 2014.

S-1/A

September 29, 2014

10.21

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

10.22

Revised Second Tranche Closing Notice and Letter Amendment dated August 18, 2014 relating to the August 2014 Notes.

S-1/A

November 4, 2014

10.22

10.23

Second Tranche Subsequent Closing Notice and Letter Amendment dated October 22, 2014 relating to the October 2014 Notes.

S-1/A

November 4, 2014

10.23

10.24

Form of Warrant Exercise Agreement.

8-K

March 5, 2015

10.1

10.25

Advisory Agreement by and between Soleno Therapeutics, Inc. and Maxim Group LLC, dated March 4, 2015.

S-4

April 1, 2015

10.25

10.26

Agreement and First Amendment to Asset Purchase Agreement between the Company, BDDI and affiliate of BDDI, dated June 30, 2015.

8-K

July 7, 2015

10.1

10.27

Common Stock Purchase Agreement between the Company and an affiliate of BDDI, dated June 30, 2015.

8-K

July 7, 2015

10.2

10.28

Registration Rights Agreement between the Company and Aspire Capital Fund, LLC, dated July 24, 2015.

8-K

July 27, 2015

4.1

10.29

Common Stock Purchase Agreement between the Company and Aspire Capital Fund, LLC, dated July 24, 2015.

8-K

July 27, 2015

10.1

10.30

Engagement Letter dated September 17, 2015, between Soleno Therapeutics, Inc. and Maxim Group, LLC.

8-K

October 15, 2015

1.1

10.31

Securities Purchase Agreement dated October 12, 2015.

8-K

October 15, 2015

10.1

10.32

Form of Registration Rights Agreement.

8-K

October 15, 2015

10.2

10.33

Form of Lock-Up Agreement.

8-K

October 15, 2015

10.3

10.34

Amendment No. 1 to Securities Purchase Agreement dated October 29, 2015.

S-1/A

December 22, 2015

10.33

10.35

Transfer and Distribution Agreement: United States: by and between Soleno Therapeutics, Inc. and Bemes, Inc. signed January 26, 2016.

8-K

January 28, 2016

10.1

10.36

Engagement Letter dated June 26, 2016, between Soleno Therapeutics, Inc. and Maxim Group, LLC.

8-K

July 6, 2016

1.1

10.37

Securities Purchase Agreement dated June 29, 2016.

8-K

July 6, 2016

10.1

10.38

Form of Registration Rights Agreement dated June 29, 2016.

8-K

July 6, 2016

10.2

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

10.39

Amendment No. 1 to Securities Purchase Agreement dated September 20, 2016.

S-1/A

September 20, 2016

10.39

10.40

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.

8-K

December 27, 2016

2.1

10.41

Registration Rights Agreement between the Company and Aspire Capital Fund, LLC, dated January 27, 2017.

S-1

February 1, 2017

10.51

10.42

Common Stock Purchase Agreement between the Company and Aspire Capital Fund, LLC, dated January 27, 2017.

S-1

February 1, 2017

10.52

10.43

Stock Purchase Agreement made by and between the Company and NeoForce Holdings, Inc. a Delaware corporation dated July 18, 2017

8-K

July 24, 2017

2.1

10.44

Joint Venture Agreement dated as of December 4, 2017 by and among Soleno Therapeutics, Inc., Capnia, Inc., and OptAsia Healthcare Limited

8-K

December 8, 2017

2.1

10.45

Securities Purchase Agreement, dated as of December 11, 2017

8-K

December 13, 2017

10.1

10.46

Confidential Consulting Agreement, dated September 5, 2017 by and between FLG Partners, LLC and the Company

8-K

June 4, 2018

10.1

10.47

Securities Purchase Agreement, dated as of December 11, 2017

8-K

December 19, 2018

10.1

21.1

Subsidiaries

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

Incorporated by Reference from

Exhibit

Number

Description of Document

Registrant’s

Form

Date Filed

with the SEC

Exhibit
Number

Filed

Herewith

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

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Soleno Therapeutics, Inc.

	~~CAPNIA, INC.~~

Date: March ~~15, 2017~~19, 2019	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, ~~and David O’Toole, and each of them,~~ with full power of substitution and resubstitution and full power to act, ~~without the other,~~ as his or her true and 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

~~Signature~~	~~Title~~	~~Date~~

/S/ ANISH BHATNAGAR Anish Bhatnagar	President, Chief Executive Officer and Director (Principal Executive Officer)	March ~~15, 2017~~19, 2019
~~Anish Bhatnagar~~	~~(Principal Executive Officer)~~

/S/ ~~DAVID D. O’TOOLE~~JONATHAN WOLTER Jonathan Wolter	Chief Financial Officer	~~March 15, 2017~~
~~David D. O’Toole~~	~~(Principal Financing~~ (Principal Financial and Accounting Officer)	March 19, 2019

/S/ ERNEST MARIO Ernest Mario	Chairman	March ~~15, 2017~~19, 2019
~~Ernest Mario~~
/S/ ANDREW SINCLAIR Andrew Sinclair	Director	March 19, 2019
~~/S/ EDGAR G. ENGLEMAN~~	~~Director~~	~~March 15, 2017~~
~~Edgar G. Engleman~~

~~/S/ STEINAR J. ENGELSEN~~	~~Director~~	~~March 15, 2017~~
~~Steinar J. Engelsen~~

~~/S/ STEPHEN KIRNON~~	~~Director~~	~~March 15, 2017~~
~~Stephen Kirnon~~

~~/S/ RAJEN DALAL~~	~~Director~~	~~March 15, 2017~~
~~Rajen Dalal~~

/S/ WILLIAM G. HARRIS	~~Director~~	~~March 15, 2017~~
William G. Harris	Director	March 19, 2019

/S/ MAHENDRA SHAH Mahendra Shah	Director	March ~~15, 2017~~19, 2019
~~Mahendra Shah~~

~~/S/ JAMES GLASHEEN~~	~~Director~~	~~March 15, 2017~~
~~James Glasheen~~

/S/ STUART COLLINSON	~~Director~~	~~March 15, 2017~~
Stuart Collinson	Director	March 19, 2019

~~EXHIBIT INDEX~~

Incorporated by Reference from
Exhibit
Number
Description of Document
Registrant’s
Form

Date Filed
with the SEC

Exhibit
Number

Filed
Herewith
3.1 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock 8-K October 15, 2015 3.1

3.2 Amended and Restated Certificate of Incorporation of Capnia, Inc. S-1/A August 7, 2014 3.2

3.3 Amended and Restated Bylaws of Capnia, Inc. S-1/A July 1, 2014 3.3

3.4 Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock 8-K July 6, 2016 3.1

4.1 Form of the Common Stock certificate. S-1/A August 5, 2014 4.1

4.2 Amended And Restated Investors’ Rights Agreement, dated March 20, 2008, by and among Capnia, Inc. and certain holders of the Capnia, Inc.’s capital stock named therein S-1 June 10, 2014 4.2

4.3 Form of Series A Warrant Agreement. S-1/A August 7, 2014 4.3

4.4 Form of the Series A Warrant certificate. S-1/A July 1, 2014 4.4

4.5 Form of Underwriters’ Compensation Warrant. S-1/A June 10, 2014 4.5

4.6 Form of Convertible Promissory Note issued in February 2010 and March 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.6

4.7 Form of Warrant to Purchase Shares issued in February 2010 and March 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.7

4.8 Form of Convertible Promissory Note issued in November 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.8

4.9 Form of Warrant to Purchase Shares issued in November 2010 in connection with the 2010 convertible note financing. S-1 June 10, 2014 4.9

4.10 Form of Convertible Promissory Note issued in January 2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.10

4.11 Form of Warrant to Purchase Shares issued in January 2012 in connection with Capnia, Inc.’s 2012 convertible note financing. S-1 June 10, 2014 4.11

4.12 Form of Convertible Promissory Note issued in July 2012 and August 2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.12

4.13 Form of Warrant to Purchase Shares issued in July 2012 and August 2012 in connection with the 2012 convertible note financing. S-1 June 10, 2014 4.13

Incorporated by Reference from
Exhibit
Number
Description of Document
Registrant’s
Form

Date Filed
with the SEC

Exhibit
Number

Filed
Herewith
4.14 Form of Convertible Promissory Note issued in April, August and October 2014 in connection with the 2014 convertible note financing. S-1 June 10, 2014 4.14

4.15 Form of Warrant to Purchase Shares issued in April, August and October 2014 in connection with the 2014 convertible note financing. S-1 June 10, 2014 4.15

4.16 Form of unit certificate. S-1/A July 1, 2014 4.16

4.17 Form of Series B Warrant Agreement. S-1/A August 7, 2014 4.17

4.18 Form of the Series B Warrant Certificate. S-1/A July 1, 2014 4.18

4.19 Form of the Series C Warrant Agreement. S-4 April 1, 2015 4.19

4.20 Form of the Series C Warrant certificate. S-4 April 1, 2015 4.20

4.21 Form of the Series D Common Stock Purchase Warrant 8-K October 15, 2015 4.21

4.22 Form of Placement Agent Warrant 8-K October 15, 2015 4.22

4.23 Form of Series D Common Stock Warrant Certificate 8-K October 15, 2015 4.23

4.24 Form of Series A Convertible Preferred Stock Certificate 8-K October 15, 2015 4.24

4.25 Form of Placement Agent Warrant 8-K July 6, 2016 4.1

4.26 Form of Series B Convertible Preferred Stock Certificate 8-K July 6, 2016 4.2

9.1 Form of Voting Agreement 8-K October 15, 2015 9.1

9.2 Form of Voting Agreement 8-K July 6, 2016 9.1

9.2 Form of Voting Agreement 8-K December 27, 2016 10.1

10.1 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. S-1/A June 10, 2014 10.1

10.2 1999 Incentive Stock Plan and forms of agreements thereunder. S-1/A June 10, 2014 10.2

10.3 2010 Equity Incentive Plan and forms of agreements thereunder. S-1/A June 10, 2014 10.3

10.4 2014 Equity Incentive Plan and forms of agreements thereunder. S-1/A July 1, 2014 10.4

10.5 2014 Employee Stock Purchase Plan and forms of agreements thereunder. S-1/A July 1, 2014 10.5

10.6 Offer Letter, dated June 22, 2007, by and between Capnia, Inc. and Ernest Mario, Ph.D. S-1 June 10, 2014 10.6

10.7 Employment Agreement, dated April 6, 2010, by and between Capnia, Inc. and Anish Bhatnagar. S-1 June 10, 2014 10.7

10.8 Offer Letter, dated May 29, 2013, between Capnia, Inc. and Anthony Wondka. S-1 June 10, 2014 10.8

10.9 Offer Letter, dated April 17, 2014, by and between Capnia, Inc. and Antoun Nabhan. S-1 June 10, 2014 10.9

10.10 Asset Purchase Agreement dated May 11, 2010, by and between Capnia, Inc. and BioMedical Drug Development Inc. S-1 June 10, 2014 10.10

Incorporated by Reference from
Exhibit
Number
Description of Document
Registrant’s
Form

Date Filed
with the SEC

Exhibit
Number

Filed
Herewith
10.11 Convertible Note and Warrant Purchase Agreement, dated February 10, 2010, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.11

10.12 Amendment No. 1 to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated November 10, 2010, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.12

10.13 Amendment No. 2 to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated January 17, 2012, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.13

10.14 Convertible Note and Warrant Purchase Agreement, dated January 16, 2012, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.14

10.15 Omnibus Amendment to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated July 31, 2012, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.15

10.16 Omnibus Amendment to Convertible Promissory Notes and Warrants to Purchase Shares, dated April 28, 2014, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.16

10.17 Convertible Note and Warrant Purchase Agreement, dated April 28, 2014, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.17

10.18 Omnibus Amendment to Convertible Note and Warrant Purchase Agreement, Convertible Promissory Notes and Warrants to Purchase Shares, dated May 5, 2014, by and among Capnia, Inc. and the investors named therein. S-1 June 10, 2014 10.18

10.19 Sublease, dated May 20, 2014, by and among Capnia, Inc. and Silicon Valley Finance Group. S-1/A July 1, 2014 10.19

10.20 Offer Letter, dated June 24, 2014, by and between Capnia, Inc. and David D. O’Toole. S-1/A July 22, 2014 10.20

10.21 Loan Agreement by and between Capnia, Inc. and the investors named therein, dated September 29, 2014. S-1/A September 29, 2014 10.21

10.22 Revised Second Tranche Closing Notice and Letter Amendment dated August 18, 2014 relating to the August 2014 Notes. S-1/A November 4, 2014 10.22

10.23 Second Tranche Subsequent Closing Notice and Letter Amendment dated October 22, 2014 relating to the October 2014 Notes. S-1/A November 4, 2014 10.23

10.24 Form of Warrant Exercise Agreement. 8-K/A March 6, 2015 10.24
10.25 Advisory Agreement by and between Capnia, Inc. and Maxim Group LLC, dated March 4, 2015. S-24 April 1, 2015 10.25

Incorporated by Reference from
Exhibit
Number
Description of Document
Registrant’s
Form

Date Filed
with the SEC

Exhibit
Number

Filed
Herewith
10.26 Agreement and First Amendment to Asset Purchase Agreement dated June 30, 2015, by and between Capnia, Inc. and Biomendical Drug Development Inc. and George Tidmarsh MD, PhD. 8-K July 7, 2015 10.26
10.27 Common Stock Purchase Agreement dated June 30, 2015, by and between Capnia, Inc. and George Tidmarsh MD, PhD. 8-K July 7, 2015 10.27
10.28 Registration Rights Agreement dated July 24, 2015 between Capnia, Inc. and Aspire Capital Fund, LLC. 8-K July 7, 2015 10.28
10.29 Common Stock Purchase Agreement dated October 12, 2015 8-K July 7, 2015 10.29
10.30 Securities Purchase Agreement dated October 12, 2015 8-K October 15, 2015 10.30
10.31 Form of Registration Rights Agreement 8-K October 15, 2015 10.31
10.32 Form of Lock-Up Agreement 8-K October 15, 2015 10.32
10.33 Amendment No. 1 to Securities Purchase Agreement dated October 29, 2015 S-1/A December 22, 2015 10.33
10.34 Transfer and Distribution Agreement: United States: by and between Capnia, Inc. and Bemes, Inc. signed January 26, 2016 8-K January 28, 2016 10.34
10.35 Engagement Letter dated June 26, 2016, between Capnia, Inc. and Maxim Group, LLC 8-K July 6, 2016 1.1
10.35 Securities Purchase Agreement dated June 29, 2016 8-K July 6, 2016 10.1
10.36 Form of Registration Rights Agreement 8-K July 6, 2016 10.2
10.37 Amendment No. 1 to Securities Purchase Agreement dated September 20, 2016 S-1/A September 9, 2016 10.36
10.38 Agreement and Plan of Merger and Reorganization, dated as of December 22, 2016, by and among Capnia, Inc.,a Delaware corporation and Essentialis, Inc., a Delaware corporation and certain other parties thereto 8-K December 27, 2016 2.1
10.40 Registration Rights Agreement between the Company and Aspire Capital Fund, LLC, dated January 27, 2017. S-1 February 2, 2017 10.51
10.41 Common Stock Purchase Agreement between the Company and Aspire Capital Fund, LLC, dated January 27, 2017 S-1 February 2, 2017 10.52
10.42 Form of Common Stock Purchase Agreement 8-K March 8, 2017 10.1



		~~Incorporated by Reference from~~
~~Exhibit~~ ~~Number~~	~~Description of Document~~	~~Registrant’s~~ ~~Form~~	~~Date Filed~~ ~~with the SEC~~	~~Exhibit~~ ~~Number~~	~~Filed~~ ~~Herewith~~
~~21.1~~	~~List of Subsidiaries~~				X
~~23.1~~	~~Consent of Marcum LLP~~				X
~~31.1~~	~~Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.~~				X
~~31.2~~	~~Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.~~				X
32.1*	~~Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.~~				X
~~101.INS~~	~~XBRL Instance Document~~				X
~~101.SCH~~	~~XBRL Taxonomy Extension Schema Document~~				X
~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~				X
~~101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase Document~~				X
~~101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase Document~~				X
~~101.PRE~~	~~XBRL Taxonomy Extension Presentation Linkbase Document~~				X

~~_________________________~~



*	The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Capnia, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

112

Delaware		77-0523891

~~Delaware~~	~~77-0523891~~
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



1235 Radio Road, Suite 110 Redwood City, California		94065
(Address of ~~Principal Executive Offices)~~principal executive offices)		(Zip Code)



Title of Each Class:			Name of Each Exchange on which Registered:
Common Stock, par value $0.001 per share Series A warrants to purchase Common Stock			The NASDAQ Capital Market The NASDAQ Capital Market



Large accelerated filer	☐	¨	Accelerated filer		¨ ☐

Non-accelerated filer	☒	¨	Smaller reporting company	☒
	x		Emerging growth company	☒

PART I
Item 1	Business	2
~~PART I~~

~~Item 1~~	~~Business~~	1

Item 1A	Risk Factors	26 14

Item 1B	Unresolved Staff Comments	63 50

Item 2	Properties	63 51

Item 3	Legal Proceedings	63 51

Item 4	Mine Safety Disclosures	64 51

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	65 52

Item 6	Selected Financial Data	66 53

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operation	68 54

Item 7A	Quantitative and Qualitative Disclosures About Market Risk	79 66

Item 8	Financial Statements and Supplementary Data	80 67

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~108~~ 102

Item 9A	Controls and Procedures	~~108~~ 102

Item 9B	Other Information	~~108~~ 102

PART III

Item 10	Directors, Executive Officers and Corporate Governance	~~109~~ 103

Item 11	Executive Compensation	~~109~~ 103

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~109~~ 103

Item 13	Certain Relationships and Related Transactions, and Director Independence	~~109~~ 103

Item 14	Principal Accounting Fees and Services	~~109~~ 103

PART IV

Item 15	Exhibits, Financial Statement Schedules	~~109~~ 104

Signatures		~~110~~ 112


☒
x	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



	High		Low
Fiscal 2015
First Quarter 2015	$	8.75	$	1.18
Second Quarter 2015	7.45		2.81
Third Quarter 2015	3.15		1.15
Fourth Quarter 2015	2.46		1.51
Fiscal 2016
First Quarter 2016	$	1.85	$	1.14
Second Quarter 2016	1.36		1.09
Third Quarter 2016	1.18		0.90
Fourth Quarter 2016	1.03		0.73



	Year Ended December 31,
Statement of Operations Data:	2016			2015

Revenue	$	1,450,788		$	607,472
Cost of goods sold	1,509,306			352,683
Gross profit	(58,518		)	254,789
Expenses
Research and development	5,184,803			4,536,244
Sales and marketing	1,630,591			1,737,470
General and administrative	6,736,203			6,140,821
Total expenses	13,551,597			12,414,535
Operating income (loss)	(13,610,115		)	(12,159,746		)
Interest and other income (expense)
Other income (expense), net	1,566,601			(3,748,800		)
Loss before provision for income taxes	$	(12,043,514	)	$	(15,908,546	)
Provision for deferred taxes	21,700			—
Net loss	(12,065,214		)	(15,908,546		)
Loss on extinguishment of convertible preferred stock	3,651,172			—
Net loss applicable to common stockholders	$	(15,716,386	)	$	(15,908,546	)
Weighted average common shares outstanding
Basic and diluted	15,507,484			9,425,880
Net loss per share
Basic and diluted	$	(1.01	)	$	(1.69	)



	December 31
Balance Sheet Data	2016		2015

Cash and cash equivalents	$	2,725,996	$	5,494,523
Working capital	$	2,093,916	$	3,211,565
Total assets	$	5,564,852	$	8,201,195
Total stockholders’ equity	$	3,435,197	$	3,223,816



	December 31, 2016			December 31, 2015
Assets
Current assets
Cash and cash equivalents	$	2,725,996		$	5,494,523
Accounts receivable	133,337			156,127
Restricted Cash	35,000			35,000
Inventory	660,391			551,008
Prepaid expenses and other current assets	246,570			167,642
Total current assets	3,801,294			6,404,300
Long-term assets
Property and equipment, net	102,560			85,745
Goodwill	718,003			718,003
Other intangible assets, net	817,465			916,807
Other assets	125,530			76,340
Total assets	$	5,564,852		$	8,201,195
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	537,891		$	695,056
Accrued compensation and other current liabilities	1,169,487			1,632,679
Series B warrant liability	—			865,000
Total current liabilities	1,707,378			3,192,735
Long-term liabilities
Series A warrant liability	194,048			1,212,803
Series C warrant liability	85,490			462,437
Other liabilities	142,739			109,404
Total liabilities	2,129,655			4,977,379
Commitments and contingencies (Note 7)
Stockholders’ equity
Preferred Stock, $.001 par value, 10,000,000 shares authorized:
Series A convertible preferred stock, 10,000 shares designated; zero and 4,555 issued and outstanding at December 31, 2016 and December 31, 2015, respectively. Liquidation value of zero.	—			5
Series B convertible preferred stock, 13,780 and zero shares designated at December 31, 2016 and December 31, 2015, respectively; 12,780 and zero shares issued and outstanding at December 31, 2016 and at December 31, 2015, respectively. Liquidation value of zero.	13			—
Common stock, $0.001 par value, 100,000,000 shares authorized, 16,786,952 and 14,017,909 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively.	16,786			14,018
Additional paid-in-capital	101,730,285			89,456,466
Accumulated deficit	(98,311,887		)	(86,246,673		)
Total stockholders’ equity	3,435,197			3,223,816
Total liabilities and stockholders’ equity	$	5,564,852		$	8,201,195



	Series A Convertible Preferred Stock				Series B Convertible Preferred Stock					Common Stock			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ (Deficit) Equity
	Shares		Amount		Shares		Amount			Shares	Amount		Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ (Deficit) Equity
Balances at January 1, 2015	—		—		—		—			6,769,106	$	6,769	$	59,141,405		$	(70,338,127	)	$	(11,189,953	)
Stock based compensation													942,369						942,369
Issuance of common stock for stock option exercises										83,848	84		293,489						293,573
Issuance of common stock for Series A warrant exercises										24,000	24		155,976						156,000
Issuance of common stock for Series B warrant exercises (net of transaction costs of $306,116)										619,512	619		3,720,094						3,720,713
Issuance of common stock for Series B warrant cashless exercises										5,879,560	5,880		416,660						422,540
Issuance of common stock for 2010/2012 warrant cashless exercises										13,407	13		(13		)				—
Contribution of Series B warrants													3,332						3,332
Derecognition of Series A warrant liability upon exercise													42,000						42,000
Derecognition of Series B warrant liability upon exercise													18,853,215						18,853,215
Issuance of shares in conjunction with BDDI asset purchase										50,000	50		112,350						112,400
Issuance of shares to Aspire Capital										71,891	72		183,250						183,322
Sales of shares through Aspire ATM vehicle										506,585	507		1,433,687						1,434,194
Issuance of Series A Convertible Preferred shares(net of transaction costs of $396,343)	4,555		5										4,158,652						4,158,657
Net loss																(15,908,546		)	(15,908,546		)
Balances at December 31, 2015	4,555		5		—		—			14,017,909	14,018		89,456,466			(86,246,673		)	3,223,816
Stock based compensation													871,270						871,270
Issuance of common stock for stock option exercises										58,419	58		70,044						70,102
Issuance of common stock for Series B warrant cashless exercises										485,202	485		593,099						593,584
Issuance of common stock on conversion of Series A Convertible Preferred shares	(2,220	)	(2	)						1,200,000	1,200		(1,198		)				—
Issuance of Series A Convertible Preferred shares(net of transaction costs of $374,661)	5,445		5										5,070,334						5,070,339
Repurchase of Series A Convertible Preferred shares	(7,780	)	(8	)									(7,779,992		)				(7,780,000		)
Issuance of Series B Convertible Preferred shares(net of transaction costs of $353,105)					13,780		14						13,426,881						13,426,895
Issuance of common stock on conversion of Series B Convertible Preferred shares					(1,000	)	(1		)	1,000,000	1,000		(999		)				—
Issuance of common stock to board members in lieu of cash payments for quarterly board fees										25,422	25		24,380						24,405
Net loss																(12,065,214		)	(12,065,214		)
Balances at December 31, 2016	—		—		12,780		$	13		16,786,952	$	16,786	101,730,285			$	(98,311,887	)	$	3,435,197



	Amount		Accumulated Amortization			Net Amount		Useful Lives (years)
Patents and trademarks	$	697,890	$	(105,524	)	$	592,366	5-12
Customer contracts	259,730		(34,631		)	225,099		10
Total	$	957,620	$	(140,155	)	$	817,465



Year ending December 31:	Patents and trademarks		Customer contracts		Total Amortization
2017	$	73,370	$	25,973	$	99,343
2018	73,370		25,973		99,343
2019	73,370		25,973		99,343
2020	64,310		25,973		90,283
2021	46,192		25,973		72,165
2022 and thereafter	261,754		95,234		356,988
Total	$	592,366	$	225,099	$	817,465



	Series A Warrant				Series B Warrant					Series C Warrant
	Number of Warrants	Liability			Number of Warrants		Liability			Number of Warrants	Liability
Balance at December 31, 2015	2,425,605	$	1,212,803		116,580		$	865,000		590,415	$	462,437
Change in value of Series A Warrants	—	(1,018,755		)	—		—			—	—
De-recognition of Series B Warrant liability upon cashless exercise of warrants (485,202 shares issued)	—	—			(102,300	)	(593,584		)	—	—
De-recognition of Series B Warrant liability upon expiration	—	—			(14,280	)	—			—	—
Change in value of Series B Warrants	—	—			—		(271,416		)	—	—
Change in value of Series C Warrants	—	—			—		—			—	(376,947		)
Balance at December 31, 2016	2,425,605	$	194,048		—		$	—		590,415	$	85,490



	February 12, 2016		December 31, 2015
Volatility	90	%	90	%
Expected Term (years)	0.00		0.12
Expected dividend yield	—	%	—	%
Risk-free rate	0.65	%	0.65	%



Year ending December 31:	Operating Leases
2017	750,118
2018	629,923
2019	334,747
Total	$	1,714,788



	Shares Available for Grant		Number of Options Outstanding		Weighted-Average Exercise Price per Share		Weighted Average Remaining Contractual Term
	Shares Available for Grant		Number of Options Outstanding		Weighted-Average Exercise Price per Share		(in years)
Balance at December 31, 2014	606,061		1,072,011		$	6.34
Additional shares authorized	270,764		—		—
Options granted	(955,713	)	955,713		3.08
Options exercised			(83,848	)	3.50
Options canceled/forfeited	85,037		(85,037	)	5.03
Balance at December 31, 2015	6,149		1,858,839		4.82		8.75
Additional shares authorized	560,717		—		—
Amendment to plan to authorize additional shares	1,500,000		—		—
Options granted	(1,339,259	)	1,339,259		1.36
Options exercised	—		(58,419	)	1.20
Options canceled/forfeited	231,249		(231,249	)	3.09
Balance at December 31, 2016	958,856		2,908,430		$	3.42	8.48

Options vested at December 31, 2016	—		1,450,033		$	4.12	8.13
Options vested and expected to vest at December 31, 2016	—		2,908,430		$	3.42	8.48




Cash consideration	$	1,000,000
Fair value of contingent consideration	153,000
Total purchase price consideration	$	1,153,000




Net tangible assets acquired	$	39,377
Customer contracts	259,730
Patents	135,890
Goodwill	718,003
Net Assets Acquired	$	1,153,000



	December 31,
	2015
Pro forma total revenues	$	1,168,846
Pro forma net loss	$	(16,002,126	)
Pro forma net loss per share – basic and diluted	$	(1.70	)
Pro forma weighted-average shares-basic and diluted	9,425,880