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| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2020
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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Delaware | 3841 | 36-4729076 | ||||||||||||
| (State or Other Jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer Identification No.) | ||||||||||||
| Incorporation or Organization) |
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713-305-5041
Code:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock | SOLY | The Nasdaq Stock Market | ||||||
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ] Smaller Reporting Company [ X ] Emerging Growth Company [ X ]
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||||||||||||||||
| Emerging growth company | ☒ | |||||||||||||||||||||||||||||||
Indicate the
EXPLANATORY NOTE
Soliton, Inc. (the “Company”) became subject to the filing requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) when its Registration Statement on Form 8-A became effective on February 15, 2019 (the “Effective Date”). The Company’s Post-Qualification Offering Statement on Form 1-A (File No. 024-10854), filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2019, as amended (“Form 1-A”), included financial statements for the fiscal years ended December 31, 2017 and 2016 and for the six month periods ended June 30, 2018 and 2017. This Quarterly Report on Form 10-Q is being filed pursuant to Rule 13a-13 of the Exchange Act, in order to file financial statements for the third fiscal quarter subsequent to the most recent periods reported in the Form 1-A.
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PART I - FINANCIAL INFORMATION
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As of September 30, December 31, ASSETS Current assets: Cash and cash equivalents Prepaid expenses and other current assets Total current assets Deferred direct issuance costs - proposed offering Property and equipment, net of accumulated depreciation Intangible assets, net of accumulated amortization Other assets Total assets LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable Accrued liabilities Dividends payable Accrued interest Accrued interest - related party Convertible notes payable, net Convertible notes payable - related party Deferred rent Total current liabilities Deferred rent Total liabilities Commitments and contingencies Stockholders’ deficit Series A preferred stock, $0.001 par value, liquidation value of $1,999,997, 416,666 shares designated, issued and outstanding Series B preferred stock, $0.001 par value, liquidation value of $14,000,641, 2,118,100 shares designated, issued and outstanding Common stock, $0.001 par value, 100,000,000 authorized, 1,898,056 and 1,820,556 shares issued and outstanding, respectively Additional paid-in capital Accumulated deficit ) ) Total stockholders’ deficit ) ) Total liabilities and stockholders’ deficitItem 1. Financial StatementsSOLITON, INC.CONDENSED BALANCE SHEETS(UNAUDITED)
2018
2017 $ 197,975 $ 18,412 15,389 7,746 213,364 26,158 278,212 — 262,789 336,726 83,740 92,102 23,283 23,283 $ 861,388 $ 478,269 $ 1,767,713 $ 445,453 1,192,718 853,443 4,293,260 3,333,260 79,988 — 916,944 295,830 1,756,155 — 8,422,000 6,025,000 5,950 — 18,434,728 10,952,986 18,418 25,878 18,453,146 10,978,864 417 417 2,118 2,118 1,898 1,821 21,795,522 21,031,388 (39,391,713 (31,536,339 (17,591,758 (10,500,595 $ 861,388 $ 478,269
| (in thousands, except for share data) | September 30, 2020 | December 31, 2019 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 34,626 | $ | 11,876 | |||||||
| Restricted cash | 200 | 200 | |||||||||
| Total cash | 34,826 | 12,076 | |||||||||
| Inventory | 266 | 0 | |||||||||
| Prepaid expenses and other current assets | 314 | 96 | |||||||||
| Total current assets | 35,406 | 12,172 | |||||||||
| Property and equipment, net of accumulated depreciation | 1,334 | 848 | |||||||||
| Intangible and other assets | 129 | 121 | |||||||||
| Total assets | $ | 36,869 | $ | 13,141 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 655 | $ | 1,338 | |||||||
| Accrued and other current liabilities | 1,690 | 1,529 | |||||||||
| Total current liabilities | 2,345 | 2,867 | |||||||||
| Commitments and contingencies (Note 5) | |||||||||||
| Stockholders’ equity (deficit): | |||||||||||
| Common stock, $0.001 par value, 100,000,000 authorized, 21,189,943 shares issued and outstanding at September 30, 2020 and 16,932,184 shares issued and outstanding at December 31, 2019 | 21 | 17 | |||||||||
| Additional paid-in capital | 100,546 | 66,300 | |||||||||
| Accumulated deficit | (66,043) | (56,043) | |||||||||
| Total stockholders’ equity | 34,524 | 10,274 | |||||||||
| Total liabilities and stockholders’ equity | $ | 36,869 | $ | 13,141 | |||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | $ | — | $ | — | $ | — | $ | — | ||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,717,113 | 717,785 | 3,804,015 | 3,144,771 | ||||||||||||
Sales and marketing | 109,565 | 30,198 | 178,115 | 77,098 | ||||||||||||
Depreciation and amortization expense | 30,028 | 32,449 | 90,321 | 99,048 | ||||||||||||
General and administrative expenses | 794,991 | 720,411 | 2,078,191 | 2,264,506 | ||||||||||||
Total operating expenses | 2,651,697 | 1,500,843 | 6,150,642 | 5,585,423 | ||||||||||||
Loss from operations | (2,651,697 | ) | (1,500,843 | ) | (6,150,642 | ) | (5,585,423 | ) | ||||||||
Other (expense) income: | ||||||||||||||||
Interest expense | (327,978 | ) | (102,345 | ) | (747,492 | ) | (183,331 | ) | ||||||||
Other income | 1,054 | 2,082 | 2,760 | 3,414 | ||||||||||||
Total other (expense) income | (326,924 | ) | (100,263 | ) | (744,732 | ) | (179,917 | ) | ||||||||
Loss before income taxes | (2,978,621 | ) | (1,601,106 | ) | (6,895,374 | ) | (5,765,340 | ) | ||||||||
Income tax (expense) benefit | — | — | — | — | ||||||||||||
Net loss | $ | (2,978,621 | ) | $ | (1,601,106 | ) | $ | (6,895,374 | ) | $ | (5,765,340 | ) | ||||
Dividend to series A and B preferred stockholders | (320,000 | ) | (320,000 | ) | (960,000 | ) | (960,000 | ) | ||||||||
Net loss attributable to common stockholders | $ | (3,298,621 | ) | $ | (1,921,106 | ) | $ | (7,855,374 | ) | $ | (6,725,340 | ) | ||||
Net loss per common share, basic and diluted | $ | (1.74 | ) | $ | (1.12 | ) | $ | (4.23 | ) | $ | (4.01 | ) | ||||
Weighted average number of common shares outstanding, basic and diluted | 1,898,056 | 1,720,556 | 1,855,190 | 1,677,690 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except for share and per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 1,256 | 2,430 | 3,762 | 3,660 | |||||||||||||||||||
| Sales and marketing | 474 | 34 | 560 | 137 | |||||||||||||||||||
| Depreciation and amortization | 87 | 73 | 229 | 146 | |||||||||||||||||||
| General and administrative | 1,852 | 1,764 | 5,531 | 5,720 | |||||||||||||||||||
| Total operating expenses | 3,669 | 4,301 | 10,082 | 9,663 | |||||||||||||||||||
| Loss from operations | (3,669) | (4,301) | (10,082) | (9,663) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | 0 | 0 | 0 | (823) | |||||||||||||||||||
| Interest income | 76 | 6 | 82 | 9 | |||||||||||||||||||
| Total other income (expense) | 76 | 6 | 82 | (814) | |||||||||||||||||||
| Net loss | (3,593) | (4,295) | (10,000) | (10,477) | |||||||||||||||||||
| Dividend to Series A and B preferred stockholders | 0 | 0 | 0 | (160) | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | (3,593) | $ | (4,295) | $ | (10,000) | $ | (10,637) | |||||||||||||||
| Net loss per common share, basic and diluted | $ | (0.17) | $ | (0.27) | $ | (0.55) | $ | (0.83) | |||||||||||||||
| Weighted average number of common shares outstanding, basic and diluted | 21,062,444 | 15,994,002 | 18,244,330 | 12,877,047 | |||||||||||||||||||
CHANGES IN
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (6,895,374 | ) | $ | (5,765,340 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 90,321 | 99,048 | ||||||
Share-based compensation | 661,205 | 427,902 | ||||||
Write-down of intangible assets | 19,138 | — | ||||||
Amortization of debt discount | 44,921 | — | ||||||
Changes in operating assets - (Increase)/Decrease: | ||||||||
Prepaid expenses and other current assets | (7,643 | ) | 14,902 | |||||
Changes in operating liabilities - Increase/(Decrease): | ||||||||
Accounts payable | 1,322,260 | 207,769 | ||||||
Accrued liabilities | 339,275 | 104,485 | ||||||
Accrued interest | 79,988 | — | ||||||
Accrued interest - related party | 621,114 | 183,331 | ||||||
Deferred rent | (1,510 | ) | 1,853 | |||||
NET CASH USED IN OPERATING ACTIVITIES: | (3,726,305 | ) | (4,726,050 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Payments for the purchase of property and equipment | (16,008 | ) | (47,189 | ) | ||||
Payments for acquisition of intangibles | (11,152 | ) | (17,644 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES: | (27,160 | ) | (64,833 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of convertible notes, net of $163,760 of issuance costs | 1,814,240 | — | ||||||
Proceeds from issuance of convertible notes - related party | 2,397,000 | 5,000,000 | ||||||
Payment of deferred direct issuance costs - proposed offering | (278,212 | ) | — | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES: | 3,933,028 | 5,000,000 | ||||||
Net increase in cash and cash equivalents | 179,563 | 209,117 | ||||||
Cash and cash equivalents, beginning of period | 18,412 | 155,892 | ||||||
Cash and cash equivalents, end of period | $ | 197,975 | $ | 365,009 | ||||
Supplemental cash flow disclosures: | ||||||||
Cash paid for interest | $ | — | $ | — | ||||
Cash paid for income taxes | $ | — | $ | — | ||||
Non-cash investing and financing activities: | ||||||||
Accrued preferred dividends | $ | 960,000 | $ | 960,000 | ||||
Warrants debt discount on convertible notes | $ | 103,006 | $ | — | ||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||
| (in thousands) | Shares | Par | |||||||||||||||||||||||||||
| Balance, December 31, 2019 | 16,932 | $ | 17 | $ | 66,300 | $ | (56,043) | $ | 10,274 | ||||||||||||||||||||
| Stock-based compensation | — | — | 711 | — | 711 | ||||||||||||||||||||||||
| Issuance of common shares | 11 | — | — | — | — | ||||||||||||||||||||||||
| Net loss | — | — | — | (3,271) | (3,271) | ||||||||||||||||||||||||
| Balance, March 31, 2020 | 16,943 | $ | 17 | $ | 67,011 | $ | (59,314) | $ | 7,714 | ||||||||||||||||||||
| Stock-based compensation | — | — | 736 | — | 736 | ||||||||||||||||||||||||
| Issuance of common shares | 30 | — | — | — | — | ||||||||||||||||||||||||
| Issuance of common shares from June 2020 Offering, net of costs | 4,217 | 4 | 32,042 | — | 32,046 | ||||||||||||||||||||||||
| Net loss | — | — | — | (3,136) | (3,136) | ||||||||||||||||||||||||
| Balance, June 30, 2020 | 21,190 | $ | 21 | $ | 99,789 | $ | (62,450) | $ | 37,360 | ||||||||||||||||||||
| Stock-based compensation | — | — | 757 | — | 757 | ||||||||||||||||||||||||
| Net loss | — | — | — | (3,593) | (3,593) | ||||||||||||||||||||||||
| Balance, September 30, 2020 | 21,190 | $ | 21 | $ | 100,546 | $ | (66,043) | $ | 34,524 | ||||||||||||||||||||
tattoos and the reduction of cellulite. The Company received clearance from the U.S. Food & Drug Administration ("FDA") for its tattoo removal indication in June of 2019 and has recently completed a four-site pivotal trial for the reduction of cellulite and filed a 510(k) with the FDA seeking clearance for this indication. The Company is based in Houston, Texas. Upon completion of the development of its products and regulatory clearances to market such products, the Company anticipates revenue will be driven by the sale of its RAP console and disposable cartridges to dermatologists, plastic surgeons and other physician offices, as well as medi-spas under the supervision of a doctor. SOLITON, INC.CONDENSED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)(UNAUDITED)(CONTINUED)Series A
Preferred StockSeries B
Preferred StockCommon Stock Additional
Paid-In
CapitalAccumulated
DeficitTotal (in thousands) Shares Par Shares Par Shares Par Balance, December 31, 2018 417 $ 0 2,118 $ 2 1,998 $ 2 $ 22,569 $ (42,131) $ (19,558) Stock-based compensation — — — — — — 512 — 512 Debt discount on convertible notes and notes payable – issuance of warrants — — — — — — 146 — 146 Payment of deferred direct issuance costs — — — — — — (186) — (186) Issuance of common shares for extinguishment of preferred shares (417) 0 (2,118) (2) 2,535 2 — — 0 Issuance of common shares for extinguishment of convertible debt — — — — 6,825 7 11,778 — 11,785 Issuance of common shares for extinguishment of dividends payable — — — — 955 1 4,772 — 4,773 Issuance of common shares from IPO, net of costs — — — — 2,173 2 9,872 — 9,874 Issuance of common shares for accelerated vesting — — — — 127 0 0 — 0 Accrued preferred dividends — — — — — — — (160) (160) Net loss — — — — — — — (3,209) (3,209) Debt forgiveness — — — — — — 434 — 434 Balance, March 31, 2019 — $ — — $ — 14,613 $ 14 $ 49,897 $ (45,500) $ 4,411 Stock-based compensation — — — — — — 686 — 686 Issuance of common shares from PIPE Offerings, net of costs — — — — 675 1 8,641 — 8,642 Issuance of common shares — — — — 406 1 (1) — 0 Net loss — — — — — — — (2,973) (2,973) Balance, June 30, 2019 — $ — — $ — 15,694 $ 16 $ 59,223 $ (48,473) $ 10,766 Stock-based compensation — — — — — — 662 — 662 Issuance of common shares for extinguishment of convertible debt — — — — 273 0 48 — 48 PIPE deal costs — — — — 0 0 1 — 1 Issuance of common shares — — — — 438 0 0 — 0 Net loss — — — — — — — (4,295) (4,295) Balance, September 30, 2019 — $ — — $ — 16,405 $ 16 $ 59,934 $ (52,768) $ 7,182 See accompanying notes to the unaudited condensed financial statements6SOLITON, INC.CONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED)(in thousands)For the Nine Months Ended
September 30,2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (10,000) $ (10,477) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 209 146 Stock-based compensation 2,204 1,860 Write-down of intangible asset 20 0 Amortization of debt discount 0 665 Changes in operating assets - (increase)/decrease: Inventory (266) 0 Prepaid expenses and other current assets (218) (188) Changes in operating liabilities - increase/(decrease): Accounts payable (932) (820) Accrued and other current liabilities 161 404 Non-convertible accrued interest - non-related and related party 0 11 Convertible accrued interest - related party 0 146 NET CASH USED IN OPERATING ACTIVITIES: (8,822) (8,253) CASH FLOWS FROM INVESTING ACTIVITIES: Payments for the purchase of property and equipment (446) (819) Payments for intangibles (28) (4) NET CASH USED IN INVESTING ACTIVITIES: (474) (823) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of non-convertible notes payable and accrued interest - related party and non-related party 0 (1,005) Proceeds from issuance of non-convertible notes payable - non-related party 0 300 Proceeds from issuance of common shares from IPO, net of costs 0 9,714 Proceeds from issuance of common shares from PIPE Offerings, net of costs 0 8,643 Proceeds from issuance of common shares from June 2020 Offering, net of costs 32,046 0 NET CASH PROVIDED BY FINANCING ACTIVITIES: 32,046 17,652 Net increase in cash, cash equivalents and restricted cash 22,750 8,576 Cash, cash equivalents and restricted cash, beginning of period 12,076 133 Cash, cash equivalents and restricted cash, end of period $ 34,826 $ 8,709 Supplemental cash flow disclosures: Cash paid for interest $ 0 $ 20 Non-cash investing and financing activities: Additions to property and equipment included in accounts payable $ 249 $ 0 Accrued preferred dividends $ 0 $ 160 Accrued direct issuance costs - offering $ 0 $ (277) Capital contributions - debt forgiveness $ 0 $ 434 Issuance of common stock for extinguishment of convertible note payable and accrued interest - related party and non-related party $ 0 $ 11,833 Issuance of common stock for extinguishment of dividends payable $ 0 $ 4,773 Debt discount on convertible notes and notes payable - issuance of warrants $ 0 $ 146 Issuance of common stock for extinguishment of preferred stock A and preferred stock B $ 0 $ 3 See accompanying notes to the unaudited condensed financial statements7SOLITON, INC.NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTSNote 1 - Description of the Business, Basis of Presentation and Summary of Significant Accounting PoliciesDescription of the BusinessSoliton, Inc. (“Soliton” or the “Company”) was organized under the laws of the State of Delaware on March 27, 2012. The Company operates in one1 segment as a medical device company organized to develop and commercialize products utilizing aits proprietary Rapid Acoustic Pulse ("RAP") technology platform. We areThe Company is a pre-revenue stage company with ourits first productproducts being developed for the removal of tattoos.Going ConcernBasis of PresentationThe accompanying condensed interim financial statements are unaudited. These unaudited condensed interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all the information and notes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and accompanying notes as found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020. In the opinion of management, the unaudited condensed interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2019 unaudited condensed balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.The Company operates in 1 reportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.The preparation of these unaudited condensed interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include work performed but not yet billed by contract manufacturers, engineers and research organizations, the valuation of equity related instruments, depreciable lives of long-lived assets (including property and equipment and intangible assets), and the valuation allowance related to deferred taxes. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates.The coronavirus disease (“COVID-19”) pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally, including our business, financial condition and results of operations. Due to the evolving and uncertain nature of COVID-19, it is reasonably possible that it could materially impact our estimates, particularly those that require consideration of forecasted financial information, in the near to medium term. These estimates relate to certain accounts including, but not limited to, the valuation allowance related to deferred taxes, intangible assets, and other long-lived assets. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer and provider behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19.On June 30, 2020, the Company completed a public offering ("June 2020 Offering") of 4,216,868 shares of common stock for total gross proceeds of approximately $35.0 million. The shares of Company common stock were sold at a public offering price of $8.30 per share and were purchased by the underwriters from the Company at a price of $7.719 per share. The June 2020 Offering was made under a prospectus supplement and related prospectus filed with the SEC pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-236963). Net proceeds from the sale of the common8stock on June 30, 2020 was approximately $32.0 million after deducting underwriting discounts and estimated offering expenses.Material UncertaintiesThe Company is an early stage and emerging growth company and has not generated any revenues to date. As such, the Company is subject to all of the risks associated with early stage and emerging growth companies. Since inception, the Company has incurred losses and negative cash flows from operating activities. The Company does not expect to generate positive cash flows from operating activities inFor the near future.For thethree and nine months ended September 30, 20182020 and 2017,2019, the Company incurred net losses of $6,895,374$3.6 million and $5,765,340,$4.3 million, respectively, and $10.0 million and $10.5 million, respectively, and had net cash flows used in operating activities for the nine months ended September 30, 2020 and 2019 of $3,726,305$8.8 million and $4,726,050,$8.3 million, respectively. At September 30, 2018,2020, the Company had an accumulated deficit of $39,391,713, negative$66.0 million, working capital of $18,221,364$33.1 million and cash, cash equivalents and restricted cash of $197,975.$34.8 million. The Company does not expect to experience positive cash flows from operating activities in the near future, if at all. future. The Company expects its cash, cash equivalents and restricted cash on hand of $34.8 million as of September 30, 2020 will be sufficient to fund the Company's operations into the third quarter of 2022 but not beyond.The Company anticipates incurring operating losses for the next severalfew years as it completes the development of its products, and seeks requested regulatory clearances to market such products and supports the commercial launch of its products. These factors raise substantial doubtuncertainties about the Company's ability to fund operations in future years. If the Company needs to raise additional capital in order to continue asto execute its business plan or a going concern within one year afterchange to its business plan, including obtaining additional regulatory clearance for its products currently under development and commercializing and generating revenues from products under development, there is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the dateCompany. A failure to raise sufficient capital could adversely impact the Company’s ability to achieve its intended business objectives and meet its financial statements are issued.obligations beyond the third quarter of 2022. The accompanying condensed financial statements have been prepared on a going concern basis and do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.On February 19,InventoryInventory is valued at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method. Inventory consists of raw materials purchased by the Company and held offsite by a vendor.Intangible AssetsIntangible assets include trademarks. At September 30, 2020 and December 31, 2019, the Company consummated its initial public offering (“IPO”). In the IPO, the Company sold a totalhad trademarks of 2,172,591 shares of common stock at a purchase price of $5.00 per share for gross proceeds of $10,862,955$0.1 million and net proceeds of approximately $9,700,000. In connection with the closing of the IPO, the Company's convertible notes (and related accrued interest) of $11,784,987 were converted into 6,825,391 shares of the Company's common stock, accrued dividends of $4,773,480 were converted into 954,696 shares of the Company's common stock and preferred stock, both Series A and Series B, were converted into 2,534,766 shares of the Company's common stock. In addition, 100,000 shares of restricted grants vested in November 2018 and 127,500 shares of unvested restricted grants were immediately vested upon the completion of the IPO. Total shares of common stock outstanding at the closing of the IPO amounted to 14,613,000. Upon the closing of the IPO, certain notes were to be automatically converted according to their terms into the Company’s common stock to the extent and provided that certain holders of these notes are not permitted to convert such notes to the extent that the holders or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Due to this 4.99% limitation, principal representing $47,781 of these notes remained outstanding and will be converted into 273,034 shares of our common stock at such time as the 4.99% limitation continues to be met. The maturity date of these notes is automatically extended until such date the notes are fully converted and these notes cease to accrue interest and are not repayable in cash.The Company estimates its current cash resources, including the approximate $9,700,000 of net proceeds from the IPO is sufficient to fund its operations into but not beyond February 2020. The Company also recognizes it will need to raise additional capital in order to continue to execute its business plan, including obtaining regulatory clearance for its products currently under development and commercializing and generating revenues from products under development. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company. A failure to raise sufficient capital, generate sufficient product revenues, control expenditures and regulatory matters, among other factors, will adversely impact the Company’s ability to meet its financial obligations as they become due and payable and to achieve its intended business objectives. If the Company is unable to raise sufficient additional funds, it will have to scale back its operations.Basis of PresentationThe accompanying interim financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2017 as found in the Offering Circular on Form 1-A. In the opinion of management, the unaudited interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2017 balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.Use of Estimates in Financial Statement PresentationThe preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's significant estimates and assumptions include stock-based compensation, depreciable lives of long-lived assets (including property and equipment and intangible assets), and the valuation allowance related to deferred taxes. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.Cash and Cash EquivalentsThe Company considers all highly liquid accounts with original maturities of three months or less to be cash equivalents. The Company participates in an insured cash sweep program through its bank that sweeps cash balances exceeding the FDIC insured limit of $250,000 into multiple accounts. Periodically in the ordinary course of business, the Company may carry cash balances at financial institutions in excess of the insured limits of $250,000.Property and EquipmentProperty and equipment are stated at historical cost and depreciated on a straight-line basis over the estimated useful lives, generally three to five years. Leasehold improvements are depreciated over the shorter of the remaining lease term or useful lives of the assets. Upon disposition of the assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Repairs and maintenance costs are included as expense in the accompanying statement of operations.Intangible AssetsIntangible assets include patents and trademarks. Patent related costs in connection with filing and prosecuting patent applications and patents filed by the Company are expensed as incurred, and are classified as research and development expenses.$0.1 million, respectively. The Company does not amortize trademarks with indefinite useful lives;lives, rather, such assets are required to be tested for impairment at least annually or sooner if events or changes in circumstances indicate that the asset may be impaired.Long-Lived AssetsThe During the three months ended September 30, 2020, the Company evaluates its long-lived assets, including equipment, for impairment whenever events or changes in circumstances indicate that the carryingwrote down a trademark with a net book value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the asset is considered impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.Deferred RentDeferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period on a straight-line basis exceed or are less than the cash payments required.Convertible DebtWhen conversion terms related to convertible debt would be triggered by future events not controlled by the Company, the Company accounts for the conversion feature as contingent conversion options. Recognition of the intrinsic value of the conversion option is recognized only upon the occurrence of a triggering event.Fair Value MeasurementsFair value is defined as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy which prioritizes the inputs used in the valuation methodologies, as follows:Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.8
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
At September 30, 2018 and December 31, 2017, the carrying amounts of the Company's financial instruments, including cash and accounts payable, approximate their respective fair value due to the short-term nature of these instruments.
At September 30, 2018 and December 31, 2017, the Company does not have any assets or liabilities required to be measured at fair value in accordance with FASB ASC Topic 820, Fair Value Measurement.
Revenue Recognition
Prior to January 1, 2017, revenues were recognized when the four basic criteria for recognition were met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured. The Company adopted new accounting guidance for revenue recognition effective January 1, 2018 which did not have a material impact on the Company’s financial statements. Beginning from January 1, 2018, revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services
Research and Development Expenses
Research and development expenses are recognized as incurred and include the costs related to the Company's various contract research service providers, suppliers, engineering studies, supplies, outsourced testing and consulting, clinical costs, and salaries and related costs of employees working directly on research activities.
Stock-Based Compensation
Stock-based compensation expense includes the estimated fair value of equity awards vested during the reporting period. The expense for equity awards vested during the reporting period is determined based upon the grant date fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of reported assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Tax rate changes are reflected in income during the period such changes are enacted. All of the Company's tax years remain subject to examination by the tax authorities.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company's financial statement as of September 30, 2018. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date.
The Company classified interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. No interest or penalties have been recognized in 2018 and 2017.
Net Loss per Common Share
JOBS Act Accounting Election
The Company is an emerging growth company ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Subsequent Events
The Company’s management reviewed all material events through the date that the financial statements were issued for subsequent event disclosure consideration. See Note 8 for additional information.
In certain instances, amounts reported in prior years' financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had an effect on previously reported cash flows between operating and investing activities. September 30, 2018 December 31, 2017 Prepaid insurance Other receivables Total prepaid expenses and other current assetsRecent Accounting StandardsIn February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02,Leases (Topic 842) ("ASU 2016-02"ASC 842"), which establishes a right-of-use (“ROU”) model requiring a lessee to recognize a ROU asset and a lease liability for all leases with terms greater-thangreater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance isASC 842 was originally effective for public EGC companies like the Company, for fiscal years beginning after December 15, 2019, includingand interim periods beginning after December 15, 2020 with early adoption permitted. In October 2019, the FASB delayed the implementation of ASC 842 for private companies until fiscal years beginning after December 15, 2020. In June 2020, the FASB further delayed the implementation of ASC 842 for private companies until fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Ayears beginning after December 15, 2022. Given the Company's status as an Emerging Growth Company ("EGC"), the Company will adopt ASC 842 in accordance with the private company guidance. The modified retrospective transition approach is required forapplies to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has the option to instead apply the provisions at the effective date without adjusting the comparative periods presented. The Company is currently evaluating the impact of this guidance on its financial position, results of operations, and cash flows.In June 2018, the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718), Improvements to Non-employee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share based compensation. The guidance is effective for the Company for the fiscal year beginning January 1, 2020. While the exact impact of this standard is not known, the guidance is not expected to have a material impact on the Company’s financial statements, as non-employee stock compensation is nominal relative to the Company's total expenses for the nine months ended September 30, 2018.The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.ReclassificationsNote2- Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consisted of the following:following (in thousands):September 30,
2020December 31,
2019 $ 14,248 $ 6,300 Prepaid insurance $ 207 $ 94 1,141 1,446 Other prepaids and receivables Other prepaids and receivables 107 2 $ 15,389 $ 7,746 Total prepaid expenses and other current assets $ 314 $ 96
Property
September 30, 2018 | December 31, 2017 | |||||||
Computer equipment and software | $ | 93,065 | $ | 95,130 | ||||
Research and development equipment | 244,481 | 241,377 | ||||||
Leasehold improvements | 242,167 | 242,167 | ||||||
Furniture | 19,893 | 19,893 | ||||||
Software | 11,020 | — | ||||||
Subtotal | 610,626 | 598,567 | ||||||
Less: accumulated depreciation | (347,837 | ) | (261,841 | ) | ||||
Total property and equipment, net | $ | 262,789 | $ | 336,726 | ||||
Depreciation expense for the three months ended September 30, 20182020 and 20172019 was $30,028$0.1 million and $32,449,$0.1 million, respectively. Depreciation expense for the nine months ended September 30, 20182020 and 20172019 was $89,945$0.2 million and $97,805,$0.1 million, respectively.
Note 4 - Intangible Assets
Intangible assets consisted of the following:
September 30, 2018 | December 31, 2017 | |||||||
Patents | $ | — | $ | 22,527 | ||||
Trademarks | 83,740 | 72,590 | ||||||
Subtotal | 83,740 | 95,117 | ||||||
Less: accumulated amortization | — | (3,015 | ) | |||||
Total intangible assets, net | $ | 83,740 | $ | 92,102 | ||||
Amortization expense for the three months ended September 30, 2018 and 2017 was $0. Amortization expense for the nine months ended September 30, 2018 and 2017 was $376 and $1,243, respectively.
On January 18, 2017, the Board approved a note purchase agreement (the "First Note") allowing the Company to sell an aggregate of $3,000,000 of convertible bridge notes (the "Notes"). The Notes were convertible into either the Company’s preferred or common stock (depends on the equity securities offered in the equity financing) at 75% of the price paid per share in a subsequent equity financing where the Company receives gross proceeds of not less than $5,000,000 or at 85% of the per share price determined by dividing the equity value of the Company that is expected to be available for distribution to the Company’s stockholders by the aggregate number of the Company’s fully-diluted common shares upon
The Company closed the initial tranche of the First Note on January 23, 2017 for $1,000,000, followed by a tranche on March 1, 2017 for $1,000,000 and a final tranche on April 27, 2017 for $1,000,000.
On June 19, 2017, the Company entered into the first amendment ("First Amendment") to the First Note to allow for the sale and issuance of an additional $3,250,000 of Notes up to an aggregated amount of $6,250,000.
The Company closed $1,300,000 on June 19, 2017 under the First Amendment and closed an additional $700,000 on July 17, 2017. No additional tranches were issued under the First Amendment.
As of September 30, 2018, the total amount of issuance under the First Note and First Amendment amounted to $5,000,000 and were issued to a single related party, who is a major stockholder of the Company.
On November 1, 2017, the Board approved a second note purchase agreement (the "Second Note") allowing the Company to sell an aggregate of $1,900,000 of Notes. The Notes were convertible into either the Company’s preferred or common stock (depends on the equity securities offered in the equity financing) at 75% of the price paid per share in a subsequent equity financing where the Company receives gross proceeds of not less than $5,000,000 or at 85% of the per share price determined by dividing the equity value of the Company that is expected to be available for distribution to the Company’s stockholders by the aggregate number of the Company’s fully-diluted common shares upon the closing of a sale, liquidation, merger, or change of control of the Company. The Notes bore interest at 8.25% per annum and initially matured on June 29, 2018, which date was extended as discussed below. At maturity, the interest rate increased to 12.0% per annum.
The Company closed the initial tranche of the Second Note on November 9, 2017 for $400,000, followed by a tranche on December 1, 2017, for $375,000, a third tranche on December 26, 2017 for $250,000, a fourth tranche on January 8, 2018 for $250,000, a fifth tranche on January 25, 2018 for $250,000 and a final trancheIPO on February 13, 2018 for $375,000 for a total19, 2019, convertible notes (and related accrued interest) of $1,900,000
On June 29, 2018, the Company and the related party modified the maturity date of the Notes entered into under the First Note and Second Note to April 30, 2019.
As of September 30, 2018, the total amount of issuance under the Second Note amounted to $1,900,000 and$11.8 million were issued to a single related party, who is a major stockholder of the Company.
On April 2, 2018, the Board approved a note purchase agreement (the "Third Note"), which was amended on August 10, 2018, allowing the Company to sell an aggregate of $500,000 of Notes. The Third Note provided that, on the closing date of the IPO, the outstanding principal and accrued, but unpaid, interest would be converted into 6,825,391 shares of common stock at the conversion price of $0.175. However, certainstock. Certain notes automatically converted, according to their terms, into common stock. Certain holders arewere not permitted to convert theirsuch notes whento the extent that the holders or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The holdersDue to this limitation, principal representing less than $0.1 million of these notes was later converted into 273,034 shares of the Company’s outstanding preferred shares agreed to waiveCompany's common stock in August and September 2019 when the adjustment toconversion did not result in the preferred stock conversion price triggered by the Third Note. The Notes bore interest at 10.0% per annumholders and mature on April 2, 2020.
As of September 30, 2018, the total amount of issuance under the Third Note amounted to $500,000. The Company issued $250,000 to a single related party, who is a major stockholder
On April 17, 2018, the Board approved a note purchase agreement (the "Fourth Note") allowing the Company to sell an aggregate of $3,000,000 of Notes. The Fourth Note provided that onCompany's outstanding common shares. All remaining debt instruments were settled at the closing date of the IPO, the outstanding principal and accrued, but unpaid, interest would be converted into common stock at the conversion price of $1.75. The holders of the Company’s outstanding preferred shares agreed to waive the adjustment to the preferred stock conversion price triggered by the Fourth Note. The Notes bore interest at 10.0% per annum and mature two years from the Note issuance date.
As of September 30, 2018, the total amount of issuance under the Fourth Note amounted to $3,000,000. The Company issued $1,272,000 in principal amount of such Notes to related party investors and $1,728,000 to non-related party investors.
The Company incurred issuance costs relating to the Fourth Note in the amount of $163,760, which is being amortized over 24-months. At September 30, 2018, the unamortized balance amounted to $136,184.
The Company also issued warrants to purchase 91,350 shares of common stock at a price of $1.75 per share to placement agents in connection with the Notes issued under the Fourth Note in the amount of $103,006. For additional information, see Note 7. The value of these warrants is also being amortized over 24-months. At September 30, 2018, the unamortized balance amounted to $85,661.
As of September 30, 2018, the net amount of the Notes for Non-Related Party amounted to $1,756,155.
The following table summarizes convertible notes payable and interest as of September 30, 2018:
Interest Rate | Related Party | Non-Related Party | Total | |||||||||||||||||||||||||||||
Initial | Post- Maturity | Principal | Interest | Principal | Interest | Principal | Interest | |||||||||||||||||||||||||
First Note | 8.25 | % | 12.00 | % | $ | 5,000,000 | $ | — | $ | 5,000,000 | ||||||||||||||||||||||
Second Note | 8.25 | % | 12.00 | % | 1,900,000 | — | 1,900,000 | |||||||||||||||||||||||||
Third Note | 10.00 | % | 10.00 | % | 250,000 | 250,000 | 500,000 | |||||||||||||||||||||||||
Fourth Note | 10.00 | % | 10.00 | % | 1,272,000 | 1,728,000 | 3,000,000 | |||||||||||||||||||||||||
Total | $ | 8,422,000 | $ | 916,944 | $ | 1,978,000 | $ | 79,988 | $ | 10,400,000 | $ | 996,932 | ||||||||||||||||||||
Unamortized Discount |
| — | — | (221,845 | ) | — | (221,845 | ) | — | |||||||||||||||||||||||
Total, Net | $ | 8,422,000 | $ | 916,944 | $ | 1,756,155 | $ | 79,988 | $ | 10,178,155 | $ | 996,932 | ||||||||||||||||||||
payments, including a $0.25 million milestone payment made in June 2019 after the Company received FDA clearance for our RAP device for tattoo removal. The specific patents initially subject to the agreement expire between 2031 and 2032.
Leases
For the nine months ended September 30, 2020 and 2019, the Company paid approximately $0.1 million and $0.1 million, respectively, for expenses related to this agreement.
Year Ending December, 31 | Amount | |||
2018 | $ | 25,164 | ||
2019 | 103,737 | |||
2020 | 108,429 | |||
Thereafter | 36,668 | |||
Total future minimum lease payments | $ | 273,998 | ||
The Company has an irrevocable letter of credit which supports its obligations to pay or perform according to the requirements of an underlying agreement with a certain vendor. Such letter of credit has an initial term of one year, renews automatically for an additional year and can only be modified or canceled with the approval of the beneficiary. As of September 30, 2020, the letter of credit was not used.Legal ProceedingsIn the normal course of business, from time-to-time, the Company may be subject to claims in legal proceedings. However, the Company does not believe it is currently a party to any pending legal actions. Notwithstanding, legal proceedings are subject-tosubject to inherent uncertainties and an unfavorable outcome could include monetary damages, and in such event, could result in a material adverse impact on the Company's business, financial position, results of operations or cash flows.Employment Agreements15
Note 76 - Stockholders’ Deficit
Preferred Stock
The Company was authorized to issue 2,534,766 shares of preferred stock with a par value of $0.001 per share with such designation, rights, and preferences as may be determined from time-to-time by the Company's Board.
As of September 30, 2018 and December 31, 2017, there were 416,666 Series A preferred stock and 2,118,100 Series B preferred stock issued and outstanding.
The Series A preferred stock has the following features:
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The Series B preferred stock has similar rights as Series A preferred stock except that the dividends are based on $6.61 per Series B preferred share and Series B preferred stock is convertible into common stock at a rate of $6.61 divided by a conversion price initially set at $6.61. As of September 30, 2018 and December 31, 2017, accrued dividends for preferred stock were $4,293,260 and $3,333,260, respectively. At September 30, 2018, the conversion price for the Series A and Series B preferred stock were $4.80 and $6.61, respectively. The holder of the Series A and Series B preferred stock has agreed to convert the preferred stock into common stock upon the completion of the Company's IPO. The holders of the Company’s outstanding shares of preferred stock agreed to waive the adjustment to the conversion price of the preferred stock upon the issuances of the Third and Fourth Note.
All outstanding shares of Series A and Series B preferred stock and accrued dividends on these shares were converted into common stock upon the Company’s IPO on February 14, 2019. The Company amended its articles of incorporation on February 19, 2019 to no longer have preferred shares authorized under the amended articles of incorporation.
Adoption of 2012 Long Term Incentive Plan
In November 2012, the Company’s Board and stockholders adopted the 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan is designed to enable the Company to offer employees, officers, directors and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may be granted under the 2012 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Company’s Board. The 2012 Stock Plan reserves shares of common stock for issuance in accordance with the 2012 Stock Plan’s terms. Total number of shares reserved and available for issuance under the plan is 789,745 shares. As of September 30, 2018, 14,745 shares remained available for grant under the 2012 Stock Plan.
Adoption of 2018 Stock Plan
During
| Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||
| Outstanding, December 31, 2019 | 158,336 | $ | 11.54 | ||||||||
| Vested | (37,494) | 11.54 | |||||||||
| Outstanding, September 30, 2020 | 120,842 | $ | 11.54 | ||||||||
All unvested restricted stock grants at September 30, 2018 vested immediately upon the Company’s IPO on February 14, 2019.
shares.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (in Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding, December 31, 2017 | 15,000 | $ | 0.13 | 9.75 | $ | — | ||||||||||
Granted | 2,220,000 | 1.75 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Canceled | — | — | ||||||||||||||
Outstanding, September 30, 2018 | 2,235,000 | $ | 1.74 | 9.69 | $ | 23,100 | ||||||||||
Exercisable, September 30, 2018 | 3,750 | $ | 0.13 | 9.01 | $ | 5,775 | ||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (in Years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Outstanding, December 31, 2019 | 2,883,550 | $ | 2.70 | 8.62 | $ | 23,862 | |||||||||||||||||
| Granted | 526,000 | 11.08 | — | — | |||||||||||||||||||
| Outstanding, September 30, 2020 | 3,409,550 | $ | 4.00 | 8.11 | $ | 12,424 | |||||||||||||||||
| Exercisable, September 30, 2020 | 1,612,250 | $ | 2.41 | 7.84 | $ | 8,434 | |||||||||||||||||
All options
Warrants
On April 20, 2018, the Company issued warrants(ii) a warrant to purchase 79,3500.7 shares (a total of 472,500) of common stock (each a “June Warrant”) (collectively, "June PIPE"). The June Warrants included in the June Units are exercisable at an exercisea price of $1.75. The warrants$16.00 per share commencing on the date of issuance and will expire on April 20, 2023. The warrantsAugust 23, 2024. On July 1, 2019, the Company filed a Registration Statement on Form S-1 to register for resale the common stock underlying the June Units sold with the Company's June 2019 private offering. Net proceeds from the closing of the sale of the June Units on June 19, 2019 were issued to a$8.6 million after deducting the placement agent in connection with notes issued under the Fourth Note.
On June 8, 2018, the Company issued warrants to purchase 12,000 shares of common stock at an exercise price of $1.75. The warrants expire on June 8, 2023. The warrants were issued to a placement agent in connection with notes issued under the Fourth Note.
fees and offering expenses.
share.
During the three and nine months ended September 30, 2018, the Company recorded amortization expense related to these warrants of $10,643 and $17,345, respectively.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding, December 31, 2017 | — | $ | — | — | $ | — | ||||||||||
Granted | 91,350 | 1.75 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Canceled | — | — | ||||||||||||||
Outstanding, September 30, 2018 | 91,350 | $ | 1.75 | 4.57 | $ | — | ||||||||||
Exercisable, September 30, 2018 | 91,350 | $ | 1.75 | 4.57 | $ | — | ||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Outstanding, December 31, 2019 | 1,374,608 | $ | 10.97 | 4.43 | $ | 14 | |||||||||||||||||
| Granted | 0 | 0 | — | — | |||||||||||||||||||
| Exercised | (40,891) | 1.75 | — | 247 | |||||||||||||||||||
| Forfeited (cashless exercise) | (9,109) | 1.75 | — | — | |||||||||||||||||||
| Outstanding, September 30, 2020 | 1,324,608 | $ | 11.32 | 3.70 | $ | 0 | |||||||||||||||||
| Exercisable, September 30, 2020 | 1,324,608 | $ | 11.32 | 3.70 | $ | 0 | |||||||||||||||||
On August 31, 2018, the Company's Board approved a $200,000 increase to the Fifth Note authorized on August 7, 2018. On December 21, 2018, the Company's Board approved an additional $300,000 increase to the Fifth Note authorized on August 7, 2018 up to a maximum of $985,000. From October 2018 to February 2019, the Company issued $125,000 and $860,000 of the Fifth Note to related parties and non-related parties, respectively. On February 15, 2019, the Company paid $1,005,039 in principal and interest to the note holders to repay the Fifth Note in full.
On November 1, 2018, the Company filed an amendment to its certificate of incorporation to increase the authorized30,000 shares of the Company's common stock, to 19,000,000 shares of common stock, $0.001 par value per share,under the Company's 2018 Stock Plan, with 4 year annual vesting and 2,534,766 shares of preferred stock, $0.001 par value per share. On February 19, 2019, the Company amended its articles of incorporation to no longer have preferred shares authorized and increased the authorized shares of common stock to 100,000,000.
In January 2019, Mr. Klemp, Dr. Capelli, Mr. Tanner, Ms. Bisson and one other individual agreed to the extinguishment of about $484,000 in deferred compensation which had been earned through September 30, 2018, and which was to be repaid out of the proceeds from this offering. In recognition of this extinguishment, on February 5, 2019, the Company granted the same parties an aggregate of 401,750 options to purchase common stock with an exercise price equal to the closing price of $1.75 per share and a term of 10 years. These options vest in four installments over the next year.
On February 19, 2019, the Company consummated its IPO. In the IPO, the Company sold a total of 2,172,591 shares ofCompany's common stock at a purchase price of $5.00 per share for gross proceeds of $10,862,955 and net proceeds of approximately $9,700,000. In connection withon the closingdate of the IPO,appointment.
On February 25, 2019,Board. In connection with Dr. Capelli's transition, the Company finalizedentered into an amendment to Dr. Capelli's amended and restated employment agreements with Walter Kemp, Christopher Capelli, Joe Tanner and Lori Bisson and included these employment agreements as Exhibits herein in this report on Form 10-Q.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEC.You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See our Post-Qualification Amendment toAnnual Report on Form 10-K for the Offering Statement dated February 13,year ended December 31, 2019 filed with the SEC on March 2, 2020 (the “2019 Annual Report on Form 10-K”), under "Risk Factors", available on the SEC'sSecurity and Exchange Commission's (“SEC”) EDGAR website at www.sec.gov, for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-Q.CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSCertain statements contained in this quarterly report on Form 10-Q areWe make forward-looking statements withinunder the meaning“Management’s Discussion and Analysis of Section 27AFinancial Condition and Results of the Securities ActOperations” and in other sections of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).this Form 10-Q. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,” “would,” “could,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue,” and the negative of these terms and other comparable terminology. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks and uncertainties described under “Risk Factors” as discussed in our Post-Qualification Amendment2019 Annual Report on Form 10-K and in other filings made by us from time to time with the Offering Statement dated February 13, 2019, under "Risk Factors", available on the SEC's EDGAR website at www.sec.gov, and a copy may also be obtained by contacting the Company.While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Form 10-Q may describe additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. All forward-looking statements made in this Form 10-Q speak only as of the date of this report. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations, and we do not intend to do so.
Forward-looking statements include, but are not limited to, statements about:
•our ability to obtain additional funding to commercialize RAPour Rapid Acoustic Pulse (“RAP”) for tattoo removal and, if approved, cellulite reduction, to develop the RAP device for other indications and develop our dermatological technologies;
•our ability to obtain clearance from the FDA to market our technology for the improvement in the appearance of cellulite;
•the success of our future clinical trials;
•compliance with obligations under our intellectual property license with The University of Texas M.D. Anderson Cancer Center (“MD Anderson;
•market acceptance of the RAP device;
•potential product liability claims;
•our dependency on third-party manufacturers to supply or manufacture our products;
•our ability to establish or maintain collaborations, licensing or other arrangements;
•our ability and third parties’ abilities to protect intellectual property rights;
•our ability to adequately support future growth; and
•our ability to attract and retain key personnel to manage our business effectively.
Our ongoing research and development activities are primarily focused on obtaining FDA clearance for our system and then developing our system and treatment headvisit for tattoo removal procedures. In addition to these development activities related to tattoo removal, we are exploring additional uses of RAP technologyand two cartridges per patient, per visit for the dermatology, plastic surgery, and aesthetic markets, as well as new methods for improving the safety and efficacy of laser-based devices.
cellulite, if approved.
On February 19, 2019, we consummated our initial public offering (“IPO”). In the IPO, we sold a total of 2,172,591 shares of common stock at a purchase price of $5.00 per share for gross proceeds of $10,862,955 and net proceeds of approximately $9,700,000. In connection with the closing of the IPO, our convertible notes (and related accrued interest) of $11,784,987 were converted into 6,825,391 sharesreceipt of our common stock, accrued dividends of $4,773,480 were converted into 954,696 shares of our common stock and preferred stock, both Series A and Series B, were converted into 2,534,766 shares of our common stock. In addition, 100,000 shares of restricted grants vested in November 2018 and 127,500 shares of unvested restricted grants were immediately vested upon the completion of the IPO. Total shares of common stock outstanding at the closing of the IPO amounted to 14,613,000. Upon the closing of the IPO, certain notes were to be automatically converted according to their terms into our common stock to the extent and provided that certain holders of these notes are not permitted to convert such notes to the extent that the holdersformal response with either additional questions or any of its affiliates would beneficially own in excess of 4.99% of our common stock after such conversion. Due to this 4.99% limitation, principal representing $47,781 of these notes remained outstanding and will be converted into 273,034 shares of our common stock at such timea final decision. We believe we could potentially receive a clearance as soon as the 4.99% limitation continues to be met. The maturity datefourth quarter of these notes is automatically extended until such date the notes are fully converted and these notes cease to accrue interest and are not repayable in cash.
Results of Operations for the Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
Below is a summary of the results of operations for the three months ended September 30, 2018 and 2017:
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Operating expenses | ||||||||||||||||
Research and development | $ | 1,717,113 | $ | 717,785 | $ | 999,328 | 139.22 | % | ||||||||
Sales and marketing | 109,565 | 30,198 | 79,367 | 262.82 | % | |||||||||||
Depreciation and amortization | 30,028 | 32,449 | (2,421 | ) | (7.46 | )% | ||||||||||
General and administrative | 794,991 | 720,411 | 74,580 | 10.35 | % | |||||||||||
Total operating expenses | $ | 2,651,697 | $ | 1,500,843 | $ | 1,150,854 | 76.68 | % | ||||||||
Research and development. Research and development ("R&D") expenses increased by $999,328 compared to the same period in 2017, primarily due to increases in contract engineering expenses of $838,922, salaries and related expenses of $86,782, which are largely due to personnel expenses being allocated more to R&D in the current period than in the prior period, clinical trial expenses of $29,444, and license and other expenses of $72,793. These increases were primarily offset by decreases in animal research expenses of $28,613. The overall increase in R&D costs reflects2020 but have aligned our transition from pure research to more development related activities.
Sales and marketing. Sales and marketing ("S&M") expenses increased by $79,367 compared to the same period in 2017, primarily due to increases in expenses related to social media development of $64,950 and our Scientific Advisory Board ("SAB") and the related cost of meetings with this group and other advisors of $14,417. We include our SAB fees in S&M because they primarily advise on our product launch and marketing decisions related to dermatologists and prospective patients.
General and administrative. General and administrative ("G&A") expenses increased by $74,580 compared to same period in 2017. This increase was primarily due to increases in membership expenses of $2,518, IT related expenses of $27,263, accounting and other professional expenses of $25,532, investor relations expenses of $22,539 and non-cash expenses related to the granting of stock options of $171,330. These increases were primarily offset by decreases in salaries and related expenses of $151,792, travel and related expenses of $19,732 and other expenses of $3,078.
Results of Operations for the Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Below is a summary of the results of operations for the nine months ended September 30, 2018 and 2017:
Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Operating expenses | ||||||||||||||||
Research and development | $ | 3,804,015 | $ | 3,144,771 | $ | 659,244 | 20.96 | % | ||||||||
Sales and marketing | 178,115 | 77,098 | 101,017 | 131.02 | % | |||||||||||
Depreciation and amortization | 90,321 | 99,048 | (8,727 | ) | (8.81 | )% | ||||||||||
General and administrative | 2,078,191 | 2,264,506 | (186,315 | ) | (8.23 | )% | ||||||||||
Total operating expenses | $ | 6,150,642 | $ | 5,585,423 | $ | 565,219 | 10.12 | % | ||||||||
Research and development. R&D expenses increased by $659,244 compared to the same period in 2017, primarily due to increases in contract engineering expenses of $821,149, salaries and related expenses of $189,104, which are largely due to personnel expenses being allocated more to R&D in the current period than in the prior period, and license and other expenses of $97,224. These increases were offset by decreases in animal research expenses of $203,099 and clinical trial expenses of $245,134.
Sales and marketing. S&M expenses increased by $101,017 compared to the same period in 2017, primarily due to an increase in expenses related to social media development of $108,500 offset by decreases in our SAB and other conference related expenses of meetings of $7,483. We include our SAB fees in S&M because they primarily advise on our product launch and marketing decisions related to dermatologists and prospective patients.
General and administrative. G&A expenses decreased by $186,315 compared to same period in 2017 primarily due to decreases in salaries and related expenses of $357,236, primarily due to the accrual of bonuses ininternal plans around the first quarter of 2017 that was forgiven2021. These timelines may be impacted by COVID-related delays in 2018, travel expensesFDA submission review.
Liquidity
Sincefinancial markets are demonstrating greater stability. Given these conditions, we expect the most appropriate launch window for our inception,new technology will open in the first half of 2021. We are making plans to launch the RAP device during the first half of 2021, which will include the tattoo removal and priorcellulite reduction indications, subject to FDA clearance of the latter. We believe the opportunity to launch both indications simultaneously will enhance both physician and patient adoption and result in a stronger launch of our IPO,technology. In the meantime, we will remain highly focused on our regulatory pathway for cellulite reduction.
On February 19, 2019, we consummated our IPO. Infurther clinical trials at sites around the IPO, we sold a total of 2,172,591 shares of common stock at a purchase price of $5.00 per share for gross proceeds of $10,862,955 and net proceeds of approximately $9,700,000. In connection with the closing of the IPO, our convertible notes (and related accrued interest) of $11,784,987 were converted into 6,825,391 shares of our common stock, accrued dividends of $4,773,480 were converted into 954,696 shares of our common stock.
country. We now expect to continueinitiate our planned additional fibrotic scar proof-of-concept study in the first half of 2021 and have been unable to invest incomplete the 26 week follow up visits for our researchcellulite clinical trial, as such, we have amended the study protocol to add a 52 week follow-up assessment visit and development effortswe are actively executing those assessments. Based on these delays, we expect it to support our current initiatives. We will not generate revenue until our commercial RAP units are cleared byextend the time required to file for additional, longer-term cellulite reduction claims with the FDA and sold.
for initial approvals of a hypertrophic scar indication that we may seek in the future.
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2020 | 2019 | Change ($) | % Change | ||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | $ | 1,256 | $ | 2,430 | $ | (1,174) | (48.31) | % | |||||||||||||||
| Sales and marketing | 474 | 34 | 440 | 1,294.12 | % | ||||||||||||||||||
| Depreciation and amortization | 87 | 73 | 14 | 19.18 | % | ||||||||||||||||||
| General and administrative | 1,852 | 1,764 | 88 | 4.99 | % | ||||||||||||||||||
| Total operating expenses | $ | 3,669 | $ | 4,301 | $ | (632) | (14.69) | % | |||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2020 | 2019 | Change ($) | % Change | ||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | $ | 3,762 | $ | 3,660 | $ | 102 | 2.79 | % | |||||||||||||||
| Sales and marketing | 560 | 137 | 423 | 308.76 | % | ||||||||||||||||||
| Depreciation and amortization | 229 | 146 | 83 | 56.85 | % | ||||||||||||||||||
| General and administrative | 5,531 | 5,720 | (189) | (3.30) | % | ||||||||||||||||||
| Total operating expenses | $ | 10,082 | $ | 9,663 | $ | 419 | 4.34 | % | |||||||||||||||
For the nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Net cash used in operating activities | $ | (3,726,305 | ) | $ | (4,726,050 | ) | ||
Net cash used in investing activities | (27,160 | ) | (64,833 | ) | ||||
Net cash provided by financing activities | 3,933,028 | 5,000,000 | ||||||
Net increase in cash and cash equivalents | $ | 179,563 | $ | 209,117 | ||||
2019 respectively (
in thousands):| 2020 | 2019 | ||||||||||
| Net cash used in operating activities | $ | (8,822) | $ | (8,253) | |||||||
| Net cash used in investing activities | (474) | (823) | |||||||||
| Net cash provided by financing activities | 32,046 | 17,652 | |||||||||
| Net increase in cash | $ | 22,750 | $ | 8,576 | |||||||
2019
Net cash used in operating activities was $4,726,050 during the nine months ended September 30, 2017, and consisted of a net loss of $5,765,340, which was offset by a net change in operating assets and liabilities of $512,340 and by non-cash items of $526,950. The significant items in the change in operating assets included a decrease in prepaid expenses and other assets of $14,902 offset by increases in liabilities, including accrued liabilities of $104,485, accounts payable of $207,769, accrued interest-related party of $183,331 and deferred rent of $1,853. The increase in accrued interest-related party is due to the issuance of the related party convertible notes and the calculation of interest thereon. Non-cash items consisted of depreciation and amortization expense of $99,048 and stock-based compensation of $427,902.
$1.9 million.
Financing activities.Net cash provided by financing activities during the nine months ended September 30, 20182020 was $3,933,028 and consisted$32.0 million, a result of thenet proceeds from the issuance of convertible notes - related party and non-related party for $2,397,000 and $1,978,000, respectively. In addition, $163,760 was a use of cash for debt issuance costs related to the issuance of the convertible notes non-related party and $278,212 was a use of cash for financing cost related to our IPO. Net cash provided by financing activities forJune 2020 Offering. For the nine months ended September 30, 2017 was2019, we received cash proceeds of $9.7 million from our IPO, net of deal costs and other expenses, and cash proceeds from our June 2019 PIPE Offering of $8.6 million, net of deal costs and other expenses. We also received cash proceeds of $0.3 million from the issuance of non-convertible notes payable to non-related parties. These amounts were offset by a use of cash for the payment of non-convertible notes and accrued interest to both related to $5,000,000 convertible note issuances to a related party.
and non-related parties of $1.0 million.
The specific patents initially subject to the agreement expire between 2031 and 2032.
For the nine months ended September 30, 2020 and 2019, we paid approximately $0.1 million and $0.1 million, respectively, for expenses related to this agreement.
Year Ending December, 31 | Amount | |||
2018 | $ | 25,164 | ||
2019 | 103,737 | |||
2020 | 108,429 | |||
Thereafter | 36,668 | |||
Total future minimum lease payments | $ | 273,998 | ||
Purchase Commitments
Unrecognized Tax Benefits
As of September 30, 2018, we have not recorded a provision for income taxes in our financial statements as we have been in a loss position since inception and we cannot be more certain than not that we will be able to recognize the income tax benefit from our NOL carry forward in the future.
Off-balance Sheet Arrangements
As of September 30, 2018,2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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Based on the evaluation,year ended December 31, 2019, our management concluded that our internal control over financial reporting was, and continues to be ineffective, as of September 30, 2020 due to material weaknesses in the form of (i)our internal controls arising from a lack of segregation of duties; (ii)duties, the limitations of our financial accounting system;system to properly segregate duties, and (iii) the absence of internal staff with extensive knowledge of SEC financial and GAAP reporting. As a result
To address these concerns, our management has reassessed its finance staffing needs and taken steps to begin to add adequate staffing and resources for thecontrol over financial reporting process by hiringand has concluded that the control deficiency represents a Corporate Controller at the corporate office. Additionalmaterial weakness. In April 2019, an additional experienced personnel will bestaff was hired in the accounting and finance department as it becomes economically feasible and sustainable, atin August 2020, an experienced employee was hired in the corporate office. New proceduresaccounting and finance department to focus on the further development of internal controls. In addition, we are retaining appropriate consultants and upgrading our accounting system in the fourth quarter of 2020. Furthermore, management added additional mitigating controls with regards to cash disbursements; changes were implemented and internal controls are continually being documented surrounding the month end financial closing and financial reportingmade in our authorization processes to improve segregation of duties; and we performed additional analysis and other post-closing procedures to ensure proper and thorough review of journal entries, account reconciliations andour financial statements.statements were prepared in accordance with GAAP. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
PART II - OTHER INFORMATIONLegal Proceedings
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Item 2. Unregistered Sales |
We closed the initial tranche of the August 7, 2018 Fifth Note on October 19, 2018, for $207,346. The principalEquity Securities and interest on the Fifth Note was due on the earlierUse of one-year from the date of issuance or upon successful completion of our IPO. For each dollar in principal amount of notes purchased by investors, we issued the investors a five-year warrant to purchase one share of common stock at an exercise price of $1.75 per share that can be exercised (i) at any time on or after the issuances of the Fifth Note and (ii) on or prior to the close of business on the five-year anniversary of the issuances of the Fifth Note. Mr. Klemp, Dr. Capelli, Ms. Bisson and other members of management collectively purchased $125,000 of such notes and warrants.
The issuance of the above notes and warrants was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder, and the issuance of the options was exempt from registration under the Securities Act in reliance upon Rule 701.
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As discussed in our Form 1-A, we stated that we intended to enter into employment agreements with our named executive officers upon the closing of our IPO on the following terms: (i) Mr. Klemp - base salary: $200,000; cash bonus target for 2019: 50%; option grant value target for 2019: $750,000; (ii) Dr. Capelli - base salary: $425,000; cash bonus target for 2019: 35%; option grant value target for 2019: $750,000; (iii) Ms. Bisson - base salary: $265,000; cash bonus target for 2019: 38%; option grant value target for 2019: $450,000; and (iv) Mr. Tanner - base salary: $250,000; cash bonus target for 2019: 36%; option grant value target for 2019: $350,000.
On February 25, 2019, we entered into employment agreements with each of the foregoing named executive officers. Each employment agreement provides for an initial term of one year, which will be automatically renewed for additional one-year terms unless either party chooses not to renew the employment agreement. The employment agreements provide for an initial base salary, cash bonus target, and option grant value target in accordance with the above disclosure set forth in our Form 1-A. Notwithstanding the targeted bonus and option amounts, the final determination on the amount of the bonus or option grant, if any, will be made by the Compensation Committee of the Board of Directors, based on criteria established by the Compensation Committee.
Pursuant to the employment agreements, if the named executive officer is terminated at our election without “cause” (as defined in the employment agreement), or by the named executive officer for “good reason” (as defined in the employment agreement), the named executive officer shall be entitled to receive severance payments equal to twelve months base salary, with respect to Mr. Klemp and Dr. Capelli, and nine months base salary, with respect to Ms. Bisson and Mr. Tanner, and, in each case, a pro rata portion of the target bonus, if any, for the year in which such termination occurs. Pursuant to the employment agreements, the named executive officers agreed not to compete with us until twelve months after the termination of their employment, with respect to Mr. Klemp and Dr. Capelli, and nine months after termination of their employment, with respect to Ms. Bisson and Mr. Tanner.
On February 26, 2019, our Board of Directors approved the following policy for compensating our independent members of the Board:
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/s/ Chief Executive Officer, President and Director Chief Financial Officer and Executive Vice-PresidentSIGNATURESPursuant to the requirements 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.SOLITON, INC.SIGNATURETITLEDATESIGNATURE TITLE DATE Christopher CapelliMarch 1, 2019 Christopher Capelli
(principal executive officer)November 12, 2020 Bradley Hauser /s/ Lori Bisson March 1, 2019 Lori Bisson
(principal financial and accounting officer)November 12, 2020 Lori Bisson 3430