Note 1 - Description of the Business and Summary of Significant Accounting Policies
|3 Months Ended|
Mar. 31, 2019
|Notes to Financial Statements|
|Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]||
1- Description of the Business and Summary of Significant Accounting Policies
Description of the Business
Soliton, Inc. (“Soliton” or the “Company”) was organized under the laws of the State of Delaware on
March 27, 2012.The Company operates in
onesegment as a medical device company organized to develop and commercialize products utilizing a proprietary Rapid Acoustic Pulse technology platform. We are a pre-revenue stage company with our
firstproduct being developed for the removal of tattoos.
Initial Public Offering
February 19, 2019,the Company consummated its initial public offering (“IPO”). In the IPO, the Company sold a total of
2,172,591shares of common stock at a purchase price of
$5.00per share for gross proceeds of
$10,862,955and 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
$11,784,987were converted into
6,825,391shares of the Company's common stock, accrued dividends of
$4,773,480were converted into
954,696shares of the Company's common stock, and preferred stock, both Series A and Series B, was converted into
2,534,766shares of the Company's common stock. In addition,
127,500shares 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
notpermitted 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
$47,781of these notes remained outstanding and will be converted into
273,034shares of our common stock at such time when the conversion will
notresult in the holders and any of its affiliates to own more than
4.99%of our outstanding common shares. 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
notrepayable in cash.
The Company is an early stage and emerging growth company and has
notgenerated 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.
March 31, 2019and
2018,the Company incurred net losses of
$1,351,665,respectively, and had net cash flows used in operating activities of
March 31, 2019,the Company had an accumulated deficit of
$45,499,839,working capital of
$3,329,660and cash of
$5,060,690.The Company does
notexpect to experience positive cash flows from operating activities in the near future, if at all. The Company anticipates incurring operating losses for the next several years as it completes the development of its products and seeks requested regulatory clearances to market such products. These factors raise substantial doubt about the Company's ability to continue as a going concern within
oneyear after the date the financial statements are issued. The accompanying financial statements have been prepared on a going concern basis and do
notinclude any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s cash on hand of
March 31, 2019is sufficient to fund its operations into but
February 2020.The Company also believes 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
noassurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company. A failure to raise sufficient capital will adversely impact the Company’s ability to meet its financial obligations as they become due and payable and to achieve its intended business objectives. If the Company is unable to raise sufficient additional funds, it will have to scale back its operations.
Basis of Presentation
The accompanying condensed interim financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do
notinclude all the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and accompanying notes as found in the Company’s Annual Report on Form
10-K for the year ended
December 31, 2018filed with the SEC on
March 29, 2019.In the opinion of management, the unaudited condensed interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The interim results of operations are
notnecessarily indicative of the results that
mayoccur for the full fiscal year. The
December 31, 2018balance sheet included herein was derived from the audited financial statements, but does
notinclude all disclosures, including notes, required by GAAP for complete financial statements.
The Company operates in
onereportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.
Use of Estimates in Financial Statement Presentation
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include valuation of equity related instruments, depreciable lives of long-lived assets (including property and equipment and intangible assets), and the valuation allowance related to deferred taxes. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid accounts with original maturities of
threemonths or less to be cash equivalents or restricted cash. Restricted cash consists of amounts held in deposit with the Company’s bank for letters of credit and are available as a method of payment for a certain vendor. The Company participates in an insured cash sweep program through its bank that sweeps cash balances exceeding the FDIC insured limit of
$250,000into multiple accounts. Periodically in the ordinary course of business, the Company
maycarry cash balances at financial institutions in excess of the insured limits of
Property and Equipment
Property and equipment are stated at historical cost and depreciated on a straight-line basis over the estimated useful lives, generally
fiveyears. 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 assets include trademarks. At
March 31, 2019and
December 31, 2018,the Company had trademarks of
$84,942,respectively. The Company does
notamortize trademarks with indefinite useful lives, rather, such assets are required to be tested for impairment at least annually or sooner if events or changes in circumstances indicate that the asset
maybe impaired. Amortization expense for the
March 31, 2019and
The Company evaluates its long-lived assets, including equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets
notbe recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the asset is considered impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets
Deferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period on a straight-line basis differ from the cash payments required.
When conversion terms related to convertible debt would be triggered by future events
notcontrolled by the Company, the Company accounts for the conversion feature as contingent conversion options. Recognition of the intrinsic value of the conversion option is recognized only upon the occurrence of a triggering event.
Fair Value Measurements
Fair value is defined as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A
three-tier fair value hierarchy which prioritizes the inputs used in the valuation methodologies, as follows:
Level- Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level- Inputs other than quoted prices included in Level
1that 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
notactive, 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- 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.
March 31, 2019and
December 31, 2018,the carrying amounts of the Company's financial instruments, including cash and cash equivalents, restricted cash and accounts payable, approximate their respective fair value due to the short-term nature of these instruments.
March 31, 2019and
December 31, 2018,the Company does
nothave any assets or liabilities required to be measured at fair value on a recurring basis.
Deferred Direct Issuance Costs – Offering
The Company had offering costs of
$276,560,consisting of legal, accounting and other fees and costs related to the IPO, of which
$250,000was previously paid through accounts payable and the remaining
$26,560was reclassified to additional paid-in capital as a reduction of the proceeds upon the closing of the IPO in
Warrants to Purchase Common Stock
We accounted for warrants issued in connection with notes payable in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification (ASC) Topic
Distinguishing Liabilities from Equity, which identifies
threecategories of freestanding financial instruments that are required to be accounted for as a liability. Based on this guidance, we determined that our warrants did
notneed to be accounted for as a liability. Accordingly, the warrants were classified as equity and are
notsubject to remeasurement at each balance sheet date. In addition, we accounted for issuance costs of warrants in accordance with ASC
Debt with Conversion and Other Options, which states proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) are allocated to elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are accounted for as paid-in capital. The remainder of the proceeds are allocated to the debt instrument which
mayresult in a discount or premium. The fair value is estimated using the Black-Scholes option pricing model, based on the market value of the underlying common stock at the measurement date, the contractual term of the warrant, risk-free interest rates, expected dividends, if any, and expected volatility of the price of the underlying common stock.
Research and Development Expenses
Research and development expenses are recognized as incurred and include the costs related to the Company's various contract research service providers, suppliers, engineering studies, supplies, outsourced testing and consulting, clinical costs, patent costs and salaries and related costs of employees working directly on research activities.
Stock-based compensation 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.
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
notthat some portion or all of a deferred tax asset will
notbe realized. Tax rate changes are reflected in income during the period such changes are enacted. The Company's tax years ending
December 31, 2016and thereafter remain subject to examination by the tax authorities.
In assessing the realization of deferred tax assets, management considers whether it is more likely than
notthat some portion or all of deferred assets will
notbe realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has recorded a full valuation allowance against its net total deferred tax assets as of
March 31, 2019and
December 31, 2018because management determined that it is
notthat those assets will be realized. Accordingly, there was
noincome tax benefit for the
March 31, 2019and
Management has evaluated and concluded that there were
nomaterial uncertain tax positions requiring recognition in the Company's financial statement as of
March 31, 2019.The Company does
notexpect any significant changes in the unrecognized tax benefits within
twelvemonths of the reporting date.
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense.
interest or penalties have been recognized for the
March 31, 2019and
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. As of
March 31, 2019,potentially dilutive securities included options to purchase
2,636,750common shares and warrants to purchase
March 31, 2018,potentially dilutive securities included options to purchase
15,000common shares, preferred stock convertible to
2,534,766common shares, accrued preferred stock dividend convertible at a price determined by the Company's Board of Directors (the "Board"), unvested restricted stock of
305,000shares, respectively, and notes and accrued interest convertible to common shares upon a future financing.
JOBS Act Accounting Election
The Company is an emerging growth company ("EGC"), as defined in the Jumpstart Our Business Startups Act of
2012(the “JOBS Act”). The JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-EGC's but any such election to opt out is irrevocable. The Company has elected
notto opt out of such extended transition period which means that when a standard is issued or revised, and it has different application dates for public or private companies, the Company, as an EGC, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This
maymake comparison of the Company’s financial statements with another public company which is neither an EGC nor an EGC which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
The Company’s management reviewed all material events through the date that the financial statements were issued for subsequent event disclosure consideration. See Note
7for additional information.
Recent Accounting Standards
February 2016,the FASB issued Accounting Standards Update ("ASU")
“Leases (Topic, which establishes a right-of-use (“ROU”) model requiring a lessee to recognize a ROU asset and a lease liability for all leases with terms greater-than
12months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is effective, for public EGC companies like the Company, for fiscal years beginning after
December 15, 2019and
mayinclude interim periods within those fiscal years. The modified retrospective transition approach applies to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has the option to instead apply the provisions at the effective date without adjusting the comparative periods presented. The Company is currently evaluating the impact of this guidance on its financial position, results of operations, and cash flows.
June 2018,the FASB issued ASU
“Compensation Stock Compensation (TopicUnder legacy guidance, the accounting for non-employee share-based payments differs from that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. ASU
718), Improvements to Non-Employee Share-Based Payment Accounting.”
07provides that existing employee guidance will apply to non-employee share-based transactions (as long as the transaction is
noteffectively a form of financing), with the exception of specific guidance related to the attributions of compensation cost. The cost of non-employee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for non-employee awards. The Company adopted the standard as of
January 1, 2019and it did
nothave an impact on the Company's financial statements, as non-employee stock compensation is nominal relative to the Company's total expenses for the
March 31, 2019.
The Company does
notbelieve that any other recently issued effective standards, or standards issued but
notyet effective, if adopted, would have a material effect on the accompanying financial statements.
The entire disclosure for the general note to the financial statements for the reporting entity which may include, descriptions of the basis of presentation, business description, significant accounting policies, consolidations, reclassifications, new pronouncements not yet adopted and changes in accounting principles.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef