Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

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Note 1. Overview

Soleno Therapeutics, Inc. (the Company or Soleno) is focused on the development and commercialization of novel therapeutics for the treatment of rare diseases. Its lead candidate is DCCR (Diazoxide Choline) Extended-Release tablets, a once-daily oral tablet for the treatment of Prader-Willi syndrome (PWS). DCCR has received Fast-Track and Breakthrough Therapy designations for the treatment of PWS in the United States (U.S.) and orphan designation for the treatment of PWS in the U.S. as well as in the European Union (E.U.). On June 28, 2024, the Company submitted a new drug application (NDA) to the FDA for DCCR for the treatment of PWS in individuals four years and older who have hyperphagia and on August 27, 2024 announced that the FDA granted Priority Review for the NDA and assigned a Prescription Drug User Fee Act (PDUFA) target action date of December 27, 2024.

The Company incorporated in the State of Delaware on August 25, 1999, and is located in Redwood City, California. It initially established its operations as Capnia, a diversified healthcare company that developed and commercialized innovative diagnostics, devices and therapeutics addressing unmet medical needs. During 2017, the Company merged with Essentialis, Inc (Essentialis) and subsequently received stockholder approval to amend its Amended and Restated Certificate of Incorporation to change its name from "Capnia, Inc." to "Soleno Therapeutics, Inc.". Essentialis was a privately held clinical-stage company focused on the development of breakthrough medicines for the treatment of rare diseases where there is increased mortality and risk of cardiovascular and endocrine complications. After the merger, the Company's primary focus has been the development and commercialization of novel therapeutics for the treatment of rare diseases and the Company divested all prior business efforts.

Note 2. Liquidity

The Company used $45.1million of cash in its operating activities and had a net loss of $119.9million during the nine months ended September 30, 2024 and has an accumulated deficit of $396.3million at September 30, 2024 resulting from having incurred losses since its inception. The Company had $48.4 million of cash and cash equivalents on hand, $208.4million of marketable securities and $27.9million of long-term marketable securities on September 30, 2024.

The Company has financed its operations principally through issuance of equity securities. On May 9, 2024, the Company closed an underwritten public offering of 3,450,000shares of its common stock at a public offering price of $46.00per share, which included the exercise in full by the underwriters of their option to purchase additional shares. The gross proceeds of the public offering were $158.7million, before deducting the underwriter discount and other offering expenses, totaling approximately $9.7million. On July 19, 2024, the Company entered into an Open Market AgreementSM (the "Sales Agreement") with Jefferies LLC, as sales agent ("Jefferies"), pursuant to which the Company may offer and sell, from time to time, through Jefferies shares of its common stock having an aggregate offering price of up to $150,000,000.

In December 2022, the Company entered into a Securities Purchase Agreement providing for the sale of up to $60.0million in warrants (Tranche A and Tranche B) and the common stock issuable upon the exercise thereof. Cumulative to date through September 30, 2024, the Company has received $10.0million from the sale of these warrants and $37.7million in proceeds from the exercise of certain of these warrants. Warrants with an aggregate exercise price of $12.3million are still outstanding.

The Company expects to continue incurring losses for the foreseeable future. However, the Company expects that its current cash, cash equivalents and marketable securities balances will be sufficient to enable the Company to meet its obligations for at least the next twelve months from the date of this filing.

Note 3. Basis of Presentation and Summary of Significant Accounting Policies

Significant Accounting Policies

There have been no material changes to the significant accounting policies during the three and nine months ended September 30, 2024 as compared to the significant accounting policies described in Note 3 of the "Notes to Consolidated Financial Statements" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, except as noted below.

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Note 4. Fair Value of Financial Instruments

The carrying value of the Company's cash, cash equivalents and accounts payable, approximate fair value due to the short-term nature of these items.

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

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

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

The fair value of marketable securities, which are Level 2 financial instruments, is based upon market prices quoted on the last day of the fiscal period or other observable market inputs. The Company obtains pricing information from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, bids and/or offers. Marketable securities, all of which are classified as available-for-sale securities, consisted of the following at September 30, 2024 (in thousands):

Based on the terms of the Company's completed merger with Essentialis on March 7, 2017, the Company is obligated to make cash earnout payments of up to a maximum of $21.2million to the former Essentialis stockholders. The fair value of the Essentialis purchase price contingent liability is estimated using scenario-based methods based upon the Company's analysis of the likelihood of obtaining specified approvals from the U.S. Food and Drug Administration (FDA) as well as achieving two commercial sales milestones of $100million and $200million in cumulative revenue. The Level 3 estimates are based, in part, on subjective assumptions. In determining the likelihood of this occurring, the analysis relied on published research relating to clinical development success rates. Based on management's assessment, an 88% probability of achieving all three milestones was determined to be reasonable as of both September 30, 2024 and December 31, 2023. During the periods presented, the Company has not changed the manner in which it values its Essentialis purchase price contingent liability.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between levels within the hierarchy during the periods presented.

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The following table sets forth a summary of the changes in the fair value of the Company's Level 3 liabilities for the nine months ended September 30, 2024 and 2023 (dollars in thousands):

Note 5. Warrants

The Company has issued multiple warrant series, of which the 2018 PIPE Warrants were determined to be liabilities pursuant to the guidance established by ASC 815 Derivatives and Hedging.

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

The 2018 PIPE Warrants were issued on December 19, 2018 in the 2018 PIPE Offering, pursuant to a Warrant Agreement with each of the investors in the 2018 PIPE Offering, and prior to their expiration on December 21, 2023, entitled the holders to purchase 34,241shares of the Company's common stock at an exercise price equal to $30.00per share, subject to adjustments.

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

Since the Company may be obligated to settle the 2018 PIPE Warrants in cash, the Company classified the 2018 PIPE Warrants as long-term liabilities at their fair value and will re-measure the warrants at each balance sheet date until they are exercised or expire. Any change in the fair value is recognized as Other income (expense) in the Company's condensed consolidated statements of operations.

The 2018 PIPE Warrants were either exercised prior to or expired on December 21, 2023.

Note 6. Commitments and Contingencies

Facility Leases

On June 13, 2024, the Company entered into a new office lease in Redwood City, California for office space for its headquarters facility. The lease provides office space of approximately 18,026square feet and for base monthly rent payments beginning at $57,400that increase annually by approximately 3.0% over the term of five yearsfrom the date of occupancy. In addition to base rent, the Company has agreed to reimburse the landlord for certain operating expenses under the terms of the lease. The lease commencement date was September 1, 2024 when the premises became available for occupancy and the related operating lease ROU assets and liabilities were recorded in the Company's condensed consolidated balance sheet as of September 30, 2024.

The Company's operating lease ROU assets, current operating lease liabilities and long-term operating lease liabilities each appear as a separate line within the Company's condensed consolidated balance sheets. In September 2024, the Company recorded an increase to its right-of-use assets by $2.8million and an increase to its lease liability of $2.8million as a result of the June 2024 office lease. As of September 30, 2024 and December 31, 2023, the Company's short-term liabilitieswere equal to $0.4million and $0.3million, respectively, and the long-term operating lease liabilitieswere equal to $2.6million and $0.1million, respectively.

The Company's prior operating lease for its predecessor headquarters facility office space in Redwood City, Californiabegan in June 2021and expired in May 2023. In April 2023, the Company entered into a twenty-four monthlease extension commencing on June 1, 2023. The term of the lease extension expires in May 2025. On February 8, 2024, the Company entered into a six-monthoffice license agreement to license 4,141square feet of additional space adjacent to its existing office where the Company was located and in

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July 2024, the Company provided notice of early termination of the license agreement for the additional space effective September 17, 2024. As a result of the lease extension, in 2023, the Company recorded an increase to its right-of-use assets by $0.6million and an increase to its lease liability by $0.6million.

The weighted average discount rate related to the Company's lease liabilities as of September 30, 2024 was 8.5% over a remaining term of 5 years. The weighted average discount rate related to the Company's lease liabilities as of December 31, 2023 was 8.25% over a remaining term of 17months. The discount rate was determined based on estimates of the Company's incremental borrowing rate, as the discount rate implicit in the lease cannot be readily determined. Due to the short-term nature of the February 2024 office license agreement, the license agreement obligations are not included in the Company's right-of-use assets and lease liabilities on the Company's condensed consolidated balance sheets.

Other Commitments

The Company enters into agreements in the normal course of business, including with contract research organizations for clinical trials, contract manufacturing organizations for certain manufacturing services, and vendors for preclinical studies as well as other services and products for operating purposes, which are generally cancelable upon written notice. As of September 30, 2024, the Company's non-cancelable other commitments aggregated $2.8million.

Contingencies

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

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Note 7. Stockholders' Equity

Convertible Preferred Stock

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

Public Offering of Common Stock

On May 9, 2024, the Company closed an underwritten public offering of 3,450,000shares of its common stock at a public offering price of $46.00per share, which included the exercise in full by the underwriters of their option to purchase additional shares. The gross proceeds of the public offering were $158.7million, before deducting the underwriter discount and other offering expenses, totaling approximately $9.7million.

Public Offering of Common Stock and Concurrent Private Placement of Common Stock and Pre-Funded Warrants

On October 2, 2023, the Company closed an underwritten public offering of 3,450,000shares of its common stock at a public offering of $20.00per share, which included the exercise in full by the underwriters of their option to purchase additional shares. The gross proceeds of the public offering were $69.0million, before deducting the underwriting discount and other offering expenses. Concurrently, the Company also completed the closing of 1,825,000shares of its common stock and 1,175,000pre-funded warrants in a private offering pursuant to a securities purchase agreement with certain investors, including entities affiliated with existing stockholders, at a price per share of common stock equal to the public offering price of $20.00and a price per pre-funded warrant of $19.99, for total gross proceeds of approximately $60.0million. In aggregate, the Company received $129.0million of gross proceeds less offering costs of $8.2million. The Company is not required under any circumstance to settle any of the pre-funded warrants for cash, and therefore classified the pre-funded warrants as permanent equity.

Securities Purchase Agreement

On December 16, 2022, the Company entered into a Securities Purchase Agreement for a private placement (Private Placement) with certain entities and members of management (collectively, Purchasers). Pursuant to the Securities Purchase Agreement, the Company agreed to sell to the Purchasers warrants to purchase up to an aggregate of 22,598,870shares of the Company's common stock, at a purchase price of $0.4425per warrant. The closing of the Private Placement occurred on May 8, 2023 (the Issue Date), following the satisfaction of certain closing conditions, including the completion of enrollment in the randomized withdrawal period of Study C602. The Company received gross proceeds of $10.0million for the sale and issuance of warrants to purchase common stock.

The warrants were separated into two tranches with 8,598,870Tranche A Warrants with an exercise price of $1.75per share and aggregate proceeds of up to approximately $15.0million, and 14,000,000Tranche B Warrants with an exercise price of $2.50per share and aggregate proceeds of up to $35.0million. The Tranche A warrants were immediately exercisable and were required to be exercised within 30days of announcement of positive top-line data from the randomized withdrawal period of Study C602. On September 26, 2023, the Company announced positive top-line data and subsequently received $15.0million from the exercise of the Tranche A warrants. The Tranche B warrants are also immediately exercisable and expire upon the earlier of 3.5 years from the date of issuance or 30 days following receipt of FDA approval of DCCR for the treatment of PWS. Through September 30, 2024, certain investors had exercised their Tranche B warrants and the Company has received $22.7million. The receipt of the aggregate exercise price of up to $12.3million for the remaining Tranche B warrants is contingent upon the exercise of such warrants.

Underwritten Public Offering

On March 31, 2022, the Company sold 2,666,667shares of its common stock at a public offering price of $3.75per share, and for certain investors, in lieu of common stock, pre-funded warrants (the 2022 pre-funded warrants) to purchase 1,333,333shares of its common stock at a public offering price $3.60per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.15per share exercise price for each 2022 pre-funded warrant. The March 2022 pre-funded warrants are immediately exercisable and may be exercised at any time until all of the March 2022 pre-funded warrants are exercised in full. Each share of common stock or March 2022 pre-funded warrant was sold together with one, immediately exercisable, common warrant (the 2022 common warrants) with a five-yearterm to purchase one share of common stock at an exercise price of $4.50per share. The net proceeds of the offering were $13.8million, after deducting the underwriting discount and other offering expenses. The Company is not required under any circumstance to settle any of the 2022 pre-funded warrants or the 2022 common warrants for cash, and therefore classified both types of warrants as permanent equity.

Through September 30, 2024, 2,145,073of the March 2022 common warrants had been exercised for gross proceeds of $9.7million and 581,850warrants were exercised using the cashless exercise option with noproceeds to the Company. As of September

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30, 2024, 1,273,077of the March 2022 common warrants remain outstanding. All 1,333,333of the March 2022 pre-funded warrants were exercised in 2023 using the cashless exercise option with noadditional proceeds received by the Company.

At the Market Offering

In July 2021, the Company entered into a Controlled Equity Offering Sales Agreement under which the Company was able to sell shares of its common stock having an aggregate offering price of up to $25.0million from time to time in any method permitted by law deemed to be an "at-the-market" Rule 415 under the Securities Act of 1933, as amended. The Controlled Equity Offering Sales Agreement was terminated in connection with the October 2, 2023 financing. While active, the Company sold 1,877,170shares of common stock through the at the market program, totaling $7.4million in net proceeds.

On July 19, 2024, the Company entered into the Sales Agreement with Jefferies, pursuant to which the Company may offer and sell up to $150.0million of shares of its common stock, from time to time, through Jefferies.

The Company will pay Jefferies a commission of 3.0% of the aggregate gross proceeds from the sale of shares and has agreed to provide Jefferies with customary indemnification and contribution rights. The Company has also agreed to reimburse Jefferies for certain specified expenses. The Company is not obligated to sell any shares under the Sales Agreement. The offering of the shares pursuant to the Sales Agreement will terminate upon the termination of the Sales Agreement by Jefferies or the Company, as permitted therein.

Common Stock Warrants

Equity Incentive Plans

2014 Plan

The Company maintains the 2014 Equity Incentive Plan (the 2014 Plan). Under the 2014 Plan the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance units or performance shares to employees, directors, advisors, and consultants. Options granted under the 2014 Plan may be incentive stock options (ISOs) or nonqualified stock options (NSOs). ISOs may be granted only to Company employees, including officers and directors.

The Board has the authority to determine to whom stock options will be granted, the number of options, the term, and the exercise price. Options are to be granted at an exercise price not less than fair value. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise price of an option will not be less than 110% of fair value. Performance-based grants have vesting contingent upon the achievement of certain performance criteria related to the Company's commercialization of its therapeutics. The contractual term of an option is no longer than five yearsfor ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten yearsfor all other options. The terms and conditions governing restricted stock units is at the sole discretion of the Board.

On January 17, 2024, the Company filed a Registration Statement on Form S-8 which registered an additional 1,000,000shares automatically available for issuance under the 2014 Plan as of December 31, 2023. On June 6, 2024, the stockholders approved the Amended and Restated 2014 Plan which included an increase of 2,000,000shares, which became immediately available for grant and issuance. As of September 30, 2024, a total of 609,179shares are available for future grant under the 2014 Plan.

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Inducement Plan

The Company maintains the 2020 Inducement Equity Incentive Plan (the Inducement Plan). The Inducement Plan provides for the grant of equity-based awards, including non-statutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to the 2014 Plan.

In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals' bona fide period of non-employment with the Company), as an inducement material to the individuals' entry into employment with the Company, or, to the extent permitted by Rule 5635(c)(3) of the Nasdaq Listing Rules, in connection with a merger or acquisition. On January 31, 2024, the Company filed a Registration Statement on Form S-8 which registered 500,000shares available for issuance under the Inducement Plan, which became available for issuance following approval of the Board of Directors on January 24, 2024.

As of September 30, 2024, a total of 5,318shares are available for future grant under the Inducement Plan.

Stock-based compensation expense

The Company recognizes stock-based compensation expense related to options and restricted stock units granted to employees, directors and consultants. The compensation expense is allocated on a departmental basis, based on the classification of the award holder. Noincome tax benefits have been recognized in the condensed consolidated statements of operations and comprehensive loss for stock-based compensation arrangements during any of the periods presented.

Stock Options

The Company granted options to purchase 288,850 and 77,000shares of the Company's common stock to employees during the three months ended September 30, 2024 and 2023, respectively. During the nine months ended September 30, 2024, the Company granted options to purchase 1,369,230of the Company's common stock to employees and a consultant, and during the nine months ended September 30, 2023, the Company granted 1,663,454of the Company's common stock to employees. There were no performance-based options granted during the three and nine months ended September 30, 2024 and 2023, respectively. The fair value of each award granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. These assumptions include the following estimates:

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Theweighted-average grant date fair value of options granted was $37.84and $3.80per share for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, total unrecognized employee stock-based compensation related to stock options that are likely to vest was $50.1million, which is expected to be recognized over the weighted-average remaining vesting period of 2.7years.

Restricted Stock Units

There were 1,239,375performance-based restricted stock units and 366,625restricted stock units granted to employees and a director during the three months ended September 30, 2024 and zerogranted during the three months ended September 30, 2023. During the nine months ended September 30, 2024, there were 1,249,375performance-based restricted stock units and 758,155restricted stock units granted to employees and directors. During the nine months ended September 30, 2023, 414,710restricted stock units were granted to employees. The shares were valued based on the Company's common stock price on the grant date.

The weighted-average grant-date fair value of all restricted stock units granted during the nine months ended September 30, 2024 and 2023 was $46.47and $5.25, respectively. The fair value of all restricted stock units vested during the nine months ended September 30, 2024 and 2023 was $44.67million and $23,000, respectively. At September 30, 2024, total unrecognized employee stock-based compensation related to restricted stock units was $34.5million, which is expected to be recognized over the weighted-average remaining vesting period of 0.4years. 74,250restricted stock units vested on September 30, 2024 and are included in the Restricted stock units vested line item above. The shares of common stock were subsequently issued after September 30, 2024 and therefore are not included in the outstanding common stock as of September 30, 2024.

2014 Employee Stock Purchase Plan

The Company's board of directors and stockholders have adopted the 2014 Employee Stock Purchase Plan (ESPP). The ESPP has become effective, and the board of directors will implement commencement of offers thereunder in its discretion. A total of 1,864shares of the Company's common stock has been made available for sale under the ESPP. In addition, the ESPP provides for annual

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increases in the number of shares available for issuance under the plan on the first day of each year beginning in the year following the initial date that the board of directors authorizes commencement, equal to the least of:

As of September 30, 2024, there were nopurchases by employees under this plan.

Note 8. Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common stock outstanding during the period. Shares of common stock that are potentially issuable for little or no cash consideration at issuance, such as the Company's pre-funded warrants issued in March 2022 and October 2023 and in connection with the exercise of certain May 2023 Tranche A and Tranche B warrants, are considered outstanding common stock and are included in the calculation of basic and diluted net loss per share in connection with ASC 260 Earnings Per Shares. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common stock outstanding and dilutive potential common stock that would be issued upon the exercise or vesting of common stock awards and exercise of common stock warrants that are not pre-funded. The Company applies the two-class method to calculate basic and diluted earnings per share as its warrants issued in March 2022, May 2023 and October 2023 are participating securities. However, the two-class method does not impact the net loss per share of common stock as the March 2022, May 2023 and October 2023 common warrants issued do not participate in losses. For the three and nine months ended September 30, 2024 and 2023, the effect of issuing potential common stock is anti-dilutive due to the net losses in those periods and therefore the number of shares used to compute basic and diluted net loss per share are the same in each of those periods.