DEER PARK, Ill., Feb. 29, 2024 (GLOBE NEWSWIRE) -- Eton Pharmaceuticals, Inc. (“Eton” or the "Company”) (Nasdaq: ETON), an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases, today announced that it will report fourth quarter and full year 2023 financial results on Thursday, March 14, 2024. Management will host a conference call and live audio webcast to discuss these results at 4:30 p.m. ET (3:30 p.m. CT). Register* (Audio Only) Click here In addition t ...

DEER PARK, Ill., Feb. 29, 2024 (GLOBE NEWSWIRE) -- Eton Pharmaceuticals, Inc. ("Eton" or the "Company") (NASDAQ:ETON), an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases, today announced that it will report fourth quarter and full year 2023 financial results on Thursday, March 14, 2024. Management will host a conference call and live audio webcast to discuss these results at 4:30 p.m. ET (3:30 p.m. CT). Register* (Audio Only) Click here In addition to ...

DEER PARK, Ill., Feb. 21, 2024 (GLOBE NEWSWIRE) -- Eton Pharmaceuticals ("Eton" or the "Company") (NASDAQ:ETON), an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases, today announced that the United States Patent and Trademark Office ("USPTO") has granted the Company's U.S. Patent Application No. 18/113,458, which covers the Company's ET-400 product candidate's proprietary formulation of oral liquid hydrocortisone. The patent has an expiration in 2043 a ...

-- Eton Cares patient support program offers $0 co-pay to eligible, commercially insured patients* ---- Current Nitisinone market is estimated to exceed $50 million annually ---- Product is now available exclusively through Optime Care -- DEER PARK, Ill., Feb. 02, 2024 (GLOBE NEWSWIRE) -- Eton Pharmaceuticals ("Eton" or "the Company") (NASDAQ:ETON), an innovative pharmaceutical company focused on developing, acquiring, and commercializing products to address unmet needs in patients suffering from rare disea ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________________ Commission file number: 001-38738 ETON PHARMACEUTICALS, INC. Emerging growth company ☒ (Exa ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Eton Pharmaceuticals' unaudited condensed financial statements for Q2 2023 and 2022, including balance sheets, operations, equity, cash flows, and detailed notes [Condensed Balance Sheets](index=4&type=section&id=Condensed%20Balance%20Sheets) Total assets and stockholders' equity increased by June 30, 2023, driven by higher cash and reduced accumulated deficit | Metric | June 30, 2023 (Unaudited, in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $21,566 | $16,305 | | Total current assets | $26,333 | $20,004 | | Total assets | $30,932 | $25,030 | | Total current liabilities | $9,588 | $6,461 | | Total liabilities | $14,207 | $11,952 | | Total stockholders' equity | $16,725 | $13,078 | [Unaudited Condensed Statements of Operations](index=5&type=section&id=Unaudited%20Condensed%20Statements%20of%20Operations) Eton Pharmaceuticals achieved net income in Q2 2023, a turnaround from Q2 2022 loss, driven by higher revenues and gross profit | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total net revenues | $11,997 | $7,358 | $17,301 | $9,534 | | Total cost of sales | $2,315 | $2,745 | $4,273 | $3,594 | | Gross profit | $9,682 | $4,613 | $13,028 | $5,940 | | Total operating expenses | $5,799 | $5,953 | $11,679 | $12,367 | | Income (loss) from operations | $3,883 | $(1,340) | $1,349 | $(6,427) | | Net income (loss) | $4,559 | $(1,558) | $1,899 | $(6,888) | | Net income (loss) per share, basic | $0.18 | $(0.06) | $0.07 | $(0.28) | [Unaudited Condensed Statements of Stockholders' Equity](index=6&type=section&id=Unaudited%20Condensed%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased from December 2022 to June 2023 due to net income and stock-based compensation, contrasting with a prior year net loss | Metric (in thousands) | Balances at Dec 31, 2022 | Stock-based compensation | Employee stock purchase plan | Stock option exercises | Shares withheld | Net income | Balances at Jun 30, 2023 | | :-------------------- | :----------------------- | :----------------------- | :--------------------------- | :--------------------- | :-------------- | :--------- | :----------------------- | | Common Stock Shares | 25,353,119 | — | 57,616 | 202,126 | (50,867) | — | 25,561,994 | | Common Stock Amount | $25 | — | — | $1 | — | — | $26 | | Additional Paid-in Capital | $116,187 | $1,657 | $140 | $131 | $(181) | — | $117,934 | | Accumulated Deficit | $(103,134) | — | — | — | — | $1,899 | $(101,235) | | Total Stockholders' Equity | $13,078 | $1,657 | $140 | $132 | $(181) | $1,899 | $16,725 | | Metric (in thousands) | Balances at Mar 31, 2022 | Stock-based compensation | Employee stock purchase plan | Warrant exercises | Warrant extensions | Net loss | Balances at Jun 30, 2022 | | :-------------------- | :----------------------- | :----------------------- | :--------------------------- | :---------------- | :----------------- | :------- | :----------------------- | | Common Stock Shares | 24,626,004 | — | 47,585 | 598,448 | — | — | 25,272,037 | | Common Stock Amount | $25 | — | — | — | — | — | $25 | | Additional Paid-in Capital | $112,801 | $1,056 | $117 | — | $244 | — | $114,218 | | Accumulated Deficit | $(99,443) | — | — | — | — | $(1,558) | $(101,001) | | Total Stockholders' Equity | $13,383 | $1,056 | $117 | — | $244 | $(1,558) | $13,242 | [Unaudited Condensed Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased for the six months ended June 30, 2023, with no investing cash usage and slightly higher financing cash usage | Cash Flow Activity (in thousands) | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,899 | $(6,888) | | Net cash provided by operating activities | $5,555 | $3,684 | | Net cash used in investing activities | $— | $(776) | | Net cash used in financing activities | $(295) | $(268) | | Change in cash and cash equivalents | $5,261 | $2,640 | | Cash and cash equivalents at end of period | $21,566 | $17,046 | [Notes to Condensed Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Financial%20Statements) Detailed notes explain the company's business, liquidity, accounting policies, and financial statement items, providing crucial context [Note 1 — Company Overview](index=9&type=section&id=Note%201%20%E2%80%94%20Company%20Overview) Eton Pharmaceuticals is an innovative pharmaceutical company focused on developing, acquiring, and commercializing rare disease products - Eton Pharmaceuticals focuses on developing, acquiring, and commercializing innovative products for rare diseases[22](index=22&type=chunk) - The company currently has three commercial rare disease products: ALKINDI SPRINKLE® (pediatric adrenocortical insufficiency), Carglumic Acid (hyperammonemia due to NAGS deficiency), and Betaine Anhydrous (homocystinuria)[23](index=23&type=chunk) - Four additional product candidates are in late-stage development: dehydrated alcohol injection (methanol poisoning, Orphan Drug Designation), ZENEO® hydrocortisone autoinjector (adrenal crisis), ET-400 (adrenocortical insufficiency), and ET-600 (diabetes insipidus)[23](index=23&type=chunk) [Note 2 — Liquidity Considerations](index=9&type=section&id=Note%202%20%E2%80%94%20Liquidity%20Considerations) The company expects current cash and revenues to fund operations for twelve months but may need additional capital, facing risks like dilution or debt covenants - Eton Pharmaceuticals believes its cash and cash equivalents of **$21,566 thousand** as of June 30, 2023, combined with expected revenues and milestone payments, will be sufficient to fund operating expenses and capital expenditures for at least the next twelve months[24](index=24&type=chunk) - The company may seek additional capital through equity financings, debt issuance, or other arrangements, but cannot assure successful fundraising or acceptable terms[24](index=24&type=chunk) - Potential risks include dilution of existing stockholders, senior rights for newly issued stock, and limitations on dividends due to existing long-term debt covenants[24](index=24&type=chunk) [Note 3 — Summary of Significant Accounting Policies](index=10&type=section&id=Note%203%20%E2%80%94%20Summary%20of%20Significant%20Accounting%20Policies) This note details the company's key accounting policies, including basis of presentation, estimates, revenue, inventory, intangible assets, and stock compensation, all under GAAP [Basis of Presentation](index=10&type=section&id=Basis%20of%20Presentation) The condensed financial statements are prepared in accordance with U.S. GAAP - The condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP")[27](index=27&type=chunk) [Unaudited Interim Financial Information](index=10&type=section&id=Unaudited%20Interim%20Financial%20Information) Interim condensed financial statements are unaudited, reflect necessary adjustments, and their results are not indicative of future performance - The accompanying interim condensed financial statements are unaudited and prepared on the same basis as audited statements, reflecting all necessary adjustments for fair presentation[28](index=28&type=chunk) - Results for the three-month and six-month periods ended June 30, 2023, are not necessarily indicative of results to be expected for the full year or any future period[28](index=28&type=chunk) [Use of Estimates](index=10&type=section&id=Use%20of%20Estimates) Management makes significant estimates and assumptions in financial statement preparation, which are reviewed periodically, and actual results may vary - Preparation of financial statements requires management to make significant estimates and assumptions, including for receivables, inventories, asset useful lives, R&D expenses, and valuation of stock options/warrants[29](index=29&type=chunk) - Estimates are periodically reviewed and adjusted, but actual results could differ from these estimates[29](index=29&type=chunk) [Segment Information](index=10&type=section&id=Segment%20Information) The company operates as a single reportable segment, focusing on developing and commercializing prescription drug products, with the CEO as the chief operating decision-maker - The Company operates as a single reportable segment, focusing on developing and commercializing prescription drug products[30](index=30&type=chunk) - The Chief Executive Officer (CEO) evaluates the Company as a single operating segment[30](index=30&type=chunk) [Cash and Cash Equivalents](index=10&type=section&id=Cash%20and%20Cash%20Equivalents) Cash equivalents are highly liquid, short-term investments held in U.S. financial institutions or money market funds, with minimal credit risk despite exceeding insured limits - Cash equivalents are highly liquid investments with original maturities of three months or less, held in U.S. financial institutions or short-term U.S. treasury bills/money market funds[31](index=31&type=chunk) - As of June 30, 2023, cash is in a non-interest-bearing account and a government money market fund[31](index=31&type=chunk) - Deposits may exceed federally insured limits, but the associated credit risk is considered minimal[31](index=31&type=chunk) [Accounts Receivable](index=10&type=section&id=Accounts%20Receivable) Accounts receivable are recorded net of allowances, with **$186 thousand** in reserves as of June 30, 2023, and minimal expected credit losses due to concentration with creditworthy customers - Accounts receivable are recorded at the invoiced amount, non-interest bearing, and net of allowances for doubtful accounts, discounts, chargebacks, returns, and Medicaid rebates[32](index=32&type=chunk) - Total reserves for these allowances were **$186 thousand** as of June 30, 2023, down from **$262 thousand** at December 31, 2022[32](index=32&type=chunk) - Accounts receivable are highly concentrated with specialty pharmacies and large wholesale pharmaceutical distributors, with minimal expected credit losses due to their creditworthiness[32](index=32&type=chunk) [Inventories](index=10&type=section&id=Inventories) Inventories, consisting of purchased finished goods, are valued at the lower of cost or net realizable value using FIFO, with reserves for expiry risk - Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method[33](index=33&type=chunk) - Inventories consist solely of purchased finished goods and are reviewed for potential excess or obsolete issues[33](index=33&type=chunk) - Reserves for ALKINDI SPRINKLE® inventories due to expiry risk were **$76 thousand** at June 30, 2023, and **$62 thousand** at December 31, 2022[34](index=34&type=chunk) [Property and Equipment](index=12&type=section&id=Property%20and%20Equipment) Property and equipment are recorded at cost, depreciated straight-line over useful lives, with maintenance expensed and improvements capitalized - Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives (3-5 years for hardware/software, equipment, furniture; shorter of useful life or lease term for leasehold improvements)[36](index=36&type=chunk) - Maintenance and repairs are expensed as incurred, while renewals and improvements are capitalized[37](index=37&type=chunk) [Intangible Assets](index=12&type=section&id=Intangible%20Assets) Licensed product rights are capitalized upon FDA approval and amortized straight-line over their useful lives, with **$2,358 thousand** in accumulated amortization as of June 30, 2023 - Payments for licensed products are capitalized upon FDA approval if recoverable and amortized on a straight-line basis over their estimated useful life[38](index=38&type=chunk) - As of June 30, 2023, intangible assets, net, reflected **$2,358 thousand** of accumulated amortization[38](index=38&type=chunk) | Year | Amortization Expense (in thousands) | | :---------------- | :-------------------------------- | | Remainder of 2023 | $363 | | 2024 | $725 | | 2025 | $725 | | 2026 | $725 | | 2027 | $608 | | Thereafter | $1,246 | | Total estimated amortization expense | $4,392 | [Impairment of Long-Lived Assets](index=12&type=section&id=Impairment%20of%20Long-Lived%20Assets) Long-lived assets are reviewed for impairment when carrying amounts may not be recoverable, with no impairment recognized in the first six months of 2023 and 2022 - Long-lived assets are reviewed for impairment when events or changes indicate the carrying amount may not be recoverable, measured by comparing carrying amount to undiscounted future cash flows[40](index=40&type=chunk) - No impairment was recognized during the six months ended June 30, 2023, and 2022[40](index=40&type=chunk) [Debt Issuance Costs and Debt Discount and Detachable Debt-Related Warrants](index=12&type=section&id=Debt%20Issuance%20Costs%20and%20Debt%20Discount%20and%20Detachable%20Debt-Related%20Warrants) Debt issuance costs and warrant-related debt discounts are recorded as debt reductions and amortized over the debt's term using the effective interest method - Debt issuance costs are deferred and recorded as a reduction to the debt balance, amortized over the expected term using the effective interest method[41](index=41&type=chunk) - Debt discounts from warrants issued with debt are also recorded as a reduction to the debt balance and accreted to interest expense over the debt's expected term[41](index=41&type=chunk) [Leases](index=13&type=section&id=Leases) The company recognizes ROU assets and lease liabilities for operating leases, measuring liabilities by present value of payments and expensing costs straight-line - The Company accounts for leases under ASC Topic 842, recognizing right-of-use (ROU) assets and lease liabilities for operating leases[43](index=43&type=chunk) - Lease liabilities are measured based on the present value of lease payments, discounted using the company's incremental borrowing rate[43](index=43&type=chunk) - Operating lease expense is recognized on a straight-line basis over the lease term, and the company does not recognize ROU assets or liabilities for leases with terms of twelve months or less[46](index=46&type=chunk) [Concentrations of Credit Risk, Sources of Supply and Significant Customers](index=13&type=section&id=Concentrations%20of%20Credit%20Risk%2C%20Sources%20of%20Supply%20and%20Significant%20Customers) The company faces credit risk from concentrated cash holdings and accounts receivable, with AnovoRx being a significant customer, and relies on a few third-party suppliers - The Company is subject to credit risk from cash and cash equivalents held in one major commercial bank, with deposits exceeding federally insured limits[47](index=47&type=chunk) - The Company is dependent on a small number of third-party suppliers for manufacturing its products and product candidates[48](index=48&type=chunk) - Accounts receivable are highly concentrated; AnovoRx accounted for **63.5%** of total net revenues for the six months ended June 30, 2023, and **84.2%** of net accounts receivable as of June 30, 2023[49](index=49&type=chunk) [Revenue Recognition for Contracts with Customers](index=13&type=section&id=Revenue%20Recognition%20for%20Contracts%20with%20Customers) Revenue is recognized under ASC 606 upon transfer of control, with specific policies for milestone payments, royalties, and product sales, including estimates for variable consideration - Revenue is recognized under ASC 606 when a customer obtains control of promised goods or services, reflecting the consideration expected in exchange[50](index=50&type=chunk)[51](index=51&type=chunk) - Milestone payments are recognized when conditions are achieved and a significant revenue reversal is improbable, typically upon regulatory approvals[56](index=56&type=chunk) - For product sales, the company estimates transaction price reductions (e.g., co-pay assistance, Medicaid reimbursements, chargebacks, returns) to ensure no significant revenue reversal[61](index=61&type=chunk) [Cost of Product Sales](index=17&type=section&id=Cost%20of%20Product%20Sales) Cost of product sales includes profit-sharing, royalties, finished product costs, freight, and intangible asset amortization, recognized with revenue or as incurred - Cost of product sales includes profit-sharing and royalty fees, purchase costs for finished products, freight and handling/storage, and amortization expense of certain intangible assets[66](index=66&type=chunk) - Costs for profit-sharing, royalties, and purchased finished products are recorded when associated product sale revenue is recognized, while outbound freight and handling/storage fees are expensed as incurred[66](index=66&type=chunk) [Research and Development Expenses](index=17&type=section&id=Research%20and%20Development%20Expenses) R&D expenses, covering internal activities and external services, are expensed as incurred, including upfront and milestone payments for unapproved licensed products - R&D expenses include internal activities (salaries, benefits, stock-based compensation) and external contracted services (product development, clinical trials, manufacturing, regulatory costs)[67](index=67&type=chunk) - R&D expenses are charged to operations as incurred, with significant judgments and estimates made in determining accrued balances[67](index=67&type=chunk) - Upfront and milestone payments for licensed products not yet FDA-approved are expensed as R&D in the period incurred[68](index=68&type=chunk) [Income (Loss) Per Share](index=17&type=section&id=Income%20%28Loss%29%20Per%20Share) Basic EPS is calculated using weighted average common shares, while diluted EPS includes common equivalent shares unless anti-dilutive - Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding[69](index=69&type=chunk) - Diluted net income (loss) per share includes common equivalent shares (unvested restricted stock, stock options, RSUs, warrants) unless their inclusion would be anti-dilutive[69](index=69&type=chunk) - For the three and six months ended June 30, 2022, common stock equivalents were excluded from diluted EPS calculation due to their anti-dilutive effect[69](index=69&type=chunk) [Stock-Based Compensation](index=17&type=section&id=Stock-Based%20Compensation) Stock-based compensation is accounted for under ASC 718, with fair value estimated using the Black-Scholes-Merton model based on subjective assumptions and expensed over service periods - Stock-based compensation is accounted for under ASC 718, requiring estimation of fair value on the grant date and expense recognition over the service (vesting) periods[70](index=70&type=chunk) - The Black-Scholes-Merton (BSM) option-pricing model is used to estimate fair value, requiring subjective assumptions for volatility, expected term, forfeitures, and fair value of common stock[70](index=70&type=chunk) - Expected volatility is based on the company's own volatility and a limited weighting of comparable companies' historical volatilities[70](index=70&type=chunk) [Fair Value Measurements](index=18&type=section&id=Fair%20Value%20Measurements) Fair value measurements are categorized into a three-level hierarchy based on input observability, with most financial instruments approximating fair value due to short-term maturities - Fair value represents the price to sell an asset or transfer a liability in an orderly transaction, classified into a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs)[72](index=72&type=chunk)[73](index=73&type=chunk) - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term debt obligation approximate their fair values[75](index=75&type=chunk) [Impact of Recent Accounting Pronouncements](index=18&type=section&id=Impact%20of%20Recent%20Accounting%20Pronouncements) The adoption of ASU 2016-13 on January 1, 2023, did not materially impact the company's financial statements due to minimal expected credit losses - The Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," on January 1, 2023[76](index=76&type=chunk) - The adoption of this standard did not have a material impact on the Company's consolidated financial statements or disclosures[76](index=76&type=chunk) - No provision for credit losses or cumulative-effect adjustment to accumulated deficit was recorded upon adoption, given the composition of accounts receivable and current market conditions[76](index=76&type=chunk) [Note 4 – Property and Equipment](index=19&type=section&id=Note%204%20%E2%80%93%20Property%20and%20Equipment) Net property and equipment decreased to **$46 thousand** by June 30, 2023, from **$72 thousand** at December 31, 2022, primarily due to depreciation | Category | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------ | :------------ | :---------------- | | Computer hardware and software | $187 | $177 | | Furniture and fixtures | $111 | $112 | | Equipment | $52 | $52 | | Leasehold improvements | $71 | $71 | | Construction in Progress | $— | $12 | | **Total** | **$421** | **$424** | | Less: accumulated depreciation | $(375) | $(352) | | **Property and equipment, net** | **$46** | **$72** | - Depreciation expense for the three months ended June 30, 2023, was **$10 thousand**, compared to **$18 thousand** in 2022[79](index=79&type=chunk) - Depreciation expense for the six months ended June 30, 2023, was **$23 thousand**, compared to **$39 thousand** in 2022[79](index=79&type=chunk) [Note 5 — Long-Term Debt](index=19&type=section&id=Note%205%20%E2%80%94%20Long-Term%20Debt) The company's long-term debt, primarily an SWK loan, was amended in April 2022 to defer principal payments and reduce interest, with payments scheduled through 2024 - The SWK Credit Agreement, initially providing up to **$10,000 thousand** in financing, was amended in April 2022 to defer loan principal payments until May 2023 and reduce the interest rate to LIBOR 3-month plus 8.0% (subject to a 2.0% floor)[80](index=80&type=chunk)[85](index=85&type=chunk) - Warrants were issued to SWK in connection with the loan, totaling **69,380 shares** with exercise prices of **$5.86** and **$6.62** per share[81](index=81&type=chunk)[82](index=82&type=chunk)[94](index=94&type=chunk) | Payment Period | Amount (in thousands) | | :--------------- | :-------------------- | | Remainder of 2023 | $1,181 | | 2024 | $6,468 | | **Total payments** | **$7,649** | | Less: amount representing interest | $(1,420) | | Loan payable, gross | $6,229 | | Less: current portion of long-term debt | $(1,540) | | Less: unamortized discount | $(136) | | **Long-term debt, net of unamortized discount** | **$4,553** | [Note 6 — Common Stock](index=21&type=section&id=Note%206%20%E2%80%94%20Common%20Stock) During the six months ended June 30, 2023, the company issued common stock via stock option exercises and ESPP, and withheld shares for tax obligations - The Company has **50,000,000** authorized shares of **$0.001** par value common stock[91](index=91&type=chunk) - During the six months ended June 30, 2023, **202,126 shares** were issued from stock option exercises and **57,616 shares** from the Employee Stock Purchase Plan (ESPP)[92](index=92&type=chunk) - The Company withheld **50,867 shares** for payroll tax obligations totaling **$181 thousand** during the six months ended June 30, 2023[92](index=92&type=chunk) [Note 7 — Common Stock Warrants](index=21&type=section&id=Note%207%20%E2%80%94%20Common%20Stock%20Warrants) As of June 30, 2023, the company had **483,380** outstanding common stock warrants with a weighted average exercise price of **$7.29**, including placement agent and SWK debt-related warrants | Description of Warrants | No. of Shares | Exercise Price | | :---------------------- | :------------ | :------------- | | Placement Agent Warrants - IPO | 414,000 | $7.50 | | SWK Warrants – Debt – Tranche 1 | 51,239 | $5.86 | | SWK Warrants – Debt – Tranche 2 | 18,141 | $6.62 | | **Total (Avg)** | **483,380** | **$7.29** | - Warrant holders have registration rights under the Securities Act of 1933[94](index=94&type=chunk) - In June 2022, the company modified terms of 2017 preferred stock offering warrants to extend expiration, incurring a **$244 thousand** modification expense[95](index=95&type=chunk) [Note 8 — Share-Based Payment Awards](index=22&type=section&id=Note%208%20%E2%80%94%20Share-Based%20Payment%20Awards) The company grants stock options, RSAs, and RSUs under its 2017 and 2018 Equity Incentive Plans, with total stock-based compensation expense decreasing in the first six months of 2023 - The Company has granted RSAs, stock options, and RSUs under its 2017 and 2018 Equity Incentive Plans, with **628,485 shares** available for future issuance under the 2018 Plan as of June 30, 2023[98](index=98&type=chunk) | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total stock-based compensation expense | $785 | $1,300 | $1,657 | $2,383 | | G&A expenses | $715 | $1,216 | $1,534 | $2,211 | | R&D expenses | $70 | $84 | $123 | $172 | - As of June 30, 2023, there was **$4,777 thousand** of unrecognized compensation costs related to non-vested stock option awards and **$729 thousand** for unvested RSUs[107](index=107&type=chunk)[108](index=108&type=chunk) [Note 9 — Related-Party Transactions](index=24&type=section&id=Note%209%20%E2%80%94%20Related-Party%20Transactions) The company had a related-party agreement with Eyemax LLC for the EM-100 product, which was later sold to Bausch Health, with future royalties to be split - The Company had an exclusive sales and marketing agreement (Eyemax Agreement) for the EM-100 product with Eyemax LLC, an entity affiliated with the Company's CEO[113](index=113&type=chunk)[114](index=114&type=chunk) - The Eyemax Agreement was amended in February 2019, selling all rights in EM-100 to the Company, which then sold the asset to Bausch Health[115](index=115&type=chunk) - Future potential royalties from Bausch Health sales of Alaway® Preservative Free will be split between Eyemax and the Company, though Bausch Health discontinued sales in March 2023[115](index=115&type=chunk) [Note 10 — Leases](index=25&type=section&id=Note%2010%20%E2%80%94%20Leases) The company recognizes ROU assets and lease liabilities for operating leases, with a **1.75-year** weighted-average remaining lease term and **$145 thousand** in total operating lease liabilities as of June 30, 2023 - The Company recognizes a right-of-use (ROU) asset and a lease liability for substantially all operating leases[119](index=119&type=chunk) | Lease Metric (in thousands) | Amount | | :-------------------------- | :----- | | Operating lease right-of-use assets, net | $149 | | Operating lease liabilities, current | $79 | | Operating lease liabilities, noncurrent | $66 | | Total operating lease liabilities | $145 | - As of June 30, 2023, the weighted-average remaining lease term was **1.75 years**, and the weighted-average incremental borrowing rate was **8.6%**[120](index=120&type=chunk) [Note 11 — Commitments and Contingencies](index=26&type=section&id=Note%2011%20%E2%80%94%20Commitments%20and%20Contingencies) The company has no material legal proceedings and manages various license and product development agreements, including royalty sales and new product acquisitions - The Company is not aware of any pending or threatened litigation matters that would have a material impact on operations[124](index=124&type=chunk) - In June 2023, the Company sold its royalty interests in three pediatric neurology product candidates (Topiramate, Zonisamide, Lamotrigine) back to Azurity for **$5,500 thousand**, recognized as license revenue[126](index=126&type=chunk) - In March 2023, the Company acquired rare disease endocrinology product candidate ET-600 from Tulex, with future payments tied to FDA acceptance, commercial sale, and tiered royalties[138](index=138&type=chunk) [Note 12 — Subsequent Events](index=28&type=section&id=Note%2012%20%E2%80%94%20Subsequent%20Events) On July 12, 2023, the company issued **91,402 ordinary shares** due to RSU vesting, with no other material subsequent events identified - On July 12, 2023, the Company issued **91,402 ordinary shares** in connection with the vesting of restricted stock units[140](index=140&type=chunk) - No additional subsequent events requiring recognition or disclosure have occurred through the filing date of the Form 10-Q[140](index=140&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, liquidity, and capital resources for Q2 2023 and 2022, including revenue/expense drivers and critical accounting policies [Forward-Looking Statements](index=29&type=section&id=Forward-Looking%20Statements) The report includes forward-looking statements based on current information, subject to significant risks and uncertainties, with no obligation for the company to update them - This Quarterly Report contains forward-looking statements, identified by words like "expect," "anticipate," "intend," "believe," "may," "plan," "seek"[143](index=143&type=chunk) - Forward-looking statements are based on information available at the report date, and the company assumes no obligation to update them[143](index=143&type=chunk) - Actual results could differ materially due to substantial risks and uncertainties, including those in the 2022 10-K Risk Factors[143](index=143&type=chunk) [Overview](index=29&type=section&id=Overview) Eton is an innovative pharmaceutical company focused on developing, acquiring, and commercializing rare disease products, with three commercial products and four late-stage candidates - Eton is an innovative pharmaceutical company focused on developing, acquiring, and commercializing products for rare diseases[144](index=144&type=chunk) - The company has three commercial rare disease products: ALKINDI SPRINKLE®, Carglumic Acid, and Betaine Anhydrous[145](index=145&type=chunk) - Four product candidates are in late-stage development: dehydrated alcohol injection, ZENEO® hydrocortisone autoinjector, ET-400, and ET-600[145](index=145&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) Total revenue and gross profit significantly increased for both the three and six months ended June 30, 2023, driven by higher sales volume of ALKINDI SPRINKLE® and Carglumic Acid | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $11,997 | $7,358 | $17,301 | $9,534 | | Gross profit | $9,682 | $4,613 | $13,028 | $5,940 | - The increase in revenue and gross profit was primarily due to increased sales volume of ALKINDI SPRINKLE® and Carglumic Acid products[146](index=146&type=chunk)[147](index=147&type=chunk) [Research and Development Expenses](index=29&type=section&id=Research%20and%20Development%20Expenses) R&D expenses increased in Q2 2023 due to an ET-600 manufacturing fee but decreased for the six-month period due to reduced expenses from products sold in 2022 | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | R&D expenses | $1,125 | $690 | $1,660 | $2,308 | - The increase in Q2 2023 R&D expenses was primarily due to a **$450 thousand** fee to Tulex for successful manufacturing of ET-600 registration batches[148](index=148&type=chunk) - The decrease in six-month YTD R&D expenses was primarily due to decreased expenses associated with products sold to Dr. Reddy's in June 2022[149](index=149&type=chunk) [General and Administrative Expenses](index=30&type=section&id=General%20and%20Administrative%20Expenses) G&A expenses decreased for both the three and six months ended June 30, 2023, primarily due to reduced FDA and legal fees from products sold in 2022, partially offset by higher employee costs | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | G&A expenses | $4,674 | $5,263 | $10,019 | $10,059 | - The decrease in G&A expenses was mainly due to decreased FDA fees and legal fees associated with products sold to Dr. Reddy's in June 2022[152](index=152&type=chunk)[153](index=153&type=chunk) - The slight decrease for the six-month period included incremental employee-related expenses from sales force expansion, offset by the aforementioned fee reductions[153](index=153&type=chunk) [Other Income and Expenses](index=30&type=section&id=Other%20Income%20and%20Expenses) The company recorded **$800 thousand** in other income for both the three and six months ended June 30, 2023, from a break-up fee in an asset acquisition auction - The Company recorded **$800 thousand** of other income for the three-month and six-month periods ended June 30, 2023[154](index=154&type=chunk) - This income was a break-up fee received from participating in an asset acquisition auction where the Company was not the winning bidder[154](index=154&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2023, the company had **$21.6 million** in cash and **$16.7 million** in working capital, expecting sufficient funds for twelve months but acknowledging potential future financing needs - As of June 30, 2023, the Company had total assets of **$30.9 million**, cash and cash equivalents of **$21.6 million**, and working capital of **$16.7 million**[155](index=155&type=chunk) - The Company believes its existing funding and revenues from approved products will be sufficient for at least the next twelve months of operations[155](index=155&type=chunk) - However, the company may need to seek additional financing sooner than expected if projected estimates for spending or growth are inaccurate[155](index=155&type=chunk) [Cash Flows](index=30&type=section&id=Cash%20Flows) Net cash from operating activities significantly increased for the six months ended June 30, 2023, driven by higher sales and gross profit, with no investing cash usage and slightly increased financing cash usage | Cash Flow Activity (in thousands) | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $1,899 | $(6,888) | | Net cash provided by operating activities | $5,555 | $3,684 | | Cash used in investing activities | $— | $(776) | | Cash used in financing activities | $(295) | $(268) | | Change in cash and cash equivalents | $5,261 | $2,640 | - The increase in cash provided by operating activities was primarily due to increased sales and gross profit from ALKINDI SPRINKLE® and Carglumic Acid products[156](index=156&type=chunk) - The decrease in cash used in investing activities was due to a **$750 thousand** payment related to the approval of Rezipres in the prior year, a product later sold to Dr. Reddy's[156](index=156&type=chunk) [Critical Accounting Policies](index=31&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies, including revenue recognition, stock-based compensation, and R&D expenses, involve significant estimates and judgments impacting financial statements [Revenue Recognition](index=31&type=section&id=Revenue%20Recognition) Revenue is recognized under ASC 606 upon transfer of control, with specific policies for milestone payments, royalties, and product sales, including estimates for variable consideration and sales reserves - Revenue is recognized in accordance with ASC 606 when the customer obtains control of promised goods or services, reflecting the expected consideration[159](index=159&type=chunk) - Milestone payments are recognized when conditions are achieved and a significant revenue reversal is improbable, typically upon regulatory approvals[162](index=162&type=chunk) - For product sales, the company estimates transaction price reductions (e.g., co-pay assistance, Medicaid reimbursements, chargebacks, returns) to ensure no significant revenue reversal, with sales reserves included in accrued liabilities and net accounts receivable[168](index=168&type=chunk)[170](index=170&type=chunk) [Stock-Based Compensation](index=32&type=section&id=Stock-Based%20Compensation) Stock-based compensation is accounted for under ASC 718, with fair value estimated using the Black-Scholes-Merton model based on subjective assumptions and expensed over service periods - Stock-based compensation is accounted for under ASC 718, requiring estimation of fair value on the grant date and expense recognition over the service (vesting) periods[171](index=171&type=chunk) - The Black-Scholes-Merton (BSM) option-pricing model is used to estimate fair value, requiring subjective assumptions for volatility, expected term, forfeitures, and fair value of common stock[171](index=171&type=chunk) - Following the IPO, the closing stock price on the grant date is used for the fair value of common stock[172](index=172&type=chunk) [Research and Development Expenses](index=33&type=section&id=Research%20and%20Development%20Expenses) R&D expenses, encompassing internal activities and external contracted services, are charged to operations as incurred, with upfront and milestone payments for unapproved licensed products also expensed as R&D - R&D expenses include both internal R&D activities and external contracted services, such as product development efforts, clinical trials, manufacturing, and regulatory costs[173](index=173&type=chunk) - R&D expenses are charged to operations as incurred, with significant judgments and estimates made in determining accrued balances[173](index=173&type=chunk) - Upfront payments and milestone payments for licensed products not yet FDA-approved are expensed as R&D in the period incurred[174](index=174&type=chunk) [Off Balance Sheet Transactions](index=33&type=section&id=Off%20Balance%20Sheet%20Transactions) The company does not have any off-balance sheet transactions - The Company does not have any off-balance sheet transactions[175](index=175&type=chunk) [JOBS Act Transition Period](index=34&type=section&id=JOBS%20Act%20Transition%20Period) As an emerging growth company, the company irrevocably elected not to use the extended transition period for new accounting standards and will remain an EGC until December 31, 2023 - The Company irrevocably elected not to avail itself of the extended transition period for complying with new or revised accounting standards provided by the JOBS Act[177](index=177&type=chunk) - As a result, the Company will adopt new or revised accounting standards on the relevant dates required for other public companies[177](index=177&type=chunk) - The Company will remain an emerging growth company until December 31, 2023[178](index=178&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk on cash and cash equivalents, managed through short-term, liquid investments, with no foreign currency risk exposure - The primary objective of the company's investment activities is to preserve capital, and it does not use hedging contracts[179](index=179&type=chunk) - The company is exposed to market risks primarily related to interest rate risk on cash and cash equivalents and the financial viability of institutions holding its capital[179](index=179&type=chunk) - These risks are managed by investing in short-term, liquid, highly rated instruments; as of June 30, 2023, cash is in a non-interest-bearing account and a government money market fund[179](index=179&type=chunk) [Item 4. Controls and Procedures](index=35&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting [Disclosure Controls and Procedures](index=35&type=section&id=Disclosure%20Controls%20and%20Procedures) The company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective as of June 30, 2023, ensuring timely and accurate reporting - The company maintains disclosure controls and procedures designed to ensure information required for SEC reports is recorded, processed, summarized, and reported timely[181](index=181&type=chunk) - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[183](index=183&type=chunk) - A control system provides only reasonable, not absolute, assurance that objectives are met, and cannot prevent or detect all errors and fraud[184](index=184&type=chunk) [Changes in Internal Control over Financial Reporting](index=35&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There were no material changes in the company's internal control over financial reporting during the period ended June 30, 2023 - No change in internal control over financial reporting occurred during the period ended June 30, 2023, that materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting[185](index=185&type=chunk) [PART II. OTHER INFORMATION](index=36&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=36&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no legal proceedings - There are no legal proceedings to report[187](index=187&type=chunk) [Item 1A. Risk Factors](index=36&type=section&id=Item%201A.%20Risk%20Factors) The company operates in a dynamic environment with numerous risks and uncertainties, and readers should consider the risk factors from the 2022 10-K, as unforeseen risks may arise - The company operates in a dynamic and rapidly changing environment involving numerous risks and uncertainties[188](index=188&type=chunk) - Readers should carefully consider the risk factors discussed in Part I, Item 1A of the company's 2022 10-K[189](index=189&type=chunk) - Additional risks and uncertainties not currently known or deemed immaterial may also materially adversely affect the business[189](index=189&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable for the reporting period - This item is not applicable[190](index=190&type=chunk) [Item 3. Defaults Upon Senior Securities](index=36&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable for the reporting period - This item is not applicable[190](index=190&type=chunk) [Item 4. Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable for the reporting period - This item is not applicable[191](index=191&type=chunk) [Item 5. Other Information](index=36&type=section&id=Item%205.%20Other%20Information) No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023 - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended June 30, 2023[192](index=192&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed or furnished with the report, including certifications, financial information in iXBRL format, and the cover page interactive data file [Exhibit Index](index=37&type=section&id=Exhibit%20Index) The Exhibit Index details documents accompanying the Form 10-Q, including CEO and CFO certifications and financial information in iXBRL format - Exhibit 31.1 and 31.2 are Certifications of the President and Chief Executive Officer and Chief Financial Officer, respectively, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[196](index=196&type=chunk) - Exhibit 32.1 contains Certifications of the Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350[196](index=196&type=chunk) - Exhibit 101 includes financial information from the Quarterly Report on Form 10-Q for the period ended June 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL)[196](index=196&type=chunk) [Signatures](index=38&type=section&id=Signatures) The report was duly signed on August 10, 2023, by Sean E. Brynjelsen, President and CEO, and James R. Gruber, CFO, for Eton Pharmaceuticals, Inc - The report was signed on August 10, 2023, by Sean E. Brynjelsen, President and Chief Executive Officer, and James R. Gruber, Chief Financial Officer[201](index=201&type=chunk)

Financial Data and Key Metrics Changes - Total product sales and royalty revenue reached $5.4 million, marking a 52% increase from Q4 2022 and a 144% increase from Q1 2022 [3][12] - General and administrative expenses for the quarter were $5.3 million, up from $4.8 million in the prior year, primarily due to employee-related expenses from sales force expansion [13] - The net loss for the quarter was $2.7 million, an improvement from a net loss of $5.3 million in the prior year, with net loss per share decreasing from $0.21 to $0.10 [29] Business Line Data and Key Metrics Changes - ALKINDI SPRINKLE and Carglumic Acid both reported record sales, contributing significantly to the overall revenue growth [3][12] - The launch of Betaine Anhydrous is expected to generate several million dollars in annual revenue with minimal incremental investment [7] Market Data and Key Metrics Changes - The company has expanded its sales force, which has positively impacted attendance at over 35 medical conferences this year, enhancing market presence [8][23] - The potential market for ET-400 and ALKINDI SPRINKLE combined is projected to exceed $50 million annually [21] Company Strategy and Development Direction - The company aims to double product sales in 2023, launch new rare disease products, and achieve profitability [18] - The strategic focus includes leveraging relationships developed from Carglumic Acid commercialization for the launch of Betaine Anhydrous [6][26] - The long-term goal is to have 10 commercial rare disease products on the market by the end of 2025 [42] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth trajectory, citing strong sales and the potential for new product launches [11][26] - The company is well-positioned to capitalize on opportunities in a challenging capital market environment, with a strong cash position and prudent spending [43] Other Important Information - R&D expenses for the quarter were $0.5 million, down from $1.6 million in the prior year, with expectations for a slight increase in future quarters due to ongoing development activities [28] - The company finished the quarter with $14.7 million in cash, with an operating cash burn of $1.5 million [14] Q&A Session Summary Question: Will the company expand the field sales force? - Management plans to maintain the current sales force size for the next quarter or two, with potential expansion as sales ramp up and new products are introduced [31] Question: What is the outlook for R&D spending in the coming quarters? - R&D spending is expected to increase slightly in future quarters due to development activities related to ET-400 and ET-600 [33] Question: Which new products are likely to contribute most to gross margin improvement? - ET-400 and ET-600 are anticipated to provide the most significant gross margin benefits, while Betaine will have a lower gross profit due to a profit split with the licensing partner [35][50] Question: What is the status of the legal collaboration with Dr. Reddy's? - The Cysteine appeal is in process, with management confident of a favorable outcome that could result in a $20 million commercialization milestone payment [48]

PART I - FINANCIAL INFORMATION This section presents Eton Pharmaceuticals' unaudited financial statements, management's analysis of operations and liquidity, market risk disclosures, and internal controls for the reporting period [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Eton Pharmaceuticals' unaudited condensed financial statements for the three months ended March 31, 2023 and 2022, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with comprehensive notes detailing accounting policies, liquidity, debt, equity, and commitments [Condensed Balance Sheets](index=4&type=section&id=Condensed%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | :-------------------- | :------------- | :---------------- | :------------------------ | | Cash and cash equivalents | $14,708 | $16,305 | -$1,597 | | Total current assets | $19,118 | $20,004 | -$886 | | Total assets | $23,928 | $25,030 | -$1,102 | | Total current liabilities | $7,494 | $6,461 | +$1,033 | | Total liabilities | $12,687 | $11,952 | +$735 | | Total stockholders' equity | $11,241 | $13,078 | -$1,837 | [Unaudited Condensed Statements of Operations](index=5&type=section&id=Unaudited%20Condensed%20Statements%20of%20Operations) This section outlines the company's financial performance over specific periods, including revenues, expenses, and net income or loss Metric (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Change (YoY) | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Total net revenues | $5,304 | $2,176 | +$3,128 | | Total cost of sales | $1,958 | $849 | +$1,109 | | Gross profit | $3,346 | $1,327 | +$2,019 | | Research and development | $535 | $1,618 | -$1,083 | | General and administrative | $5,345 | $4,796 | +$549 | | Total operating expenses | $5,880 | $6,414 | -$534 | | (Loss) income from operations | $(2,534) | $(5,087) | +$2,553 | | Net (loss) income | $(2,660) | $(5,330) | +$2,670 | | Net (loss) income per share, basic and diluted | $(0.10) | $(0.21) | +$0.11 | [Unaudited Condensed Statements of Stockholders' Equity](index=6&type=section&id=Unaudited%20Condensed%20Statements%20of%20Stockholders'%20Equity) This section details changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Metric (in thousands) | Balances at December 31, 2022 | Stock-based compensation | Stock option exercises | Shares withheld | Net loss | Balances at March 31, 2023 | :-------------------- | :---------------------------- | :----------------------- | :--------------------- | :-------------- | :------- | :------------------------- | | Common Stock Shares | 25,353,119 | — | 202,126 | (50,867) | — | 25,504,378 | | Common Stock Amount | $25 | — | $1 | — | — | $26 | | Additional Paid-in Capital | $116,187 | $872 | $131 | $(181) | — | $117,009 | | Accumulated Deficit | $(103,134) | — | — | — | $(2,660) | $(105,794) | | Total Stockholders' Equity | $13,078 | $872 | $132 | $(181) | $(2,660) | $11,241 | [Unaudited Condensed Statements of Cash Flows](index=7&type=section&id=Unaudited%20Condensed%20Statements%20of%20Cash%20Flows) This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Cash Flow Activity (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Change (YoY) | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash (used in) provided by operating activities | $(1,548) | $1,223 | -$2,771 | | Net cash used in investing activities | $0 | $(15) | +$15 | | Net cash used in financing activities | $(49) | $(385) | +$336 | | Change in cash and cash equivalents | $(1,597) | $823 | -$2,420 | | Cash and cash equivalents at end of period | $14,708 | $15,229 | -$521 | [Notes to Condensed Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Financial%20Statements) This section provides detailed explanations and additional information supporting the condensed financial statements, covering accounting policies, debt, equity, and commitments [Note 1 — Company Overview](index=8&type=section&id=Note%201%20%E2%80%94%20Company%20Overview) This note provides a general description of Eton Pharmaceuticals, its business model, and its primary product portfolio - Eton Pharmaceuticals is an innovative pharmaceutical company focused on developing, acquiring, and commercializing products for rare diseases[19](index=19&type=chunk) - Currently has three commercial rare disease products: ALKINDI SPRINKLE® (adrenocortical insufficiency), Carglumic Acid (hyperammonemia due to NAGS deficiency), and Betaine Anhydrous (homocystinuria)[20](index=20&type=chunk) - Four additional product candidates in late-stage development: dehydrated alcohol injection (methanol poisoning, Orphan Drug Designation), ZENEO® hydrocortisone autoinjector (adrenal crisis), ET-400, and ET-600[20](index=20&type=chunk) - Entitled to royalties or milestone payments from four FDA-approved products and one product candidate developed and out-licensed: EPRONTIA™, Cysteine Hydrochloride, Zonisade®, Biorphen®, and Lamotrigine for Oral Suspension[21](index=21&type=chunk) [Note 2 — Liquidity Considerations](index=8&type=section&id=Note%202%20%E2%80%94%20Liquidity%20Considerations) This note discusses the company's ability to meet its short-term and long-term financial obligations, including cash position and future funding needs - The Company believes its existing cash and cash equivalents of **$14.7 million** as of March 31, 2023, combined with expected revenues and milestone payments in 2023, will be **sufficient to fund operations and capital expenditures for at least the next twelve months**[22](index=22&type=chunk) - Potential need for additional capital through equity financings, debt issuance, or other arrangements if product sales growth is delayed or product development/regulatory approvals are not obtained[22](index=22&type=chunk) - Existing long-term debt obligation contains covenants limiting dividend payments or other distributions to stockholders[22](index=22&type=chunk) [Note 3 — Summary of Significant Accounting Policies](index=9&type=section&id=Note%203%20%E2%80%94%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and methods used in preparing the financial statements, including revenue recognition and estimates - The condensed financial statements are prepared in accordance with GAAP and are unaudited, reflecting management's necessary adjustments for fair presentation[25](index=25&type=chunk)[26](index=26&type=chunk) - Key estimates and assumptions include provisions for uncollectible receivables, inventory valuation, useful lives of assets, impairment, deferred tax assets, R&D accruals, and valuation of stock options/warrants/RSUs[27](index=27&type=chunk) - Operates as a single reportable segment focused on developing and commercializing prescription drug products[28](index=28&type=chunk) - Accounts receivable are recorded net of allowances for doubtful accounts, cash discounts, distribution fees, chargebacks, and returns, with reserves totaling **$176 thousand** as of March 31, 2023 (vs. **$262 thousand** at Dec 31, 2022)[30](index=30&type=chunk) - Inventories are valued at the lower of cost or net realizable value using FIFO, with reserves for ALKINDI SPRINKLE® of **$56 thousand** as of March 31, 2023 (vs. **$62 thousand** at Dec 31, 2022)[31](index=31&type=chunk) - Intangible assets are capitalized for FDA-approved products and amortized over their estimated useful lives; amortization expense was **$181 thousand** for Q1 2023 (vs. **$131 thousand** for Q1 2022)[36](index=36&type=chunk) Estimated Remaining Amortization Expense for Intangible Assets (in thousands) | Year | Amortization Expense | | :---------------- | :------------------- | | Remainder of 2023 | $544 | | 2024 | $725 | | 2025 | $725 | | 2026 | $725 | | 2027 | $608 | | Thereafter | $1,246 | | **Total** | **$4,573** | - Revenue recognition follows ASC 606, identifying performance obligations, determining transaction price, and recognizing revenue when obligations are satisfied. Milestone payments and royalties are recognized based on specific conditions[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk)[54](index=54&type=chunk)[55](index=55&type=chunk) - Significant customer concentration: AnovoRx sales made up **96.3%** of total net revenues for Q1 2023 and **95.1%** of net accounts receivable as of March 31, 2023[47](index=47&type=chunk) - Stock-based compensation expense was **$872 thousand** for Q1 2023 (vs. **$1,083 thousand** for Q1 2022), estimated using the Black-Scholes-Merton model[68](index=68&type=chunk)[98](index=98&type=chunk) - Adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) on January 1, 2023, with no material impact on financial statements[74](index=74&type=chunk) [Note 4 – Property and Equipment](index=18&type=section&id=Note%204%20%E2%80%93%20Property%20and%20Equipment) This note details the company's tangible assets, their cost, accumulated depreciation, and net book value Category (in thousands) | March 31, 2023 | December 31, 2022 | :---------------------- | :------------- | :---------------- | | Computer hardware and software | $187 | $177 | | Furniture and fixtures | $111 | $112 | | Equipment | $52 | $52 | | Leasehold improvements | $71 | $71 | | Construction in Progress | $0 | $12 | | **Total** | **$421** | **$424** | | Less: accumulated depreciation | $(365) | $(352) | | **Property and equipment, net** | **$56** | **$72** | - Depreciation expense for Q1 2023 was **$13 thousand**, compared to **$21 thousand** for Q1 2022[77](index=77&type=chunk) [Note 5 — Long-Term Debt](index=18&type=section&id=Note%205%20%E2%80%94%20Long-Term%20Debt) This note describes the company's long-term borrowing arrangements, including terms, interest rates, and future payment obligations - The Company has a SWK Credit Agreement for up to **$10 million**, with **$7 million** drawn. The loan term is five years, bearing interest at LIBOR 3-month plus **10.0%** (reduced to **8.0%** in April 2022) with a **2.0%** LIBOR floor[78](index=78&type=chunk)[83](index=83&type=chunk) - Principal payments were deferred until May 2023, with **$1,339 thousand** classified as current portion of long-term debt as of March 31, 2023[83](index=83&type=chunk) - Interest expense for Q1 2023 was **$265 thousand** (including **$29 thousand** debt discount amortization), compared to **$247 thousand** for Q1 2022 (including **$36 thousand** debt discount amortization)[84](index=84&type=chunk) Future Payments for SWK Loan Principal and Interest (in thousands) | Year | Amount | | :---------------- | :----- | | Remainder of 2023 | $1,643 | | 2024 | $6,602 | | **Total payments** | **$8,245** | | Less: amount representing interest | $(1,630) | | Loan payable, gross | $6,615 | | Less: current portion of long-term debt | $(1,339) | | Less: unamortized discount | $(169) | | **Long-term debt, net of unamortized discount** | **$5,107** | [Note 6 — Common Stock](index=20&type=section&id=Note%206%20%E2%80%94%20Common%20Stock) This note provides information on the company's common stock, including authorized, issued, and outstanding shares, and related transactions - **50,000,000** authorized shares of **$0.001** par value common stock[89](index=89&type=chunk) - Issued **202,126** shares of common stock from stock option exercises during Q1 2023[90](index=90&type=chunk) - Withheld **50,867** shares for payroll tax obligations totaling **$181 thousand** in Q1 2023[90](index=90&type=chunk) [Note 7 — Common Stock Warrants](index=20&type=section&id=Note%207%20%E2%80%94%20Common%20Stock%20Warrants) This note details the outstanding common stock warrants, including their exercise prices and associated rights Outstanding Warrants as of March 31, 2023 | Description of Warrants | No. of Shares | Exercise Price | | :---------------------- | :------------ | :------------- | | Placement Agent Warrants - IPO | 414,000 | $7.50 | | SWK Warrants – Debt – Tranche 1 | 51,239 | $5.86 | | SWK Warrants – Debt – Tranche 2 | 18,141 | $6.62 | | **Total (Avg)** | **483,380** | **$7.29** | - Warrant holders have demand and piggyback registration rights under the Securities Act of 1933[92](index=92&type=chunk) [Note 8 — Share-Based Payment Awards](index=21&type=section&id=Note%208%20%E2%80%94%20Share-Based%20Payment%20Awards) This note describes the company's equity incentive plans, including stock options and restricted stock units, and related compensation expenses - **516,298** shares available for future issuance under the 2018 Equity Incentive Plan as of March 31, 2023[95](index=95&type=chunk) - Total stock-based compensation expense was **$872 thousand** for Q1 2023 (vs. **$1,083 thousand** for Q1 2022)[98](index=98&type=chunk) Stock Option Activity for Three Months Ended March 31, 2023 | Metric | Shares | Weighted Average Exercise Price | | :------------------------ | :---------- | :------------------------------ | | Outstanding as of Dec 31, 2022 | 4,402,292 | $4.71 | | Issued | 1,053,291 | $3.47 | | Exercised | (402,308) | $2.22 | | Forfeited/Cancelled | (61,250) | $1.95 | | **Outstanding as of Mar 31, 2023** | **4,992,025** | **$4.68** | | Exerciseable as of Mar 31, 2023 | 2,858,033 | $5.05 | - Unrecognized compensation costs for non-vested stock options totaled **$5,473 thousand** as of March 31, 2023[103](index=103&type=chunk) Restricted Stock Unit (RSU) Activity for Three Months Ended March 31, 2023 | Metric | Number of Units | Weighted Average Grant Date Fair Value Per Unit | | :------------------------ | :-------------- | :---------------------------------------------- | | Outstanding and unvested as of Dec 31, 2022 | 369,606 | $2.63 | | Forfeited | (4,000) | $2.63 | | **Outstanding and unvested as of Mar 31, 2023** | **365,606** | **$2.63** | - Unrecognized stock-based compensation expense for unvested RSUs was **$789 thousand** as of March 31, 2023, to be recognized over a weighted average period of **3.3 years**[104](index=104&type=chunk) - **710,296** shares available for issuance under the Employee Stock Purchase Plan (ESPP) as of March 31, 2023[105](index=105&type=chunk) - ESPP expense was **$36 thousand** for Q1 2023 (vs. **$45 thousand** for Q1 2022)[107](index=107&type=chunk) [Note 9 — Related-Party Transactions](index=23&type=section&id=Note%209%20%E2%80%94%20Related-Party%20Transactions) This note discloses transactions and arrangements between the company and its related parties, such as executives or affiliated entities - The CEO has a partial interest in Eyemax LLC, with which the Company had an agreement for the EM-100/Alaway Preservative Free eye allergy product[109](index=109&type=chunk)[110](index=110&type=chunk) - The Company sold the EM-100 asset and associated product rights to Bausch Health in February 2019, with future royalties on Bausch Health sales to be split between Eyemax and the Company[111](index=111&type=chunk) - The Company has realized **$1,818 thousand** of non-royalty and royalty revenue from this arrangement as of March 31, 2023[111](index=111&type=chunk) - Bausch Health discontinued sales of Alaway® Preservative Free effective March 24, 2023[113](index=113&type=chunk) [Note 10 — Leases](index=24&type=section&id=Note%2010%20%E2%80%94%20Leases) This note provides information on the company's lease agreements, including right-of-use assets, lease liabilities, and associated costs - Operating lease cost was **$23 thousand** for Q1 2023 (vs. **$21 thousand** for Q1 2022)[117](index=117&type=chunk) - Cash paid for operating lease liabilities was **$19 thousand** for Q1 2023 (vs. **$20 thousand** for Q1 2022)[117](index=117&type=chunk) - Weighted-average remaining lease term was **2.0 years**, and the weighted-average incremental borrowing rate was **8.6%** as of March 31, 2023[117](index=117&type=chunk) Lease-Related Assets and Liabilities as of March 31, 2023 (in thousands) | Category | Amount | | :------- | :----- | | Operating lease right-of-use assets, net | $169 | | Operating lease liabilities, current | $78 | | Operating lease liabilities, noncurrent | $86 | | **Total operating lease liabilities** | **$164** | [Note 11 — Commitments and Contingencies](index=25&type=section&id=Note%2011%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines the company's contractual obligations, potential liabilities, and significant agreements that may impact future financial results - The Company is **not aware of any pending or threatened litigation that would materially impact operations**[121](index=121&type=chunk) - Sold rights to three oral solution pediatric neurology product candidates (Topiramate, Zonisamide, Lamotrigine) to Azurity in 2021, having recognized **$22 million** in milestone revenues to date and potentially receiving up to **$20 million** more[123](index=123&type=chunk) - Acquired U.S. and Canadian rights to Crossject's ZENEO® hydrocortisone needleless autoinjector in June 2021, with potential for up to **$3.5 million** in development milestones and **$6 million** in commercial milestones, plus a **10%** royalty on net sales[129](index=129&type=chunk)[130](index=130&type=chunk) - Acquired U.S. marketing rights to Carglumic Acid Tablets in October 2021, retaining **50%** of product profits[131](index=131&type=chunk) - Sold rights in Cysteine Hydrochloride, Biorphen®, and Rezipres® to Dr. Reddy's in June 2022 for **$5 million** at closing and potential additional payments up to **$42.5 million** based on milestones[133](index=133&type=chunk) - Acquired an FDA-approved ANDA for Betaine Anhydrous for oral solution in September 2022, retaining **65%** of product profits[134](index=134&type=chunk) - Acquired rare disease endocrinology product candidate ET-600 from Tulex in March 2023, with potential milestone payments totaling **$900 thousand** and tiered royalties of **12.5%** to **17.0%** on net sales[135](index=135&type=chunk) [Note 12 — Subsequent Events](index=27&type=section&id=Note%2012%20%E2%80%94%20Subsequent%20Events) This note reports on significant events that occurred after the balance sheet date but before the financial statements were issued - **No subsequent events requiring recognition or disclosure have occurred through the filing date of this Form 10-Q**[137](index=137&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Eton Pharmaceuticals' financial condition and operational results for the three months ended March 31, 2023, highlighting revenue growth, changes in expenses, liquidity, and critical accounting policies [Overview](index=28&type=section&id=Overview) This section provides a high-level summary of Eton Pharmaceuticals' business, product portfolio, and strategic focus on rare diseases - Eton Pharmaceuticals is an innovative pharmaceutical company focused on developing, acquiring, and commercializing products for rare diseases[141](index=141&type=chunk) - Currently has three commercial rare disease products: ALKINDI SPRINKLE®, Carglumic Acid, and Betaine Anhydrous, with four additional product candidates in late-stage development[141](index=141&type=chunk) - Entitled to royalties or milestone payments from four FDA-approved products and one product candidate developed and out-licensed[142](index=142&type=chunk) [Results of Operations](index=28&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, detailing changes in revenues, cost of sales, gross profit, and operating expenses - Total revenue from product sales and royalties increased to **$5,304 thousand** for Q1 2023, up from **$2,176 thousand** for Q1 2022, primarily due to increased sales volume of ALKINDI SPRINKLE® and Carglumic Acid[143](index=143&type=chunk) - Gross profit increased to **$3,346 thousand** for Q1 2023, up from **$1,327 thousand** for Q1 2022[143](index=143&type=chunk) - Research and development (R&D) expenses decreased to **$535 thousand** for Q1 2023, down from **$1,618 thousand** for Q1 2022, mainly due to a **$500 thousand** fee to Crossject in 2022 and decreased development costs for other new product candidates[144](index=144&type=chunk) - General and administrative (G&A) expenses increased to **$5,345 thousand** for Q1 2023, up from **$4,796 thousand** for Q1 2022, primarily due to incremental employee-related expenses from sales force expansion[147](index=147&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's financial flexibility, including its cash position, working capital, and ability to fund future operations and capital needs - As of March 31, 2023, total assets were **$23.9 million**, cash and cash equivalents were **$14.7 million**, and working capital was **$11.6 million**[148](index=148&type=chunk) - The Company believes **existing funding and revenues from approved products will be sufficient for at least the next twelve months of operations**[148](index=148&type=chunk) - Potential need for additional financing if projected estimates for spending are inaccurate or growth is faster than expected[148](index=148&type=chunk) [Cash Flows](index=29&type=section&id=Cash%20Flows) This section examines the company's cash generation and usage across operating, investing, and financing activities, highlighting key changes Summary of Cash Flows (in thousands) | Cash Flow Activity | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :----------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(1,548) | $1,223 | | Cash used in investing activities | $0 | $(15) | | Cash used in financing activities | $(49) | $(385) | | Change in cash and cash equivalents | $(1,597) | $823 | - Decrease in cash from operating activities primarily due to a **$5 million** milestone payment received in Q1 2022 related to the EPRONTIA® product launch[149](index=149&type=chunk) - Decrease in cash used in financing activities due to a deferral of loan principal payments from April 2022 until May 2023[149](index=149&type=chunk) [Critical Accounting Policies](index=30&type=section&id=Critical%20Accounting%20Policies) This section discusses the accounting policies that require significant management judgment and estimates, impacting the reported financial results - **The preparation of financial statements requires management to make estimates and judgments affecting reported amounts, based on historical experience, known trends, and other reasonable factors**[150](index=150&type=chunk) - Key critical accounting policies include Revenue Recognition (following ASC 606), Stock-Based Compensation (using Black-Scholes-Merton model), and Research and Development Expenses (expensed as incurred, with estimates for accruals)[151](index=151&type=chunk)[152](index=152&type=chunk)[163](index=163&type=chunk)[166](index=166&type=chunk) [JOBS Act Transition Period](index=33&type=section&id=JOBS%20Act%20Transition%20Period) This section clarifies the company's election regarding the extended transition period for new accounting standards under the JOBS Act - **The Company has irrevocably elected not to use the extended transition period for complying with new or revised accounting standards provided by the JOBS Act, adopting new standards on the same dates as other public companies**[170](index=170&type=chunk) - As an emerging growth company until December 31, 2023, the Company may rely on certain exemptions, such as not providing an auditor's attestation report on internal controls over financial reporting[171](index=171&type=chunk) [Off Balance Sheet Transactions](index=32&type=section&id=Off%20Balance%20Sheet%20Transactions) This section confirms the absence of any off-balance sheet arrangements that could materially affect the company's financial position - **The Company does not have any off-balance sheet transactions**[168](index=168&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines Eton Pharmaceuticals' exposure to market risks, primarily interest rate risk on cash and cash equivalents, and the strategies employed to manage these risks - **The primary objective of investment activities is to preserve capital, and the Company does not use hedging contracts**[172](index=172&type=chunk) - Exposed to interest rate risk on cash and cash equivalents and risks related to the financial viability of institutions holding capital[172](index=172&type=chunk) - Risks are managed by investing in short-term, liquid, highly-rated instruments; cash is held in a non-interest bearing account and a government money market fund as of March 31, 2023[172](index=172&type=chunk) - Currently, there is no exposure to foreign currency risk[172](index=172&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details Eton Pharmaceuticals' disclosure controls and procedures, confirming their effectiveness as of March 31, 2023, and reporting no material changes in internal control over financial reporting during the period - **The Company maintains disclosure controls and procedures designed to ensure timely and accurate reporting of information required by the Exchange Act**[174](index=174&type=chunk) - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[176](index=176&type=chunk) - No changes in internal control over financial reporting occurred during Q1 2023 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[178](index=178&type=chunk) PART II - OTHER INFORMATION This section provides additional disclosures including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits [Item 1. Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) This section states that Eton Pharmaceuticals is not currently involved in any legal proceedings or claims that would have a material impact on its operations - **The Company is not aware of any pending or threatened litigation matters that would have a material impact on its operations**[180](index=180&type=chunk) [Item 1A. Risk Factors](index=35&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to the comprehensive discussion of risk factors detailed in the Company's 2022 10-K, emphasizing that these factors could materially affect the business, financial condition, cash flows, or future results - **Readers should carefully consider the risk factors discussed in Part I, Item 1A of the Company's 2022 10-K, as they could materially affect the business, financial condition, cash flows, or future results**[182](index=182&type=chunk) - The Company operates in a dynamic and rapidly changing environment with numerous risks and uncertainties, and other unanticipated or currently immaterial events may also affect results[181](index=181&type=chunk)[182](index=182&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there are no applicable disclosures regarding unregistered sales of equity securities or use of proceeds for the reporting period - **Not applicable for this reporting period**[183](index=183&type=chunk) [Item 3. Defaults Upon Senior Securities](index=35&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there are no applicable disclosures regarding defaults upon senior securities for the reporting period - **Not applicable for this reporting period**[183](index=183&type=chunk) [Item 4. Mine Safety Disclosures](index=35&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that there are no applicable disclosures regarding mine safety for the reporting period - **Not applicable for this reporting period**[184](index=184&type=chunk) [Item 5. Other Information](index=35&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to disclose for the reporting period - **Not applicable for this reporting period**[185](index=185&type=chunk) [Item 6. Exhibits](index=35&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed or furnished with the Form 10-Q, including certifications from the CEO and CFO, and financial information formatted in iXBRL - Includes certifications from the President and Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[188](index=188&type=chunk) - Financial information from the Quarterly Report on Form 10-Q for the period ended March 31, 2023, is formatted in Inline Extensible Business Reporting Language (iXBRL)[188](index=188&type=chunk)

Eton Pharmaceuticals, Inc. (NASDAQ:ETON) Q4 2022 Earnings Conference Call March 16, 2023 4:30 PM ET Company Participants David Krempa - Chief Business Officer Sean Brynjelsen - CEO James Gruber - CFO Conference Call Participants James Kennedy - Marathon Micro Partners Operator Good afternoon and welcome to the Eton Pharmaceuticals' Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen only mode. Following the formal remarks, we will open the call out for your ...

[PART I](index=3&type=section&id=PART%20I) [Business Overview](index=6&type=section&id=Item%201.%20Business) Eton Pharmaceuticals develops, acquires, and commercializes rare disease products, leveraging expertise, third-party manufacturing, and navigating extensive government regulations [Company Overview](index=6&type=section&id=Overview) Eton Pharmaceuticals focuses on developing, acquiring, and commercializing rare disease products, including three commercial products, three late-stage candidates, and six out-licensed products - Eton Pharmaceuticals is an innovative pharmaceutical company focused on developing, acquiring, and commercializing products for rare diseases[23](index=23&type=chunk) - Commercial Rare Disease Products: * **ALKINDI SPRINKLE®** (hydrocortisone granules) for adrenocortical insufficiency in children[24](index=24&type=chunk)[25](index=25&type=chunk) * **Carglumic Acid** tablets for hyperammonemia due to NAGS deficiency[26](index=26&type=chunk) * **Betaine Anhydrous for Oral Solution** for homocystinuria[27](index=27&type=chunk) - Late-Stage Product Candidates: * **Dehydrated Alcohol Injection** for methanol poisoning (Orphan Drug Designation, FDA review with Target Action Date of June 27, 2023)[24](index=24&type=chunk)[28](index=28&type=chunk) * **ET-400** for adrenal insufficiency (NDA submission expected by end of 2023)[29](index=29&type=chunk) * **ZENEO® Hydrocortisone Autoinjector** for adrenal crisis (NDA submission expected in 2024)[30](index=30&type=chunk) - Out-licensed Products (royalties or milestone payments): * **Alaway® Preservative Free** (ketotifen fumarate) for allergic conjunctivitis[32](index=32&type=chunk) * **EPRONTIA®** (topiramate oral solution) for seizures and migraine prevention[33](index=33&type=chunk) * **Cysteine Hydrochloride** for nutritional requirements of newborn infants[34](index=34&type=chunk) * **ZONISADE™** (zonisamide oral suspension) for partial seizures in epilepsy[35](index=35&type=chunk) * **Biorphen®** (phenylephrine injection) for clinically important hypotension[36](index=36&type=chunk) * **Lamotrigine for Oral Suspension** for epilepsy (under development, received CRL)[37](index=37&type=chunk)[38](index=38&type=chunk) [Goals and Strengths](index=8&type=section&id=Goals%20and%20Strengths) The company aims to be a leading profitable pharmaceutical company for rare diseases, leveraging strong business development and regulatory expertise - Goal: Become a leading profitable pharmaceutical company bringing innovative treatments to rare disease patients[41](index=41&type=chunk) - Competitive Strengths: * Business development experience: Ability to identify and execute transactions on under-appreciated development assets, with over **150 transactions** completed by the team[41](index=41&type=chunk) * Regulatory expertise: Knowledge and experience gaining FDA approval, particularly within the **505(b)(2) regulatory pathway**, to expedite drug development and reduce investment[46](index=46&type=chunk) [Operations (Sales, R&D, Manufacturing, IP)](index=8&type=section&id=Operations%20(Sales,%20R%26D,%20Manufacturing,%20IP)) Eton manages internal sales for orphan products, out-licenses others, relies on external R&D and third-party manufacturing, and protects intellectual property [Sales and Marketing](index=8&type=section&id=Sales%20and%20Marketing) Eton commercializes three orphan products in the United States using its internal infrastructure and sales force, while out-licensed products generate royalties from partners - Eton commercializes three orphan products (**ALKINDI SPRINKLE®**, **Carglumic Acid**, and **Betaine Anhydrous**) in the United States using its internal infrastructure and sales force, distributing products via specialty pharmacies[41](index=41&type=chunk) - Out-licensed products are commercialized by partners (Bausch Health for Alaway Preservative Free, Azurity for EPRONTIA®, ZONISADE™, and lamotrigine suspension), with Eton receiving royalties on net sales[42](index=42&type=chunk) [Research and Development](index=8&type=section&id=Research%20and%20Development) Eton's research and development activities are supported by eight internal employees and extensive use of external product development partners and contract laboratory services - Eton has **eight employees** supporting product research and development activities[43](index=43&type=chunk) - The company utilizes external sources, including product development partners and contract laboratory services, for various product development activities[43](index=43&type=chunk) [Manufacturing and Suppliers](index=8&type=section&id=Manufacturing%20and%20Suppliers) Eton relies entirely on third-party contract manufacturing organizations (CMOs) in compliance with cGMP, which reduces capital investment and provides operational flexibility - Eton relies on third-party contract manufacturing organizations (CMOs) in the United States or Europe to manufacture its products[44](index=44&type=chunk) - All products are manufactured in compliance with current Good Manufacturing Processes (cGMP), and Eton's internal quality system requires quality agreements and audits of all manufacturers[44](index=44&type=chunk) - Reliance on external manufacturers significantly reduces capital investment and provides flexibility[44](index=44&type=chunk) [Intellectual Property](index=8&type=section&id=Intellectual%20Property) Eton protects its proprietary position through U.S. and foreign patent applications, trade secrets, and technological innovation, with ALKINDI SPRINKLE® protected by patents extending to 2034 - Eton protects its proprietary position by filing U.S. and foreign patent applications, and relies on trade secrets, know-how, and technological innovation[45](index=45&type=chunk) - **ALKINDI SPRINKLE®** is protected by **three issued patents** that extend to **2034**[25](index=25&type=chunk)[47](index=47&type=chunk) [Government Regulations and Funding](index=9&type=section&id=Government%20Regulations%20and%20Funding) Eton operates under extensive government regulations, including FDA approval pathways, U.S. healthcare laws, and evolving reimbursement and healthcare reform policies [FDA Market Approval Process](index=9&type=section&id=FDA%20Market%20Approval%20Process) The FDA market approval process involves preclinical testing, IND submission, human clinical trials, NDA approval, and ongoing post-approval compliance - The FDA market approval process involves preclinical testing, submission of an Investigational New Drug (IND) application, performance of human clinical trials (Phase 1, 2, 3) under Good Clinical Practices (cGCP), submission and approval of a New Drug Application (NDA), and agreement on package insert language[50](index=50&type=chunk)[51](index=51&type=chunk)[52](index=52&type=chunk) - Manufacturing processes must conform to current Good Manufacturing Processes (cGMP) throughout clinical testing and post-approval[54](index=54&type=chunk)[59](index=59&type=chunk) - Post-approval requirements include reporting adverse reactions, providing updated safety/efficacy information, complying with advertising/promotional labeling, and potential Risk Evaluation and Mitigation Strategies (REMS) or Phase 4 clinical trials[57](index=57&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk) [Section 505(b)(2) New Drug Applications](index=11&type=section&id=Section%20505(b)(2)%20New%20Drug%20Applications) The 505(b)(2) pathway allows for expedited FDA approval of new indications or formulations by relying on existing data, but carries risks of patent infringement and exclusivity challenges - The **505(b)(2) regulatory pathway** allows for FDA approval of new indications or formulations of previously approved products by relying on studies not conducted by or for the applicant, or the FDA's prior conclusions[61](index=61&type=chunk)[62](index=62&type=chunk) - This pathway can expedite drug development by leveraging existing data but still requires the applicant to provide manufacturing and quality data[46](index=46&type=chunk)[62](index=62&type=chunk) - Risks include potential patent infringement lawsuits (Paragraph IV certification triggering a **30-month stay**) and being blocked by non-patent exclusivity of a previously approved drug, even if not directly relied upon[63](index=63&type=chunk)[114](index=114&type=chunk)[117](index=117&type=chunk) [Section 505(j) Abbreviated New Drug Applications](index=12&type=section&id=Section%20505(j)%20Abbreviated%20New%20Drug%20Applications) The 505(j) pathway is used for therapeutically equivalent products, typically requiring only bioequivalence trials, making it generally shorter and less expensive than the 505(b)(2) pathway - The **505(j) pathway** is used for product candidates therapeutically equivalent to an approved product, relying on the FDA's prior finding of safety and effectiveness for the reference drug[65](index=65&type=chunk) - This pathway typically requires no clinical testing other than a bioequivalence trial, making it generally shorter and less expensive than the 505(b)(2) pathway[65](index=65&type=chunk) [Other U.S. Healthcare Laws and Compliance Requirements](index=12&type=section&id=Other%20U.S.%20Healthcare%20Laws%20and%20Compliance%20Requirements) Eton is subject to extensive federal and state healthcare laws, including anti-kickback, false claims, and privacy regulations, with non-compliance leading to significant penalties - Eton is subject to federal and state healthcare laws, including the U.S. Anti-Kickback Statute, federal civil and criminal false claims laws (e.g., U.S. False Claims Act), and HIPAA (Health Insurance Portability and Accountability Act of 1996)[66](index=66&type=chunk) - State laws also apply, covering anti-kickback, false claims, reporting of payments to healthcare providers, drug pricing, and pharmaceutical sales representative registration[67](index=67&type=chunk) - Non-compliance can lead to significant penalties, including criminal/civil penalties, fines, disgorgement, imprisonment, exclusion from government healthcare programs, and operational restructuring[67](index=67&type=chunk) [Reimbursement](index=13&type=section&id=Reimbursement) Product sales depend on third-party payor coverage and reimbursement, which are increasingly challenged by price controls and cost-containment programs, including Medicare Part D - Sales of Eton's products depend on coverage and reimbursement by third-party payors (government health programs, commercial insurance, managed care organizations)[68](index=68&type=chunk) - Third-party payors are increasingly challenging drug prices, and governments are implementing cost-containment programs, including price controls and restrictions on reimbursement[68](index=68&type=chunk) - The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) expanded Medicare Part D, which can lead to lower negotiated prices for covered products and influence private payor rates[69](index=69&type=chunk) [Healthcare Reform](index=14&type=section&id=Healthcare%20Reform) Healthcare reform laws, including the ACA and IRA, impose reporting requirements, rebates, and price negotiation, which are expected to increase downward pressure on drug prices and potentially harm future revenues - The Patient Protection and Affordable Care Act (Health Care Reform Law) substantially changed healthcare financing, imposing reporting requirements, increased Medicaid rebates, annual fees on manufacturers, and a Medicare Part D coverage gap discount program[73](index=73&type=chunk) - The Inflation Reduction Act (IRA), signed in August 2022, allows the government to negotiate prices for select high-cost Medicare Part D and Part B drugs, imposes inflation-based rebates, and redesigns Medicare Part D out-of-pocket limits[80](index=80&type=chunk) - These reforms are expected to result in more rigorous coverage criteria and additional downward pressure on drug prices, potentially harming future revenues[82](index=82&type=chunk) [Brexit Impact](index=15&type=section&id=Brexit%20Impact) Brexit has established the UK's independent regulatory regime, which may diverge from EU legislation, potentially affecting marketing approval and commercialization of pharmaceutical products - Brexit has led to the UK's independent regulatory regime, which currently aligns with EU legislation but may diverge in the future, potentially affecting marketing approval and commercialization of pharmaceutical products[83](index=83&type=chunk) [Employees](index=17&type=section&id=Employees) Eton Pharmaceuticals has 28 full-time employees across R&D, sales/marketing, and corporate roles, supplemented by outside consultants as needed - Eton Pharmaceuticals has **28 full-time employees**: * **8** in research and development[86](index=86&type=chunk) * **16** in sales/marketing operations[86](index=86&type=chunk) * **4** in general corporate and strategy roles[86](index=86&type=chunk) - The company also utilizes outside consultants on an as-needed basis[86](index=86&type=chunk) [Corporate and Other Information](index=17&type=section&id=Corporate%20and%20Other%20Information) Eton Pharmaceuticals, incorporated in Delaware in 2017, maintains its principal executive offices in Deer Park, Illinois, and uses its corporate website for press releases and SEC filings - Eton Pharmaceuticals, Inc. was incorporated in Delaware in April 2017[87](index=87&type=chunk) - Its principal executive offices are located at 21925 W. Field Parkway, Suite 235, Deer Park, Illinois, 60010[87](index=87&type=chunk) - The company's corporate website (www.etonpharma.com) is used to post press releases and links to SEC filings[87](index=87&type=chunk) [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) Eton Pharmaceuticals faces significant risks across its business, product development, regulatory, manufacturing, commercialization, intellectual property, and common stock ownership [Risks Relating to Our Business](index=19&type=section&id=Risks%20Relating%20to%20Our%20Business) Eton faces business risks including a limited operating history, challenges in managing growth, potential product liability lawsuits, and vulnerability to cyber attacks - As a specialty pharmaceutical company with a limited operating history (founded April 2017), it is difficult for potential investors to evaluate the business, and there is no assurance of achieving profitability[92](index=92&type=chunk)[93](index=93&type=chunk) - The company may need to grow its organization, which could lead to difficulties in managing growth and diverting management's attention[94](index=94&type=chunk) - Eton faces a potential risk of product liability lawsuits from commercialized or clinical products, which could result in substantial liabilities, decreased demand, reputational damage, and limitations on commercialization[95](index=95&type=chunk)[97](index=97&type=chunk) - Reliance on information technology makes the company vulnerable to cyber attacks, system failures, and security breaches, potentially disrupting operations and leading to data loss or misappropriation[99](index=99&type=chunk) - Sales of counterfeit or unauthorized products could adversely affect revenues, business, and reputation[100](index=100&type=chunk) [Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization](index=22&type=section&id=Risks%20Related%20to%20Product%20Development,%20Regulatory%20Approval,%20Manufacturing%20and%20Commercialization) Eton's success depends on successful product development, regulatory approval, and commercialization, facing intense competition, complex regulatory pathways, reliance on third-party manufacturers, and evolving data privacy laws - The company's business depends entirely on the successful development, regulatory approval, and commercialization of its product candidates, which is a highly speculative undertaking with an uncertain outcome[102](index=102&type=chunk) - Eton faces intense competition from other biotechnology and pharmaceutical companies, many with greater resources, which could lead to competitors developing products more rapidly or rendering Eton's products obsolete[103](index=103&type=chunk)[104](index=104&type=chunk) - The **505(b)(2) regulatory pathway**, which Eton intends to pursue for most candidates, may take significantly longer, cost more, and encounter greater complications if the FDA does not agree with the pathway or if its interpretation changes[112](index=112&type=chunk)[113](index=113&type=chunk) - An NDA submitted under Section 505(b)(2) subjects the company to the risk of patent infringement lawsuits, which could delay or prevent regulatory approval and commercialization[115](index=115&type=chunk)[117](index=117&type=chunk) - Eton is completely dependent on third-party contract manufacturing organizations (CMOs) for its products, and any failure by these CMOs to obtain or maintain manufacturing approval, provide sufficient quantities, or meet quality standards could halt or delay commercialization[145](index=145&type=chunk)[146](index=146&type=chunk) - Clinical drug development is a lengthy, expensive, and uncertain process, and results from earlier studies may not be predictive of future trial results, potentially leading to delays, increased costs, or failure to obtain regulatory approval[162](index=162&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk) - The company is subject to extensive and evolving data privacy and security laws and regulations (e.g., HIPAA, GDPR, CCPA), with non-compliance potentially leading to negative publicity, enforcement actions, and significant costs[167](index=167&type=chunk)[168](index=168&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) [Risks Relating to Our Intellectual Property Rights](index=41&type=section&id=Risks%20Relating%20to%20Our%20Intellectual%20Property%20Rights) Eton's intellectual property rights are crucial but vulnerable to loss of acquired rights, challenges, invalidation, circumvention, and varying global protections, potentially leading to costly litigation or infringement - Eton depends on acquired rights to certain pharmaceutical compounds, and any loss of these rights or disputes with assignors/licensors could prevent product sales[175](index=175&type=chunk)[176](index=176&type=chunk) - Protecting intellectual property rights is difficult and costly, with patent positions being uncertain and vulnerable to challenges, invalidation, or circumvention by third parties[177](index=177&type=chunk)[180](index=180&type=chunk) - It may be difficult to protect intellectual property rights globally due to prohibitive costs and varying legal protections in different countries, potentially allowing competitors to use Eton's technologies[182](index=182&type=chunk)[184](index=184&type=chunk) - Changes in U.S. or foreign patent law, such as the Leahy-Smith America Invents Act (AIA), or interpretations of such laws, could diminish the value of patents and impair the ability to protect products[189](index=189&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk) - Eton's product candidates may infringe the intellectual property rights of others, leading to costly litigation, delays in commercialization, or the need for expensive licensing agreements[194](index=194&type=chunk)[195](index=195&type=chunk) [Risks Related to Owning Our Common Stock](index=45&type=section&id=Risks%20Related%20to%20Owning%20Our%20Common%20Stock) Ownership of Eton's common stock carries risks including market volatility, dilution from future capital raises, reduced attractiveness as an "emerging growth company," lack of dividends, and limitations on NOL carryforwards - The trading market for Eton's common stock may not be active or sustained, leading to significant price fluctuations and potential substantial losses for investors[199](index=199&type=chunk)[202](index=202&type=chunk) - Future capital raises, including through an effective Form S-3 registration statement for up to **$100 million**, could dilute existing stockholders' ownership and depress the market price of common stock[201](index=201&type=chunk) - As an "emerging growth company" under the JOBS Act, Eton benefits from reduced disclosure requirements, which may make its common stock less attractive to some investors and potentially impact its ability to raise capital[205](index=205&type=chunk)[208](index=208&type=chunk)[211](index=211&type=chunk) - The company has not paid dividends in the past and has no immediate plans to do so, meaning any returns to stockholders will be limited to stock appreciation[212](index=212&type=chunk) - Eton's ability to use its net operating loss (NOL) carryforwards and other tax attributes may be limited by "ownership changes" under tax law, potentially increasing future tax liability[215](index=215&type=chunk) - Provisions in Eton's charter documents and Delaware law may inhibit a takeover that stockholders consider favorable, potentially entrenching management and reducing the common stock price[221](index=221&type=chunk)[222](index=222&type=chunk) - Significant ownership by directors, executive officers, and former parent company Harrow Health, Inc. (**7.8%** as of March 7, 2023) may limit other stockholders' ability to influence corporate matters[227](index=227&type=chunk) [Unresolved Staff Comments](index=51&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report [Properties](index=51&type=section&id=Item%202.%20Properties) Eton Pharmaceuticals conducts all administrative activities from its 5,507 square foot leased office space in Deer Park, Illinois, with the lease expiring on March 31, 2025 - Eton's principal executive offices are located in a **5,507 square foot** leased office space at 21925 W. Field Parkway, Suite 235, Deer Park, Illinois 60010[230](index=230&type=chunk) - The lease for this facility expires on **March 31, 2025**[230](index=230&type=chunk) - The company considers its current facilities suitable and adequate to meet its current needs[231](index=231&type=chunk) [Legal Proceedings](index=51&type=section&id=Item%203.%20Legal%20Proceedings) There are no legal proceedings to report [Mine Safety Disclosures](index=51&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Eton Pharmaceuticals [PART II](index=52&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=52&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Eton's common stock is listed on the Nasdaq Global Market under the symbol "ETON" with 8 record holders as of March 7, 2023, and the company has never paid cash dividends, intending to reinvest future earnings [Market Information](index=52&type=section&id=Market%20Information) Eton's common stock is listed on the Nasdaq Global Market under the symbol "ETON", with a closing price of $2.82 per share on December 30, 2022 - Eton's common stock is listed on the Nasdaq Global Market under the symbol "**ETON**"[3](index=3&type=chunk) - The closing price of common stock on December 30, 2022, was **$2.82 per share**[236](index=236&type=chunk) [Record Holders](index=52&type=section&id=Record%20Holders) As of March 7, 2023, Eton had 8 record holders for its common stock, which closed at $3.99 per share - As of March 7, 2023, Eton had **8 holders of record** for its common stock[237](index=237&type=chunk) - The closing price per share of common stock on March 7, 2023, was **$3.99**[237](index=237&type=chunk) [Dividends](index=52&type=section&id=Dividends) Eton has never declared or paid cash dividends on its common stock and intends to retain future earnings for reinvestment - Eton has never declared or paid a cash dividend on its common stock[238](index=238&type=chunk) - The company currently intends to retain any future earnings and does not expect to pay any dividends in the foreseeable future[238](index=238&type=chunk) [Recent Sales of Unregistered Securities](index=52&type=section&id=Recent%20Sales%20of%20Unregistered%20Securities) Not applicable - Not applicable[239](index=239&type=chunk) [Selected Financial Data](index=52&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable to Eton Pharmaceuticals - Not applicable[240](index=240&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=52&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Eton Pharmaceuticals reported 2022 net revenues of $21.3 million, a net loss of $9.0 million, and $16.3 million in cash, expecting sufficient liquidity for the next twelve months [Overview](index=52&type=section&id=Overview_7) Eton Pharmaceuticals is an innovative company focused on developing, acquiring, and commercializing rare disease products, having built a diversified portfolio since its formation in 2017 - Eton Pharmaceuticals is an innovative pharmaceutical company focused on developing, acquiring, and commercializing products to address unmet needs in patients suffering from rare diseases[242](index=242&type=chunk) - Since its formation in 2017, the company has assembled a diversified portfolio of rare disease products using its expertise in business development, regulatory, and product development[242](index=242&type=chunk) [Results of Operations](index=53&type=section&id=Results%20of%20Operations) Eton's total net revenues slightly decreased to $21.3 million in 2022 due to lower licensing revenue, despite significant growth in product sales, resulting in an increased net loss of $9.0 million Net Revenues (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------------------------ | :----- | :----- | :----- | | Licensing revenue | $10,000 | $19,000 | $0 | | Product sales & royalties, net | $11,251 | $2,832 | $39 | | **Total Net Revenues** | **$21,251** | **$21,832** | **$39** | Gross Profit (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :--------- | :----- | :----- | :----- | | Gross profit | $14,318 | $19,005 | $(397) | Operating Expenses (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :-------------------- | :----- | :----- | :----- | | Research and development | $3,996 | $6,235 | $14,104 | | General and administrative | $18,582 | $14,265 | $12,610 | | **Total Operating Expenses** | **$22,578** | **$20,500** | **$26,714** | Net Loss (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------- | :----- | :----- | :----- | | Net loss | $(9,021) | $(1,955) | $(27,970) | - Net product revenue increased by **$8.4 million** to **$11.3 million** in 2022 from **$2.8 million** in 2021, driven by growth in **ALKINDI SPRINKLE®** and **Carglumic Acid**[245](index=245&type=chunk) - The **$2.2 million** decrease in R&D expenses in 2022 was due to non-recurring milestone payments in 2021[247](index=247&type=chunk) - The **$4.3 million** increase in G&A expenses in 2022 was primarily due to personnel additions and increased sales & marketing spending[247](index=247&type=chunk) [General and Administrative Expenses](index=53&type=section&id=General%20and%20Administrative%20Expenses) G&A expenses, primarily employee compensation and sales/marketing costs, are expected to increase to support business growth and promotional activities - G&A expenses primarily consist of employee compensation, selling and advertising/promotional expenses, legal and professional fees, business insurance, and FDA fees[248](index=248&type=chunk)[253](index=253&type=chunk) - The company anticipates G&A expenses will increase to support business growth, particularly in sales and marketing for additional personnel and promotional activities[248](index=248&type=chunk)[253](index=253&type=chunk) [Research and Development Expenses](index=53&type=section&id=Research%20and%20Development%20Expenses_7) The majority of R&D spending is directed towards third-party contractors for product development and testing, including milestone payments, supported by eight internal employees - The majority of R&D spending is directed towards third parties contracted for product development and testing, in addition to development partner milestone payments[249](index=249&type=chunk)[254](index=254&type=chunk) - Eton had **eight employees** supporting its product development function in 2022[249](index=249&type=chunk) [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) Eton believes its existing funding and revenues will be sufficient for the next twelve months, but acknowledges potential needs for additional financing if spending estimates are inaccurate Liquidity and Capital Resources (in thousands) | Metric | December 31, 2022 (in thousands) | | :------------------------ | :------------------ | | Total assets | $25,030 | | Cash and cash equivalents | $16,305 | | Working capital | $13,500 | - Eton believes its existing funding and revenues from approved products will be sufficient for at least the next twelve months of operations[255](index=255&type=chunk) - Projected estimates for product development spending, administrative expenses, and working capital requirements could be inaccurate, potentially requiring additional financing sooner than anticipated[255](index=255&type=chunk) [Cash Flows](index=54&type=section&id=Cash%20Flows) Eton's operating cash flow significantly improved in 2022, primarily due to increased revenue, while investing activities focused on licensing fees and financing activities included a prior common stock offering Cash Flow Summary (in thousands) | Metric | Year ended Dec 31, 2022 (in thousands) | Year ended Dec 31, 2021 (in thousands) | Year ended Dec 31, 2020 (in thousands) | | :------------------------------------------ | :---------------------- | :---------------------- | :---------------------- | | Net cash provided by (used in) operating activities | $4,821 | $(4,721) | $(22,346) | | Net cash used in investing activities | $(2,788) | $(2,559) | $(50) | | Net cash flows (used in) provided by financing activities | $(134) | $391 | $31,625 | | **Net change in cash and cash equivalents** | **$1,899** | **$(6,889)** | **$9,229** | - The decrease in cash used in operating activities in 2022 is primarily a result of increased revenue[256](index=256&type=chunk) - Investing activities in 2022 and 2021 primarily consisted of licensing fees for **Betaine** and **Carglumic Acid**, respectively[256](index=256&type=chunk) - Financing activities in 2020 included a follow-on common stock offering[256](index=256&type=chunk) [Critical Accounting Policies](index=54&type=section&id=Critical%20Accounting%20Policies) Eton's critical accounting policies include revenue recognition, stock-based compensation, and research and development expenses, all prepared under GAAP, with specific considerations for its "emerging growth company" status [Revenue Recognition](index=55&type=section&id=Revenue%20Recognition) Eton recognizes revenue under ASC 606 when customers obtain control of goods or services, net of estimated sales deductions, and recognizes milestone payments and royalties when conditions are met - Eton accounts for contracts with customers under ASC 606, recognizing revenue when the customer obtains control of promised goods or services, reflecting the expected consideration[259](index=259&type=chunk)[338](index=338&type=chunk) - Revenue from product sales is recognized net of estimated reductions for returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid, and GPO fees, which are established at the time of sale/shipment[267](index=267&type=chunk)[268](index=268&type=chunk)[350](index=350&type=chunk) - Milestone payments are recognized when conditions are achieved and a significant revenue reversal is improbable, while sales-based royalties are recognized at the later of when sales occur or the performance obligation is satisfied[262](index=262&type=chunk)[263](index=263&type=chunk)[341](index=341&type=chunk)[344](index=344&type=chunk) [Stock-Based Compensation](index=56&type=section&id=Stock-Based%20Compensation) Stock-based compensation is expensed over service periods, with fair value estimated using the Black-Scholes-Merton model based on subjective assumptions including comparable company volatility - Stock-based compensation is accounted for under ASC 718, requiring estimation of fair value of awards on the grant date and expense recognition over the related service periods (vesting period)[272](index=272&type=chunk)[357](index=357&type=chunk) - The Black-Scholes-Merton (BSM) option-pricing model is used to estimate fair value, requiring subjective assumptions for expected stock price volatility, expected term, forfeitures, and risk-free interest rate[273](index=273&type=chunk)[357](index=357&type=chunk) - Expected volatilities are based on comparable companies' historical volatility, with limited weighting for Eton's own volatility, and the closing stock price on the grant date is used for common stock fair value[273](index=273&type=chunk)[275](index=275&type=chunk)[357](index=357&type=chunk) [Research and Development Expenses](index=57&type=section&id=Research%20and%20Development%20Expenses_57) R&D expenses, including internal activities and external contracted services, are charged to operations as incurred, with upfront and milestone payments for unapproved licensed technology also expensed immediately - R&D expenses include internal activities (salaries, benefits, stock-based compensation) and external contracted services (product development, clinical trials, manufacturing, regulatory costs)[276](index=276&type=chunk)[354](index=354&type=chunk) - Expenses are charged to operations as incurred, with accruals based on services performed and estimates of costs applicable to the stage of project completion[276](index=276&type=chunk)[354](index=354&type=chunk) - Upfront and milestone payments for licensing technology for products not yet FDA-approved are expensed as R&D in the period incurred[277](index=277&type=chunk)[355](index=355&type=chunk) [Of Balance Sheet Transactions](index=57&type=section&id=Of%20Balance%20Sheet%20Transactions) Eton Pharmaceuticals does not have any off-balance sheet transactions - Eton Pharmaceuticals does not have any off-balance sheet transactions[278](index=278&type=chunk) [JOBS Act Transition Period](index=57&type=section&id=JOBS%20Act%20Transition%20Period) As an "emerging growth company" under the JOBS Act, Eton has elected not to use the extended transition period for new accounting standards but will leverage other benefits like reduced disclosure requirements - Eton is an "emerging growth company" under the JOBS Act of 2012[279](index=279&type=chunk)[280](index=280&type=chunk) - The company has irrevocably elected not to use the extended transition period for complying with new or revised financial accounting standards, adopting them on the same schedule as other public companies[8](index=8&type=chunk)[279](index=279&type=chunk) - Eton intends to take advantage of other JOBS Act benefits, such as exemptions from auditor attestation requirements of Section 404 of Sarbanes-Oxley Act and reduced executive compensation disclosure[207](index=207&type=chunk)[208](index=208&type=chunk)[280](index=280&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=58&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Eton's primary market risk is interest rate risk on its cash and cash equivalents, which it manages by investing in short-term, liquid, highly rated instruments, with minimal exposure due to low interest rates and no foreign currency risk - The primary objective of Eton's investment activities is to preserve capital[282](index=282&type=chunk) - Eton is exposed to interest rate risk on its cash and cash equivalents, which it manages by investing in short-term, liquid, highly rated instruments (e.g., cash deposits, money market, U.S. treasury bills)[282](index=282&type=chunk) - The company believes it has minimal exposure to interest rate risk due to the extremely low interest rate environment and the short duration of its invested funds[282](index=282&type=chunk) - Eton currently does not have exposure to foreign currency risk[282](index=282&type=chunk) [Financial Statements and Supplementary Data](index=58&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Eton Pharmaceuticals' audited financial statements for 2022, 2021, and 2020, including balance sheets, statements of operations, stockholders' equity, and cash flows, with an unqualified auditor opinion noting product sales deductions as a critical audit matter [Report of Independent Registered Public Accounting Firm](index=58&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KMJ Corbin & Company LLP issued an unqualified opinion on Eton's financial statements, identifying the estimation of product sales deductions as a critical audit matter due to limited sales history and subjective assumptions - KMJ Corbin & Company LLP (PCAOB ID: 170) served as Eton's auditor since 2018[295](index=295&type=chunk) - The auditor issued an unqualified opinion, stating that the financial statements for the three years ended December 31, 2022, present fairly, in all material respects, the financial position and results of operations in conformity with GAAP[286](index=286&type=chunk) - A critical audit matter identified was the estimation of product sales deductions (returns, chargebacks, fees) due to the limited sales history of the company's products and the subjectivity of certain assumptions[292](index=292&type=chunk)[293](index=293&type=chunk) [Balance Sheets](index=60&type=section&id=Balance%20Sheets) Eton's balance sheet as of December 31, 2022, shows $16.3 million in cash and cash equivalents, a decrease in total assets to $25.0 million, and a decrease in total stockholders' equity to $13.1 million Balance Sheet Summary (in thousands) | Metric | December 31, 2022 (in thousands) | December 31, 2021 (in thousands) | YoY Change (2022 vs 2021) | | :-------------------------- | :------------------ | :------------------ | :-------------------------- | | Cash and cash equivalents | $16,305 | $14,406 | 13.2% | | Accounts receivable, net | $1,852 | $5,471 | (66.2%) | | Inventories | $557 | $550 | 1.3% | | Prepaid expenses and other current assets | $1,290 | $3,177 | (59.4%) | | Total current assets | $20,004 | $23,604 | (15.3%) | | Property and equipment, net | $72 | $115 | (37.4%) | | Intangible assets, net | $4,754 | $3,621 | 31.3% | | Total assets | $25,030 | $27,465 | (8.8%) | | Accounts payable | $1,766 | $1,774 | (0.5%) | | Current portion of long-term debt | $1,033 | $1,418 | (27.2%) | | Accrued liabilities | $3,662 | $1,366 | 168.1% | | Total current liabilities | $6,461 | $4,558 | 41.7% | | Long-term debt, net | $5,384 | $5,262 | 2.3% | | Total liabilities | $11,952 | $9,835 | 21.5% | | Common stock (shares) | 25,353,119 | 24,626,004 | 2.9% | | Additional paid-in capital | $116,187 | $111,718 | 4.0% | | Accumulated deficit | $(103,134) | $(94,113) | 9.6% | | **Total stockholders' equity** | **$13,078** | **$17,630** | **(25.8%)** | [Statements of Operations](index=61&type=section&id=Statements%20of%20Operations) Eton reported total net revenues of $21.3 million in 2022, a slight decrease from $21.8 million in 2021, resulting in a net loss of $9.0 million, up from $2.0 million in 2021 Statements of Operations Summary (in thousands, except per share amounts) | Metric | Year ended Dec 31, 2022 (in thousands) | Year ended Dec 31, 2021 (in thousands) | Year ended Dec 31, 2020 (in thousands) | | :------------------------------------------ | :---------------------- | :---------------------- | :---------------------- | | Licensing revenue | $10,000 | $19,000 | $0 | | Product sales and royalties, net | $11,251 | $2,832 | $39 | | **Total net revenues** | **$21,251** | **$21,832** | **$39** | | Cost of Sales: Licensing revenue | $1,640 | $1,500 | $0 | | Cost of Sales: Product sales and royalties | $5,293 | $1,327 | $436 | | **Total cost of sales** | **$6,933** | **$2,827** | **$436** | | **Gross profit (loss)** | **$14,318** | **$19,005** | **$(397)** | | Operating expenses: Research and development | $3,996 | $6,235 | $14,104 | | Operating expenses: General and administrative | $18,582 | $14,265 | $12,610 | | **Total operating expenses** | **$22,578** | **$20,500** | **$26,714** | | Loss from operations | $(8,260) | $(1,495) | $(27,111) | | Other income (expense), net | $(761) | $(1,006) | $(859) | | Gain on PPP loan forgiveness | $0 | $365 | $0 | | Gain on equipment sale | $0 | $181 | $0 | | Loss before income tax expense | $(9,021) | $(1,955) | $(27,970) | | Income tax expense | $0 | $0 | $0 | | **Net loss** | **$(9,021)** | **$(1,955)** | **$(27,970)** | | Net loss per share, basic and diluted | $(0.36) | $(0.08) | $(1.33) | | Weighted average number of common shares outstanding, basic and diluted | 25,146 | 25,207 | 21,010 | [Statements of Stockholders' Equity](index=62&type=section&id=Statements%20of%20Stockholders'%20Equity) Total stockholders' equity decreased by $4.6 million in 2022 to $13.1 million, primarily due to the net loss, partially offset by an increase in additional paid-in capital from stock-based compensation Statements of Stockholders' Equity Summary (in thousands, except share amounts) | Metric | December 31, 2022 (in thousands) | December 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | :------------------ | | Common Stock (shares) | 25,353,119 | 24,626,004 | 24,312,808 | | Common Stock (amount) | $25 | $25 | $24 | | Additional paid-in capital | $116,187 | $111,718 | $107,797 | | Accumulated deficit | $(103,134) | $(94,113) | $(92,158) | | **Total Stockholders' Equity** | **$13,078** | **$17,630** | **$15,663** | - Total stockholders' equity decreased by **$4,552 thousand** from **$17,630 thousand** in 2021 to **$13,078 thousand** in 2022, primarily due to the net loss of **$9,021 thousand**[302](index=302&type=chunk) - Additional paid-in capital increased by **$4,469 thousand** in 2022, driven by **$4,218 thousand** in stock-based compensation[302](index=302&type=chunk) [Statements of Cash Flows](index=63&type=section&id=Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly improved to $4.8 million in 2022, while investing activities used $2.8 million, and financing activities resulted in a net use of $0.1 million Statements of Cash Flows Summary (in thousands) | Metric | Year ended Dec 31, 2022 (in thousands) | Year ended Dec 31, 2021 (in thousands) | Year ended Dec 31, 2020 (in thousands) | | :------------------------------------------ | :---------------------- | :---------------------- | :---------------------- | | Net cash provided by (used in) operating activities | $4,821 | $(4,721) | $(22,346) | | Net cash used in investing activities | $(2,788) | $(2,559) | $(50) | | Net cash flows (used in) provided by financing activities | $(134) | $391 | $31,625 | | **Net change in cash and cash equivalents** | **$1,899** | **$(6,889)** | **$9,229** | | Cash and cash equivalents at end of year | $16,305 | $14,406 | $21,295 | - Net cash provided by operating activities significantly improved to **$4,821 thousand** in 2022 from a net use of **$4,721 thousand** in 2021, primarily due to increased revenue[256](index=256&type=chunk)[304](index=304&type=chunk) - Investing activities used **$2,788 thousand** in 2022, mainly for the purchase of product licensing rights (**$2,750 thousand**)[256](index=256&type=chunk)[304](index=304&type=chunk) - Financing activities resulted in a net use of **$134 thousand** in 2022, compared to a net provision of **$391 thousand** in 2021 and **$31,625 thousand** in 2020 (which included a common stock offering)[256](index=256&type=chunk)[304](index=304&type=chunk) [Notes to Financial Statements](index=64&type=section&id=Notes%20to%20Financial%20Statements) The notes provide detailed information on Eton's financial statements, covering company overview, liquidity, significant accounting policies, property, debt, common stock, warrants, share-based payments, net loss per share, related-party transactions, leases, income taxes, employee savings plan, and commitments [Note 1 — Company Overview](index=64&type=section&id=Note%201%20%E2%80%94%20Company%20Overview) Eton is an innovative pharmaceutical company focused on rare diseases, with three FDA-approved products, three late-stage candidates, and royalties from six out-licensed products - Eton is an innovative pharmaceutical company focused on developing, acquiring, and commercializing products for rare diseases[306](index=306&type=chunk) - The company has three FDA-approved rare disease products (**ALKINDI SPRINKLE®**, **Carglumic Acid**, **Betaine Anhydrous**) and three additional product candidates in late-stage development (dehydrated alcohol injection, **ZENEO® hydrocortisone autoinjector**, **ET-400**)[307](index=307&type=chunk) - Eton is entitled to royalties or milestone payments from six FDA-approved products that it developed and out-licensed (**Alaway® Preservative Free**, **EPRONTIA®**, **Cysteine Hydrochloride**, **ZONISADE™**, **Lamotrigine**, and **Biorphen®**)[308](index=308&type=chunk) [Note 2 — Liquidity Considerations](index=64&type=section&id=Note%202%20%E2%80%94%20Liquidity%20Considerations) As of December 31, 2022, Eton had an accumulated deficit of $103.1 million and a net loss of $9.0 million, but believes its $16.3 million in cash will fund operations for at least the next twelve months, while acknowledging potential needs for additional capital - As of December 31, 2022, Eton had an accumulated deficit of **$103,134 thousand** and a net loss of **$9,021 thousand** for the year[309](index=309&type=chunk) - The company believes its existing cash and cash equivalents of **$16,305 thousand** as of December 31, 2022, will be sufficient to fund operations and capital expenditures for at least the next twelve months[310](index=310&type=chunk) - Eton may need to seek additional capital through equity financings, debt issuance, or other arrangements if capital resources are depleted faster than anticipated[310](index=310&type=chunk) [Note 3 — Summary of Significant Accounting Policies](index=65&type=section&id=Note%203%20%E2%80%94%20Summary%20of%20Significant%20Accounting%20Policies) Eton's financial statements are prepared under GAAP, operating as a single segment, with intangible assets capitalized upon FDA approval, revenue recognized net of sales deductions, R&D expensed as incurred, stock-based compensation valued using Black-Scholes-Merton, and a 100% valuation reserve against deferred tax assets - Financial statements are prepared in accordance with GAAP, requiring management to make significant estimates and assumptions[311](index=311&type=chunk)[314](index=314&type=chunk) - Eton operates as a single reportable segment focused on developing and commercializing prescription drug products[315](index=315&type=chunk) - Intangible assets, such as licensed products, are capitalized upon FDA approval and amortized on a straight-line basis over their estimated useful lives[322](index=322&type=chunk) - Revenue recognition follows ASC 606, with revenue from product sales recognized net of estimated sales deductions (e.g., returns, chargebacks, discounts)[338](index=338&type=chunk)[347](index=347&type=chunk)[348](index=348&type=chunk) - Research and development expenses, including upfront and milestone payments for unapproved licensed technology, are charged to operations as incurred[354](index=354&type=chunk)[355](index=355&type=chunk) - Stock-based compensation is valued using the Black-Scholes-Merton model and expensed over the service period[357](index=357&type=chunk) - A **100% valuation reserve** has been established against deferred tax assets as of December 31, 2022 and 2021, due to uncertainty of future taxable income[359](index=359&type=chunk)[431](index=431&type=chunk) [Note 4 – Property and Equipment](index=72&type=section&id=Note%204%20%E2%80%93%20Property%20and%20Equipment) Eton's net property and equipment decreased to $72 thousand in 2022, with depreciation expense of $66 thousand for the year Property and Equipment, Net (in thousands) | Category | December 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Computer hardware and software | $177 | $157 | | Furniture and fixtures | $112 | $106 | | Equipment | $52 | $132 | | Leasehold improvements | $71 | $71 | | Construction in progress | $12 | $0 | | Total | $424 | $466 | | Less: accumulated depreciation and amortization | $(352) | $(351) | | **Property and equipment, net** | **$72** | **$115** | - Depreciation expense for property and equipment was **$66 thousand** in 2022, **$155 thousand** in 2021, and **$347 thousand** in 2020[369](index=369&type=chunk) [Note 5 – Debt](index=73&type=section&id=Note%205%20%E2%80%93%20Debt) Eton's debt includes a SWK Credit Agreement, amended in April 2022 to defer principal payments and reduce interest, and previously included a PPP loan that was fully forgiven in 2021 - Eton entered into a SWK Credit Agreement in November 2019 for up to **$10,000 thousand** in financing, with an additional **$2,000 thousand** borrowed in August 2020[372](index=372&type=chunk) - The SWK Credit Agreement was amended in April 2022 to defer loan principal payments until May 2023 and reduce the interest rate to LIBOR 3-month plus **8.0%**[376](index=376&type=chunk) - In connection with the SWK loan, Eton issued warrants to SWK to purchase **51,239 shares** (**$5.86 exercise price**) and **18,141 shares** (**$6.62 exercise price**)[373](index=373&type=chunk)[374](index=374&type=chunk) - The PPP loan of **$361 thousand** received in May 2020 was fully forgiven in May 2021, resulting in a **$365 thousand** gain[381](index=381&type=chunk) - The EIDL loan of **$150 thousand** received in July 2020 was fully paid off in July 2021[382](index=382&type=chunk) [Note 6 — Common Stock](index=74&type=section&id=Note%206%20%E2%80%94%20Common%20Stock) Eton has 50 million authorized shares of common stock, with 25.4 million outstanding as of December 31, 2022, and has issued shares for milestone fees, public offerings, stock option exercises, ESPP, and warrant exercises - Eton has **50,000,000 authorized shares** of **$0.001 par value** common stock[383](index=383&type=chunk) - As of December 31, 2022, **25,353,119 shares** of common stock were issued and outstanding[297](index=297&type=chunk) - In March 2020, **379,474 shares** of common stock were issued to Diurnal Limited as a milestone fee for acquiring U.S. marketing rights to **ALKINDI SPRINKLE®**, valued at **$1,264 thousand**[384](index=384&type=chunk) - In October 2020, the company issued **3,220,000 shares** in a public offering, receiving net proceeds of **$21,026 thousand**[385](index=385&type=chunk) - During 2022, **25,000 shares** were issued from stock option exercises, **69,884 shares** from the Employee Stock Purchase Plan (ESPP), and **632,231 shares** from stock warrant exercises[388](index=388&type=chunk) [Note 7 — Common Stock Warrants](index=75&type=section&id=Note%207%20%E2%80%94%20Common%20Stock%20Warrants) As of December 31, 2022, Eton had 483,380 warrants outstanding with an average exercise price of $7.29, after 1,067,242 warrants were exercised during the year, and incurred a $244 thousand modification expense for warrant expiration extensions Warrants Outstanding (as of December 31, 2022) | Description of Warrants | No. of Shares | Exercise Price | | :------------------------ | :------------ | :------------- | | Placement Agent Warrants - IPO | 414,000 | $7.50 | | SWK Warrants – Debt (Tranche 1) | 51,239 | $5.86 | | SWK Warrants – Debt (Tranche 2) | 18,141 | $6.62 | | **Total** | **483,380** | **$7.29 (Avg)** | - In 2022, **1,067,242 warrants** were exercised, resulting in the issuance of **632,231 shares** of common stock[391](index=391&type=chunk) - A modification expense of **$244 thousand** was incurred in 2022 for extending the expiration date of certain warrants from the 2017 preferred stock offering[390](index=390&type=chunk) [Note 8 — Share-Based Payment Awards](index=75&type=section&id=Note%208%20%E2%80%94%20Share-Based%20Payment%20Awards) Eton's 2018 Equity Incentive Plan had 239,167 shares available for future issuance as of December 31, 2022, with total stock-based compensation expense of $4.2 million in 2022, and significant unrecognized compensation costs remaining Total Stock-Based Compensation Expense (in thousands) | Year | Amount (in thousands) | | :--- | :----- | | 2022 | $4,218 | | 2021 | $3,381 | | 2020 | $2,576 | - Eton operates under the 2018 Equity Incentive Plan, which authorized the issuance of common stock for awards, with **239,167 shares** available for future issuance as of December 31, 2022[392](index=392&type=chunk) - Modifications to certain outstanding awards for two senior executives in 2022 resulted in a modification expense of approximately **$104 thousand**[397](index=397&type=chunk) - As of December 31, 2022, there was **$3,868 thousand** of unrecognized compensation costs related to non-vested stock option awards and **$858 thousand** for unvested Restricted Stock Units (RSUs)[404](index=404&type=chunk)[405](index=405&type=chunk) [Note 9 — Basic and Diluted Net Loss per Common Share](index=78&type=section&id=Note%209%20%E2%80%94%20Basic%20and%20Diluted%20Net%20Loss%20per%20Common%20Share) Eton reported a basic and diluted net loss per common share of $(0.36) in 2022, with common stock equivalents excluded from diluted calculations due to their anti-dilutive effect Net Loss Per Common Share | Metric | Year ended Dec 31, 2022 | Year ended Dec 31, 2021 | Year ended Dec 31, 2020 | | :---------------------------------- | :---------------------- | :---------------------- | :---------------------- | | Net loss per common share (basic and diluted) | $(0.36) | $(0.08) | $(1.33) | | Weighted average common shares outstanding | 25,145,657 | 25,207,299 | 21,010,058 | - Common stock equivalents (stock options, unvested RSAs and RSUs, and warrants) were excluded from the calculation of diluted net loss per share for 2022, 2021, and 2020 because their inclusion would be anti-dilutive due to the reported net losses[410](index=410&type=chunk) [Note 10 — Related-Party Transactions](index=79&type=section&id=Note%2010%20%E2%80%94%20Related-Party%20Transactions) Harrow Health, Inc. held 7.8% of Eton's common stock as of December 31, 2022, and Eton had an agreement with Eyemax LLC, an entity affiliated with Eton's CEO, for product rights that were later sold to Bausch Health - Harrow Health, Inc. (former parent company) owned **1,982,000 shares** of Eton's common stock as of December 31, 2022, representing **7.8%** of outstanding shares[413](index=413&type=chunk) - Eton had an agreement with Eyemax LLC, an entity affiliated with Eton's CEO, for **EM-100** product rights, which were later sold to Bausch Health, with Eton and Eyemax splitting future royalties[415](index=415&type=chunk)[416](index=416&type=chunk)[417](index=417&type=chunk) [Note 11 — Leases](index=79&type=section&id=Note%2011%20%E2%80%94%20Leases) Eton recognizes ROU assets and lease liabilities for its office space, with the lease renewed through March 31, 2025, and future annual commitments totaling $201 thousand - Eton recognizes right-of-use (ROU) assets and lease liabilities for its operating leases, primarily office space, in accordance with ASC Topic 842[328](index=328&type=chunk)[419](index=419&type=chunk) - The office lease was renewed in November 2022 for a two-year period through **March 31, 2025**, resulting in **$188 thousand** in ROU assets and operating lease liabilities[420](index=420&type=chunk)[427](index=427&type=chunk) - The weighted-average remaining lease term was **2.25 years**, and the weighted-average discount rate was **8.6%** as of December 31, 2022[424](index=424&type=chunk) Future Annual Lease Commitments (as of December 31, 2022, in thousands) | Year | Undiscounted Lease Payments (in thousands) | | :--- | :-------------------------- | | 2023 | $88 | | 2024 | $90 | | 2025 | $23 | | **Total** | **$201** | [Note 12 – Income Taxes](index=81&type=section&id=Note%2012%20%E2%80%93%20Income%20Taxes) Eton reported no income tax expense for 2020-2022, with a 100% valuation reserve against its $21.6 million deferred tax assets due to uncertain future taxable income, and federal NOL carryforwards of $60.3 million - Eton reported no income tax expense for the years ended December 31, 2022, 2021, and 2020[428](index=428&type=chunk) Deferred Tax Assets (as of December 31, in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :-------------------- | :----- | :----- | | Net operating losses | $17,183 | $15,871 | | Stock-based expenses | $3,090 | $2,135 | | Accruals and other | $1,359 | $542 | | **Total deferred tax assets** | **$21,632** | **$18,548** | - A **100% valuation reserve** of **$21,632 thousand** was established against deferred tax assets at December 31, 2022, due to the uncertainty of future taxable income[431](index=431&type=chunk) - Eton has a federal and state Net Operating Loss (NOL) carryforward of **$60,281 thousand** as of December 31, 2022, with federal NOLs incurred after 2017 carried forward indefinitely (subject to **80% usage limitation**) and pre-2018 federal NOLs expiring in 2037[432](index=432&type=chunk) [Note 13 - Employee Savings Plan](index=82&type=section&id=Note%2013%20-%20Employee%20Savings%20Plan) Eton established a 401(k) employee savings plan in 2018, making matching contributions up to 4% of participants' annual cash compensation, totaling $172 thousand in 2022 - Eton established an employee savings plan (401(k)) effective January 1, 2018[434](index=434&type=chunk) - The company makes matching contributions up to **4%** of participants' annual cash compensation[434](index=434&type=chunk) Matching Contributions to 401(k) Plan (in thousands) | Year | Amount (in thousands) | | :--- | :----- | | 2022 | $172 | | 2021 | $154 | | 2020 | $117 | [Note 14 — Commitments and Contingencies](index=83&type=section&id=Note%2014%20%E2%80%94%20Commitments%20and%20Contingencies) Eton has no material pending litigation but has various commitments from licensing and acquisition agreements, including potential milestone payments and royalties for out-licensed and acquired products - Eton is subject to legal proceedings and claims in the ordinary course of business but is not aware of any material pending or threatened litigation[436](index=436&type=chunk) - The company out-licensed three oral solution pediatric neurology product candidates (**Topiramate**, **Zonisamide**, **Lamotrigine**) to Azurity in 2021, having recognized **$22,000 thousand** in milestone revenues to date, with potential for up to **$20,000 thousand** in additional milestones[438](index=438&type=chunk) - In June 2022, Eton sold its rights in **Cysteine Hydrochloride**, **Biorphen®**, and **Rezipres®** to Dr. Reddy's for **$5,000 thousand** at closing, with potential for up to **$42,500 thousand** in additional payments[449](index=449&type=chunk) - Eton acquired U.S. marketing rights for **ALKINDI SPRINKLE®** in March 2020, paying **$3,500 thousand** in cash and issuing **379,474 shares** of common stock (valued at **$1,264 thousand**)[445](index=445&type=chunk)[446](index=446&type=chunk) - In June 2021, Eton acquired U.S. and Canadian rights to Crossject's **ZENEO® hydrocortisone needleless autoinjector**, with potential for up to **$3,500 thousand** in development milestones and **$6,000 thousand** in commercial milestones, plus a **10% royalty** on net sales[447](index=447&type=chunk) - In October 2021, Eton acquired U.S. marketing rights to **Carglumic Acid Tablets** for **$3,250 thousand**, retaining **50%** of product profits[448](index=448&type=chunk) - In September 2022, Eton acquired an FDA-approved ANDA for **Betaine Anhydrous for oral solution** for **$2,000 thousand**, with potential for up to **$1,000 thousand** in commercial milestones and retaining **65%** of product profits[450](index=450&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=85&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[453](index=453&type=chunk) [Controls and Procedures](index=85&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2022, management concluded that Eton's disclosure controls and procedures and internal control over financial reporting were effective, acknowledging the inherent limitations of control systems [Disclosure Controls and Procedures](index=85&type=section&id=Disclosure%20Controls%20and%20Procedures) As of December 31, 2022, management concluded that Eton's disclosure controls and procedures were effective, ensuring timely and accurate reporting of information for SEC filings - As of December 31, 2022, management concluded that Eton's disclosure controls and procedures were effective[456](index=456&type=chunk) - These controls are designed to ensure that information required for SEC reports is recorded, processed, summarized, and reported timely and communicated to management[454](index=454&type=chunk) [Management's Report on Internal Control over Financial Reporting](index=85&type=section&id=Management's%20Report%20on%20Internal%20Control%20over%20Financial%20Reporting) Management concluded that Eton's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework, with no independent auditor attestation report provided - Management concluded that Eton's internal control over financial reporting was effective as of December 31, 2022, based on the 2013 Internal Control—Integrated Framework issued by COSO[457](index=457&type=chunk) - This report does not include an attestation report from the independent registered public accounting firm, as permitted by applicable SEC rules[458](index=458&type=chunk) [Changes in Internal Control over Financial Reporting](index=85&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There have been no material changes in internal control over financial reporting during the quarter ended December 31, 2022 - There have been no material changes in internal control over financial reporting during the quarter ended December 31, 2022[459](index=459&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=86&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) Management acknowledges that control systems provide only reasonable assurance, subject to inherent limitations such as resource constraints, errors, circumvention, and management override - Management acknowledges that control systems provide only reasonable, not absolute, assurance that objectives will be met[461](index=461&type=chunk) - Inherent limitations include resource constraints, faulty judgments, simple errors, circumvention by individuals or collusion, and management override[461](index=461&type=chunk) [Other Information](index=86&type=section&id=Item%209B.%20Other%20Information) This item is not applicable to Eton Pharmaceuticals - Not applicable[462](index=462&type=chunk) [PART III](index=80&type=section&id=PART%20III) [