Eton Pharmaceuticals(ETON) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents Eton Pharmaceuticals, Inc.'s unaudited condensed financial statements for Q3 2019 and FY 2018, covering balance sheets, operations, equity, cash flows, and notes Condensed Balance Sheets Condensed Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :-------------------------- | :----------------------- | :----------- | | Cash and cash equivalents | $11,777 | $26,735 | | Total current assets | $12,107 | $27,502 | | Total assets | $13,507 | $28,327 | | Total current liabilities | $1,107 | $2,024 | | Total liabilities | $1,159 | $2,024 | | Total stockholders' equity | $12,348 | $26,303 | - Total assets decreased from $28,327 thousand at December 31, 2018, to $13,507 thousand at September 30, 2019, primarily driven by a significant reduction in cash and cash equivalents[9] - Total stockholders' equity decreased from $26,303 thousand at December 31, 2018, to $12,348 thousand at September 30, 2019, largely due to the accumulated deficit[9] Unaudited Condensed Statements of Operations Condensed Statements of Operations Highlights (in thousands) | Metric | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | | :------------------------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $— | $— | $500 | $— | | Research and development expenses | $3,418 | $1,544 | $11,322 | $4,525 | | General and administrative expenses | $1,624 | $830 | $5,123 | $3,510 | | Total operating expenses | $5,042 | $2,374 | $16,445 | $8,035 | | Loss from operations | $(5,042) | $(2,374) | $(15,945) | $(8,035) | | Net loss | $(4,965) | $(2,910) | $(15,624) | $(9,010) | | Net loss per share attributable to common stockholders, basic and diluted | $(0.28) | $(0.65) | $(0.88) | $(2.40) | - For the nine months ended September 30, 2019, the company reported $500 thousand in revenue, compared to no revenue in the prior year period[11] - Research and development expenses significantly increased by 150% to $11,322 thousand for the nine months ended September 30, 2019, from $4,525 thousand in the same period of 2018[11] - Net loss for the nine months ended September 30, 2019, increased to $15,624 thousand from $9,010 thousand in the prior year, reflecting higher operating expenses[11] Unaudited Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the three months ended September 30, 2019 and 2018 Stockholders' Equity Changes (Three Months Ended Sep 30, 2019 vs. 2018) (in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | | :------------------------------------------------------------------ | :----------- | :----------- | | Balances at June 30 | $16,699 | $(12,936) | | Stock-based compensation | $537 | $165 | | Stock option exercises | $77 | $— | | Accrued dividends on redeemable convertible preferred stock | $— | $(300) | | Deemed dividends for accretion of redeemable convertible preferred stock issuance costs | $— | $(429) | | Net loss | $(4,965) | $(2,910) | | Balances at September 30 | $12,348 | $(16,410) | - Total stockholders' equity increased from a deficit of $(16,410) thousand at September 30, 2018, to an equity of $12,348 thousand at September 30, 2019, primarily due to the IPO in November 2018 and subsequent equity activities[12] - Stock-based compensation expense increased to $537 thousand for the three months ended September 30, 2019, from $165 thousand in the same period of 2018[12] Unaudited Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the nine months ended September 30, 2019 and 2018 Stockholders' Equity Changes (Nine Months Ended Sep 30, 2019 vs. 2018) (in thousands) | Metric | Sep 30, 2019 | Sep 30, 2018 | | :------------------------------------------------------------------ | :----------- | :----------- | | Balances at December 31 | $26,303 | $(6,874) | | Stock-based compensation | $1,387 | $1,631 | | Stock option exercises | $154 | $— | | Employee stock purchase plan | $128 | $— | | Accrued dividends on redeemable convertible preferred stock | $— | $(900) | | Deemed dividends for accretion of redeemable convertible preferred stock issuance costs | $— | $(1,257) | | Net loss | $(15,624) | $(9,010) | | Balances at September 30 | $12,348 | $(16,410) | - The accumulated deficit increased to $(61,492) thousand at September 30, 2019, from $(45,868) thousand at December 31, 2018, primarily due to the net loss incurred[13] - The company issued 134,122 shares for stock option exercises and 23,083 shares for its Employee Stock Purchase Plan during the nine months ended September 30, 2019[13] Unaudited Condensed Statements of Cash Flows Condensed Statements of Cash Flows Highlights (Nine Months Ended Sep 30, 2019 vs. 2018) (in thousands) | Category | 2019 | 2018 | | :---------------------------------------- | :---------- | :--------- | | Net cash used in operating activities | $(14,178) | $(6,371) | | Cash used in investing activities | $(1,062) | $(182) | | Cash flows from financing activities | $282 | $— | | Change in cash and cash equivalents | $(14,958) | $(6,553) | | Cash and cash equivalents at end of period | $11,777 | $6,603 | - Net cash used in operating activities increased significantly to $14,178 thousand for the nine months ended September 30, 2019, from $6,371 thousand in the prior year, driven by higher operating losses and increased product development[16] - Cash used in investing activities increased to $1,062 thousand, primarily due to purchases of property and equipment for the new laboratory facility[16] - Cash and cash equivalents decreased by $14,958 thousand during the nine months ended September 30, 2019, resulting in an ending balance of $11,777 thousand[16] Notes to Condensed Financial Statements Note 1 — Company Overview - Eton Pharmaceuticals, Inc. was incorporated in Delaware on April 27, 2017, as a specialty pharmaceutical company focused on developing and commercializing prescription drug products via the FDA's 505(b)(2) regulatory pathway[20] - The company completed an initial public offering (IPO) in November 2018, selling 4,140,000 shares of common stock at $6.00 per share, generating net proceeds of $21,960 thousand[21] Note 2 — Liquidity Considerations - As of September 30, 2019, the company had an accumulated deficit of $61,492 thousand and net cash used in operating activities of $14,178 thousand for the nine months ended September 30, 2019[22] - The company received its first FDA product approval for Biorphen® in October 2019 and believes its existing cash and cash equivalents of $11,777 thousand will be sufficient to fund operations for at least the next twelve months, based on expected Biorphen sales and spending management[23] - The company may seek additional capital through equity financings, debt sales, or other arrangements, acknowledging potential dilution for existing stockholders or restrictive covenants with debt[23] Note 3 — Summary of Significant Accounting Policies - The financial statements are prepared in accordance with GAAP, and interim condensed financial statements are unaudited, reflecting management's necessary adjustments for fair presentation[24][25] - The company operates as a single reportable segment, focusing on developing and commercializing prescription drug products[29] - The company adopted ASC 842 (Leases) effective January 1, 2019, using the modified retrospective approach, which did not materially affect its financial condition, results of operations, or cash flows[58] Note 4 — Revenues - Prior to 2019, the company had no revenues. For the nine months ended September 30, 2019, revenue of $500 thousand resulted from the sale of EM-100 product rights to Bausch Health Ireland Limited[61] - Under the Asset Purchase Agreement, Bausch is obligated to pay a $1,500 thousand milestone upon first commercial sale of EM-100 and royalties on net sales for ten years[61] Note 5 – Property and Equipment Property and Equipment, Net (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------- | :----------- | :----------- | | Computer hardware and software | $170 | $93 | | Furniture and fixtures | $115 | $98 | | Equipment | $993 | $99 | | Leasehold improvements | $147 | $53 | | Construction in progress | $3 | $492 | | Total | $1,428 | $835 | | Less: accumulated depreciation | $(259) | $(62) | | Property and equipment, net | $1,169 | $773 | - Property and equipment, net, increased to $1,169 thousand at September 30, 2019, from $773 thousand at December 31, 2018, primarily due to increased investment in equipment and leasehold improvements[62] - Depreciation expense for the nine-month period ended September 30, 2019, was $197 thousand, a significant increase from $33 thousand in the same period of 2018[62] Note 6 — Redeemable Convertible Preferred Stock — Series A - In June 2017, the company issued 6,685,082 shares of Series A Preferred stock at $3.00 per share, raising $20,055 thousand[63] - The Series A Preferred stock was classified as temporary equity due to a possible cash redemption feature and automatically converted to common stock upon the IPO in November 2018[64][65] - Upon conversion, the company recorded a beneficial conversion amount of $21,747 thousand as a deemed dividend[65] Note 7 — Common Stock - The company has 50,000,000 authorized shares of $0.001 par value common stock[66] - During the nine months ended September 30, 2019, the company issued 134,122 shares for stock option exercises, 23,083 shares for its Employee Stock Purchase Plan, and 42,034 shares for stock warrant exercises[66] Note 8 — Common Stock Warrants - The company issued warrants for 600,000 shares to consultants (exercise price $0.01) and 649,409 shares to a placement agent (exercise price $3.00, adjusted post-IPO) in 2017[69][70] - Prior to the IPO, certain warrants were classified as a warrant liability due to variable share amounts, with fair value changes recorded as other income/expense. Post-IPO, the number of shares became fixed, and the liability was reclassified to additional paid-in-capital[71][72] Outstanding Warrants as of September 30, 2019 | Warrant Type | Shares | Exercise Price (Avg) | | :-------------------------------- | :---------- | :------------------- | | Business Advisory Warrants | 600,000 | $0.01 | | Placement Agent Warrants - Series A Preferred | 636,447 | $3.00 | | Placement Agent Warrants - IPO | 414,000 | $7.50 | | Total | 1,650,447 | $3.04 | Note 9 — Share-Based Payment Awards - The company operates under the 2017 and 2018 Equity Incentive Plans, with 872,837 shares available for future issuance under the 2018 Plan as of September 30, 2019[78] Stock-Based Compensation Expense (in thousands) | Period | General and Administrative | Research and Development | Total | | :------------------------------------ | :------------------------- | :----------------------- | :---- | | Three months ended Sep 30, 2019 | $460 | $77 | $537 | | Three months ended Sep 30, 2018 | $147 | $18 | $165 | | Nine months ended Sep 30, 2019 | $1,150 | $237 | $1,387| | Nine months ended Sep 30, 2018 | $1,581 | $50 | $1,631| Stock Option Activity (as of Sep 30, 2019) | Metric | Shares | Weighted Average Exercise Price | | :-------------------------------------- | :---------- | :------------------------------ | | Options outstanding as of Dec 31, 2018 | 1,295,000 | $1.78 | | Issued | 717,500 | $7.44 | | Exercised | (134,122) | $1.15 | | Options outstanding as of Sep 30, 2019 | 1,878,378 | $3.99 | | Options exercisable at Sep 30, 2019 | 643,431 | $2.65 | - The company adopted an Employee Stock Purchase Plan (ESPP) in December 2018, with an initial reserve of 150,000 shares. In June 2019, 23,083 shares were issued under the ESPP at $5.53 per share[96][98] Note 10 — Basic and Diluted Net Loss per Common Share Basic and Diluted Net Loss per Common Share | Metric | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | | :------------------------------------------------------------------ | :------------------------------ | :------------------------------ | | Net loss attributable to common stockholders | $(4,965) | $(3,639) | | Weighted average common shares outstanding (basic and diluted) | 17,878,114 | 5,614,892 | | Net loss per common share (basic and diluted) | $(0.28) | $(0.65) | | | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | | Net loss attributable to common stockholders | $(15,624) | $(11,167) | | Weighted average common shares outstanding (basic and diluted) | 17,705,852 | 4,657,900 | | Net loss per common share (basic and diluted) | $(0.88) | $(2.40) | - Common stock equivalents (stock options, RSAs, RSUs, warrants, and convertible preferred stock) were anti-dilutive and thus excluded from diluted net loss per share calculations for both periods[101] - The decline in common stock equivalents from 9,039,088 in 2018 to 3,573,885 in 2019 was primarily due to the automatic conversion of Series A Preferred stock at the IPO[101] Note 11 — Related Party Transactions - The company was formed as a wholly-owned subsidiary of Harrow Health, Inc. (Harrow), which contributed 3,500,000 shares of common stock[103] - The company sold its rights to CT-100 to Harrow in May 2019, with Harrow obligated to make milestone and royalty payments[104] - The company has various agreements with entities affiliated with its CEO, including exclusive rights for EM-100 (later sold to Bausch), DS-100, and DS-200, involving upfront payments, milestone payments, and profit-sharing arrangements[108][110][111][112] Note 12 — Leases - Effective January 1, 2019, the company adopted ASC 842, recognizing $281 thousand in ROU assets and $272 thousand in operating lease liabilities for its office and laboratory space[113][114] - The weighted-average remaining lease term was 1.5 years, and the weighted-average incremental borrowing rate was 7.8% as of September 30, 2019[119] Lease-Related Assets and Liabilities (as of Sep 30, 2019) (in thousands) | Category | Amount | | :-------------------------------------- | :----- | | Operating lease right-of-use assets, net | $191 | | Operating lease liabilities, current | $130 | | Operating lease liabilities, noncurrent | $52 | | Total operating lease liabilities | $182 | Note 13 — Commitments and Contingencies - The company is subject to legal proceedings in the ordinary course of business but is not aware of any material pending or threatened litigation[122] - The company has entered into various license and product development agreements for DS-300, ET-103, ET-104, ET-202 (Biorphen®), and ET-203, involving upfront payments, milestone payments upon regulatory approvals or commercial sales, and profit/royalty sharing[124][125][126][129] - For ET-105, the company paid Aucta Pharmaceuticals $2,000 thousand upon FDA acceptance for review and will pay additional milestones up to $18,000 thousand based on commercial success (e.g., $1,000 thousand when net sales exceed $10 million)[130] Note 14 — Subsequent Events - On November 13, 2019, the company entered into a credit agreement with SWK Holdings Corporation for up to $10,000 thousand in financing, receiving $5,000 thousand at closing[132] - Additional borrowings of $5,000 thousand are contingent on FDA approval of a second product (excluding EM-100), or $2,000 thousand upon EM-100 approval and $3,000 thousand upon another product's approval[132] - The credit agreement has a five-year term, bears interest at LIBOR 3-month plus 10.0% (with a 2.0% LIBOR floor), includes warrants to SWK, a 2.0% unused credit limit fee, and a 5.0% exit fee[132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of Eton Pharmaceuticals, Inc.'s Q3 2019 financial condition and operations, focusing on product development, FDA approval, and increased expenses Overview - Eton Pharmaceuticals, formed in April 2017, is a specialty pharmaceutical company developing and commercializing innovative products, primarily focusing on hospital-based and pediatric oral liquid products[136][138] - The company received FDA approval for Biorphen® (phenylephrine HCl injection) in October 2019, which will be marketed in the United States for treating hypotension during anesthesia[137] - The business model targets low-risk candidates with established safety/efficacy to reduce clinical burden and address unmet patient needs[136][138] Results of Operations - The company generated limited revenues through September 2019 but expects significant revenue-generating activities to commence in late 2019 and beyond following Biorphen® FDA approval[139] Net Loss (in thousands) | Period | Net Loss | | :------------------------------------ | :------- | | Three months ended Sep 30, 2019 | $(4,965) | | Three months ended Sep 30, 2018 | $(2,910) | | Nine months ended Sep 30, 2019 | $(15,624)| | Nine months ended Sep 30, 2018 | $(9,010) | - The increase in net loss is attributed to higher operating expenses, including increased R&D and G&A costs[148] Research and Development Expenses Research and Development Expenses (in thousands) | Period | R&D Expenses | | :------------------------------------ | :----------- | | Three months ended Sep 30, 2019 | $3,418 | | Three months ended Sep 30, 2018 | $1,544 | | Nine months ended Sep 30, 2019 | $11,322 | | Nine months ended Sep 30, 2018 | $4,525 | - R&D expenses for the three months ended September 30, 2019, increased by 121% to $3,418 thousand, driven by milestone spending for ET-105 and higher indirect expenses for new personnel and laboratory operating costs[140] - For the nine months ended September 30, 2019, R&D expenses rose by 150% to $11,322 thousand, primarily due to licensing fees and milestone payments for DS-200, ET-202, ET-203, and ET-104, along with increased indirect expenses[141] General and Administrative Expenses General and Administrative Expenses (in thousands) | Period | G&A Expenses | | :------------------------------------ | :----------- | | Three months ended Sep 30, 2019 | $1,624 | | Three months ended Sep 30, 2018 | $830 | | Nine months ended Sep 30, 2019 | $5,123 | | Nine months ended Sep 30, 2018 | $3,510 | - G&A expenses for the three months ended September 30, 2019, increased by 96% to $1,624 thousand, mainly due to increased headcount, public company expenses, initial product marketing, and distribution setup costs[145] - For the nine months ended September 30, 2019, G&A expenses increased by 46% to $5,123 thousand, driven by similar factors, partially offset by lower stock-based consulting service fees[146] Cash Flows Summary of Cash Flows (Nine Months Ended Sep 30, 2019 vs. 2018) (in thousands) | Category | 2019 | 2018 | | :---------------------------------------- | :---------- | :--------- | | Net cash used in operating activities | $(14,178) | $(6,371) | | Cash used in investing activities | $(1,062) | $(182) | | Cash flows from financing activities | $282 | $— | | Change in cash and cash equivalents | $(14,958) | $(6,553) | - The increase in cash used in operating activities is primarily due to higher operating losses from increased product candidate licensing and development, personnel, and operating expenses for the new laboratory and business expansion[149] - Investing activities increased due to capital expenditures for the new laboratory facility, while financing activities in 2019 were driven by ESPP stock purchases and stock option exercises[149] Critical Accounting Policies - The company's financial statements require management to make estimates and judgments, particularly for revenue recognition, stock-based compensation, and research and development expenses[151][152] - Revenue recognition follows ASC 606, where revenue is recognized when customers obtain control of promised goods or services, with specific considerations for milestone payments and royalties[154][157][158] - Stock-based compensation is accounted for under ASC 718, with fair value estimated using the Black-Scholes-Merton model, incorporating subjective assumptions like expected volatility and term[161][162] - R&D expenses, including internal activities and external contracted services, are charged to operations as incurred, with upfront and milestone payments for unapproved products expensed immediately[163][164] Off Balance Sheet Transactions - The company does not have any off-balance sheet transactions[165] JOBS Act Transition Period - The company, as an 'emerging growth company' under the JOBS Act, has irrevocably elected not to use the extended transition period for complying with new or revised accounting standards, adopting them on the same dates as other public companies[166] - The company may rely on other exemptions under the JOBS Act, such as not providing an auditor's attestation report on internal controls over financial reporting[167] - The company will remain an emerging growth company until the earliest of December 31, 2023, reaching $1.07 billion in annual gross revenues, becoming a 'large accelerated filer,' or issuing over $1.0 billion in non-convertible debt[167] Item 3. Quantitative and Qualitative Disclosures About Market Risk Eton Pharmaceuticals, Inc.'s market risk exposure, mainly interest rate risk on cash and equivalents, managed via short-term investments, with minimal foreign currency risk - The company's primary investment objective is capital preservation, and it does not use hedging contracts[169] - Market risks are primarily related to interest rate risk on cash and cash equivalents and the financial viability of institutions holding its capital[169] - As of September 30, 2019, cash equivalents and investments are exclusively in money market funds. The company believes its exposure to interest rate risk is minimal due to low interest rates and short duration of invested funds, and it has no foreign currency risk[169] Item 4. Controls and Procedures Eton Pharmaceuticals, Inc.'s disclosure controls and procedures, effective as of September 30, 2019, with no material changes in internal control over financial reporting Disclosure Controls and Procedures - The company maintains disclosure controls and procedures designed to ensure information required for SEC reports is recorded, processed, summarized, and reported timely[170] - Management, including the CEO and CFO, evaluated the effectiveness of these controls for the nine months ended September 30, 2019, and concluded they are effective[172] - Management acknowledges that no control system can provide absolute assurance against all errors or fraud due to inherent limitations and resource constraints[173] Changes in Internal Control over Financial Reporting - There have been no material changes in the company's internal control over financial reporting during the period ended September 30, 2019[174] PART II. OTHER INFORMATION Item 1. Legal Proceedings Eton Pharmaceuticals, Inc. has no legal proceedings to report - The company has no legal proceedings[176] Item 1A. Risk Factors Refers readers to the risk factors in the company's 2018 10-K, noting no material changes to these risks - Readers should consider the risk factors outlined in Part I, Item 1A of the company's 2018 10-K[176] - There have been no material changes to the risk factors included in the 2018 10-K[176] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Eton Pharmaceuticals, Inc. has no unregistered sales of equity securities or use of proceeds to report - The company has no unregistered sales of equity securities and use of proceeds to report[177] Item 3. Defaults Upon Senior Securities Eton Pharmaceuticals, Inc. has no defaults upon senior securities to report - The company has no defaults upon senior securities to report[178] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to Eton Pharmaceuticals, Inc - Mine safety disclosures are not applicable to the company[179] Item 5. Other Information There is no other information to report - There is no other information to report[180] Item 6. Exhibits Lists exhibits filed with the report, including licensing agreements, certifications, and XBRL financial information Exhibit Index - Key exhibits include an Exclusive License and Product Development Agreement with Aucta Pharmaceuticals, Inc., and certifications from the President/CEO and CFO[184] - The report also includes financial information formatted in Extensible Business Reporting Language (XBRL)[184] Signatures Contains signatures of Eton Pharmaceuticals, Inc.'s President/CEO and CFO, certifying the report's submission - The report is signed by Sean E. Brynjelsen, President and Chief Executive Officer, and W. Wilson Troutman, Chief Financial Officer, on November 14, 2019[189]