Eton Pharmaceuticals(ETON) - 2022 Q4 - Annual Report

PART I Business Overview Eton Pharmaceuticals develops, acquires, and commercializes rare disease products, leveraging expertise, third-party manufacturing, and navigating extensive government regulations Company 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] - Commercial Rare Disease Products: * ALKINDI SPRINKLE® (hydrocortisone granules) for adrenocortical insufficiency in children[24][25] * Carglumic Acid tablets for hyperammonemia due to NAGS deficiency[26] * Betaine Anhydrous for Oral Solution for homocystinuria[27] - Late-Stage Product Candidates: * Dehydrated Alcohol Injection for methanol poisoning (Orphan Drug Designation, FDA review with Target Action Date of June 27, 2023)[24][28] * ET-400 for adrenal insufficiency (NDA submission expected by end of 2023)[29] * ZENEO® Hydrocortisone Autoinjector for adrenal crisis (NDA submission expected in 2024)[30] - Out-licensed Products (royalties or milestone payments): * Alaway® Preservative Free (ketotifen fumarate) for allergic conjunctivitis[32] * EPRONTIA® (topiramate oral solution) for seizures and migraine prevention[33] * Cysteine Hydrochloride for nutritional requirements of newborn infants[34] * ZONISADE™ (zonisamide oral suspension) for partial seizures in epilepsy[35] * Biorphen® (phenylephrine injection) for clinically important hypotension[36] * Lamotrigine for Oral Suspension for epilepsy (under development, received CRL)[37][38] Goals and Strengths 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] - 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] * Regulatory expertise: Knowledge and experience gaining FDA approval, particularly within the 505(b)(2) regulatory pathway, to expedite drug development and reduce investment[46] Operations (Sales, R&D, Manufacturing, IP) 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 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] - 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] Research and Development 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] - The company utilizes external sources, including product development partners and contract laboratory services, for various product development activities[43] Manufacturing and Suppliers 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] - 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] - Reliance on external manufacturers significantly reduces capital investment and provides flexibility[44] Intellectual Property 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] - ALKINDI SPRINKLE® is protected by three issued patents that extend to 2034[25][47] Government Regulations and Funding 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 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][51][52] - Manufacturing processes must conform to current Good Manufacturing Processes (cGMP) throughout clinical testing and post-approval[54][59] - 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][59][60] Section 505(b)(2) New Drug Applications 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][62] - This pathway can expedite drug development by leveraging existing data but still requires the applicant to provide manufacturing and quality data[46][62] - 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][114][117] Section 505(j) Abbreviated New Drug Applications 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] - 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] Other U.S. Healthcare Laws and Compliance Requirements 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] - State laws also apply, covering anti-kickback, false claims, reporting of payments to healthcare providers, drug pricing, and pharmaceutical sales representative registration[67] - Non-compliance can lead to significant penalties, including criminal/civil penalties, fines, disgorgement, imprisonment, exclusion from government healthcare programs, and operational restructuring[67] 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] - Third-party payors are increasingly challenging drug prices, and governments are implementing cost-containment programs, including price controls and restrictions on reimbursement[68] - 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] Healthcare Reform 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] - 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] - These reforms are expected to result in more rigorous coverage criteria and additional downward pressure on drug prices, potentially harming future revenues[82] Brexit Impact 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] 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] * 16 in sales/marketing operations[86] * 4 in general corporate and strategy roles[86] - The company also utilizes outside consultants on an as-needed basis[86] Corporate and Other Information 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] - Its principal executive offices are located at 21925 W. Field Parkway, Suite 235, Deer Park, Illinois, 60010[87] - The company's corporate website (www.etonpharma.com) is used to post press releases and links to SEC filings[87] Risk Factors Eton Pharmaceuticals faces significant risks across its business, product development, regulatory, manufacturing, commercialization, intellectual property, and common stock ownership Risks Relating to Our Business 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][93] - The company may need to grow its organization, which could lead to difficulties in managing growth and diverting management's attention[94] - 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][97] - 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] - Sales of counterfeit or unauthorized products could adversely affect revenues, business, and reputation[100] Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization 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] - 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][104] - 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][113] - 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][117] - 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][146] - 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][164][165] - 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][168][170][171][172][173] Risks Relating to Our Intellectual Property Rights 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][176] - Protecting intellectual property rights is difficult and costly, with patent positions being uncertain and vulnerable to challenges, invalidation, or circumvention by third parties[177][180] - 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][184] - 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][190][191][192] - 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][195] Risks Related to Owning Our Common Stock 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][202] - 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] - 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][208][211] - 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] - 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] - 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][222] - 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] Unresolved Staff Comments There are no unresolved staff comments to report Properties 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] - The lease for this facility expires on March 31, 2025[230] - The company considers its current facilities suitable and adequate to meet its current needs[231] Legal Proceedings There are no legal proceedings to report Mine Safety Disclosures This item is not applicable to Eton Pharmaceuticals PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 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] - The closing price of common stock on December 30, 2022, was $2.82 per share[236] Record Holders 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] - The closing price per share of common stock on March 7, 2023, was $3.99[237] 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] - The company currently intends to retain any future earnings and does not expect to pay any dividends in the foreseeable future[238] Recent Sales of Unregistered Securities Not applicable - Not applicable[239] Selected Financial Data This item is not applicable to Eton Pharmaceuticals - Not applicable[240] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] Results of Operations 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] - The $2.2 million decrease in R&D expenses in 2022 was due to non-recurring milestone payments in 2021[247] - The $4.3 million increase in G&A expenses in 2022 was primarily due to personnel additions and increased sales & marketing spending[247] General and Administrative Expenses 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][253] - The company anticipates G&A expenses will increase to support business growth, particularly in sales and marketing for additional personnel and promotional activities[248][253] Research and Development Expenses 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][254] - Eton had eight employees supporting its product development function in 2022[249] Liquidity and Capital Resources 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] - Projected estimates for product development spending, administrative expenses, and working capital requirements could be inaccurate, potentially requiring additional financing sooner than anticipated[255] Cash Flows 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] - Investing activities in 2022 and 2021 primarily consisted of licensing fees for Betaine and Carglumic Acid, respectively[256] - Financing activities in 2020 included a follow-on common stock offering[256] Critical Accounting Policies 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 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][338] - 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][268][350] - 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][263][341][344] Stock-Based Compensation 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][357] - 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][357] - 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][275][357] Research and Development Expenses 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][354] - 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][354] - Upfront and milestone payments for licensing technology for products not yet FDA-approved are expensed as R&D in the period incurred[277][355] Of Balance Sheet Transactions Eton Pharmaceuticals does not have any off-balance sheet transactions - Eton Pharmaceuticals does not have any off-balance sheet transactions[278] JOBS Act Transition Period 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][280] - 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][279] - 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][208][280] Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - 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] - Eton currently does not have exposure to foreign currency risk[282] Financial Statements and Supplementary Data 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 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] - 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] - 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][293] Balance Sheets 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 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 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] - Additional paid-in capital increased by $4,469 thousand in 2022, driven by $4,218 thousand in stock-based compensation[302] Statements of Cash Flows 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][304] - Investing activities used $2,788 thousand in 2022, mainly for the purchase of product licensing rights ($2,750 thousand)[256][304] - 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][304] Notes to Financial Statements 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 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] - 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] - 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] Note 2 — Liquidity Considerations 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] - 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] - Eton may need to seek additional capital through equity financings, debt issuance, or other arrangements if capital resources are depleted faster than anticipated[310] Note 3 — Summary of Significant Accounting Policies 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][314] - Eton operates as a single reportable segment focused on developing and commercializing prescription drug products[315] - Intangible assets, such as licensed products, are capitalized upon FDA approval and amortized on a straight-line basis over their estimated useful lives[322] - Revenue recognition follows ASC 606, with revenue from product sales recognized net of estimated sales deductions (e.g., returns, chargebacks, discounts)[338][347][348] - Research and development expenses, including upfront and milestone payments for unapproved licensed technology, are charged to operations as incurred[354][355] - Stock-based compensation is valued using the Black-Scholes-Merton model and expensed over the service period[357] - 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][431] Note 4 – Property and Equipment 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] Note 5 – Debt 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] - 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] - 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][374] - The PPP loan of $361 thousand received in May 2020 was fully forgiven in May 2021, resulting in a $365 thousand gain[381] - The EIDL loan of $150 thousand received in July 2020 was fully paid off in July 2021[382] Note 6 — Common Stock 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] - As of December 31, 2022, 25,353,119 shares of common stock were issued and outstanding[297] - 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] - In October 2020, the company issued 3,220,000 shares in a public offering, receiving net proceeds of $21,026 thousand[385] - 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] Note 7 — Common Stock Warrants 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] - 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] Note 8 — Share-Based Payment Awards 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] - Modifications to certain outstanding awards for two senior executives in 2022 resulted in a modification expense of approximately $104 thousand[397] - 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][405] Note 9 — Basic and Diluted Net Loss per Common Share 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] Note 10 — Related-Party Transactions 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] - 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][416][417] Note 11 — Leases 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][419] - 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][427] - 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] 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 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] 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] - 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] Note 13 - Employee Savings Plan 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] - The company makes matching contributions up to 4% of participants' annual cash compensation[434] Matching Contributions to 401(k) Plan (in thousands) | Year | Amount (in thousands) | | :--- | :----- | | 2022 | $172 | | 2021 | $154 | | 2020 | $117 | Note 14 — Commitments and Contingencies 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] - 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] - 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] - 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][446] - 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] - In October 2021, Eton acquired U.S. marketing rights to Carglumic Acid Tablets for $3,250 thousand, retaining 50% of product profits[448] - 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] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[453] Controls and Procedures 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 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] - These controls are designed to ensure that information required for SEC reports is recorded, processed, summarized, and reported timely and communicated to management[454] Management's Report on Internal Control over Financial Reporting 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] - This report does not include an attestation report from the independent registered public accounting firm, as permitted by applicable SEC rules[458] Changes in Internal Control over Financial Reporting 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] Inherent Limitations on Effectiveness of Controls 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] - Inherent limitations include resource constraints, faulty judgments, simple errors, circumvention by individuals or collusion, and management override[461] Other Information This item is not applicable to Eton Pharmaceuticals - Not applicable[462] PART III [