Eton Pharmaceuticals(ETON) - 2023 Q1 - Quarterly Report

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 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 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 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 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 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 This section provides detailed explanations and additional information supporting the condensed financial statements, covering accounting policies, debt, equity, and commitments Note 1 — Company Overview 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] - Currently has three commercial rare disease products: ALKINDI SPRINKLE® (adrenocortical insufficiency), Carglumic Acid (hyperammonemia due to NAGS deficiency), and Betaine Anhydrous (homocystinuria)[20] - 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] - 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] Note 2 — Liquidity Considerations 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] - 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] - Existing long-term debt obligation contains covenants limiting dividend payments or other distributions to stockholders[22] Note 3 — Summary of Significant Accounting Policies 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][26] - 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] - Operates as a single reportable segment focused on developing and commercializing prescription drug products[28] - 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] - 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] - 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] 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][49][50][54][55] - 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] - 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][98] - Adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) on January 1, 2023, with no material impact on financial statements[74] Note 4 – Property and Equipment 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] Note 5 — Long-Term Debt 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][83] - 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] - 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] 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 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] - Issued 202,126 shares of common stock from stock option exercises during Q1 2023[90] - Withheld 50,867 shares for payroll tax obligations totaling $181 thousand in Q1 2023[90] Note 7 — Common Stock Warrants 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] Note 8 — Share-Based Payment Awards 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] - Total stock-based compensation expense was $872 thousand for Q1 2023 (vs. $1,083 thousand for Q1 2022)[98] 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] 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] - 710,296 shares available for issuance under the Employee Stock Purchase Plan (ESPP) as of March 31, 2023[105] - ESPP expense was $36 thousand for Q1 2023 (vs. $45 thousand for Q1 2022)[107] Note 9 — Related-Party Transactions 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][110] - 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] - The Company has realized $1,818 thousand of non-royalty and royalty revenue from this arrangement as of March 31, 2023[111] - Bausch Health discontinued sales of Alaway® Preservative Free effective March 24, 2023[113] Note 10 — Leases 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] - Cash paid for operating lease liabilities was $19 thousand for Q1 2023 (vs. $20 thousand for Q1 2022)[117] - 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] 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 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] - 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] - 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][130] - Acquired U.S. marketing rights to Carglumic Acid Tablets in October 2021, retaining 50% of product profits[131] - 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] - Acquired an FDA-approved ANDA for Betaine Anhydrous for oral solution in September 2022, retaining 65% of product profits[134] - 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] Note 12 — Subsequent Events 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - Currently has three commercial rare disease products: ALKINDI SPRINKLE®, Carglumic Acid, and Betaine Anhydrous, with four additional product candidates in late-stage development[141] - Entitled to royalties or milestone payments from four FDA-approved products and one product candidate developed and out-licensed[142] Results of Operations 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] - Gross profit increased to $3,346 thousand for Q1 2023, up from $1,327 thousand for Q1 2022[143] - 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] - 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] Liquidity and Capital Resources 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] - The Company believes existing funding and revenues from approved products will be sufficient for at least the next twelve months of operations[148] - Potential need for additional financing if projected estimates for spending are inaccurate or growth is faster than expected[148] Cash Flows 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] - Decrease in cash used in financing activities due to a deferral of loan principal payments from April 2022 until May 2023[149] Critical Accounting Policies 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] - 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][152][163][166] JOBS Act Transition Period 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] - 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] Off Balance Sheet Transactions 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - Exposed to interest rate risk on cash and cash equivalents and risks related to the financial viability of institutions holding capital[172] - 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] - Currently, there is no exposure to foreign currency risk[172] Item 4. Controls and Procedures 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] - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[176] - 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] 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 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] Item 1A. Risk Factors 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] - 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][182] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities 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] Item 4. Mine Safety Disclosures This section indicates that there are no applicable disclosures regarding mine safety for the reporting period - Not applicable for this reporting period[184] Item 5. Other Information This section states that there is no other information to disclose for the reporting period - Not applicable for this reporting period[185] Item 6. Exhibits 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] - 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]