Eton Pharmaceuticals(ETON) - 2023 Q2 - Quarterly Report

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