Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
1 — Company Overview
Eton
is an innovative pharmaceutical company focused on developing, acquiring, and commercializing innovative products to address unmet needs
in patients suffering from rare diseases.
The
Company currently has three commercial rare disease products, ALKINDI SPRINKLE® for the treatment of adrenocortical insufficiency,
Carglumic Acid for the treatment of acute hyperammonemia due to N-acetylglutamate synthase (NAGS) deficiency, and Betaine Anhydrous for
the treatment of homocystinuria and has three additional product candidates in late-stage development. The Company is developing dehydrated
alcohol injection, which has received Orphan Drug Designation for the treatment of methanol poisoning, ZENEO® hydrocortisone autoinjector
for the treatment of adrenal crisis, and ET-400.
In
addition, the Company is entitled to royalties or milestone payments from six FDA-approved products that the Company developed and out-licensed.
The products are Alaway® Preservative Free, EPRONTIA™, Cysteine Hydrochloride, Zonisade®, Biorphen®, and Rezipres®.
Note
2 — Liquidity Considerations
The
Company currently believes its existing cash and cash equivalents of $13,378 as of September 30, 2022 along with revenues from approved
products and additional milestone payments expected to be paid in 2022 will be sufficient to fund its operating expenses and capital
expenditure requirements for at least the next twelve months from the date of filing of this quarterly report. This estimate is based
on the Company’s current assumptions, including assumptions relating to estimated sales and its ability to manage its spending.
The Company could use its available capital resources sooner than currently expected. Accordingly, the Company could seek to obtain additional
capital through equity financings, the issuance of debt or other arrangements. However, there can be no assurance that the Company will
be able to raise additional capital if needed or under acceptable terms, if at all. The sale of additional equity may dilute existing
stockholders and newly issued shares could contain senior rights and preferences compared to currently outstanding common shares. The
Company’s existing long-term debt obligation contains covenants and limits the Company’s ability to pay dividends or make
other distributions to stockholders. If the Company experiences delays in product sales growth, completing its product development and
obtaining regulatory approval for its other product candidates and is unable to obtain such additional financing, operations might need
to be scaled back or discontinued.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies
Basis
of Presentation
The
Company has prepared the accompanying condensed financial statements in accordance with accounting principles generally accepted in the
United States (“GAAP”).
Unaudited
Interim Financial Information
The
accompanying interim condensed financial statements are unaudited and have been prepared on the same basis as the audited financial statements
and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company’s financial position
as of September 30, 2022 and the results of its operations and its cash flows for the periods ended September 30, 2022 and 2021. The
financial data and other information disclosed in these notes related to the three-month and nine-month periods ended September 30, 2022
and 2021 are also unaudited. The results for the three-month and nine-month periods ended September 30, 2022 are not necessarily indicative
of results to be expected for the year ending December 31, 2022, any other interim periods or any future year or period.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial
statements include, but are not limited to, provisions for uncollectible receivables and sales returns, valuation of inventories, useful
lives of assets, the impairment of intangible assets, the accrual of research and development expenses and the valuation of common stock,
stock options and warrants, and restricted stock units. Estimates are periodically reviewed in light of changes in circumstances, facts
and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates
or assumptions.
Segment
Information
The
Company operates the business on the basis of a single reportable segment, which is the business of developing and commercializing prescription
drug products. The Company’s chief operating decision-maker is the Chief Executive Officer (“CEO”), who evaluates the
Company as a single operating segment.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. All cash and
cash equivalents are held in U.S. financial institutions or invested in short-term U.S. treasury bills or high-grade money market funds.
As of September 30, 2022, the Company’s cash is in a non-interest bearing account as well as a government money market fund. From
time to time, amounts deposited with its bank exceed federally insured limits. The Company believes the associated credit risk to be
minimal.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are recorded net of allowances for doubtful
accounts, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances. The total for these reserves
amounted to $448 and $96 as of September 30, 2022 and December 31, 2021, respectively.
Inventories
The
Company values its inventories at the lower of cost or net realizable value using the first-in, first-out method of valuation. The Company
reviews its inventories for potential excess or obsolete issues on an ongoing basis and will record a write-down if an impairment is
identified. Inventories at September 30, 2022 and December 31, 2021 consist solely of purchased finished goods. At September 30, 2022
and December 31, 2021 inventories are shown net of a reserve for its Biorphen product of $0 and $1,414, respectively, due to the risk
of expiry before this entire stock of inventories is sold.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Property
and Equipment
Property
and equipment are stated at cost. Depreciation of property and equipment is computed utilizing the straight-line method based on the
following estimated useful lives: computer hardware and software is depreciated over three years; equipment, furniture and fixtures is
depreciated over five years; leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever
is shorter. Construction in progress is capitalized but not depreciated until it is placed into service.
Maintenance
and repairs are charged to expense as incurred, while renewals and improvements are capitalized.
Intangible
Assets
The
Company capitalizes payments it makes for licensed products when the payment relates to an FDA-approved product and the
cost is recoverable based on expected future cash flows from the product. The cost is amortized on a straight-line basis over the
estimated useful life of the product commencing on the approval date in accordance with Accounting Standards Codification
(“ASC”) 350 — Intangibles - Goodwill and Other. In November 2021, the Company purchased the rights for its
Carglumic Acid product for $3,250
and that cost is being amortized over ten
years. A $750
payment related to the approval of Biorphen had been capitalized in 2019 and that cost was being amortized over five
years. As a result of the Biorphen sale to Dr. Reddy’s Laboratories S.A. (“Dr. Reddy’s”) (see Note
11), amortization of that asset was accelerated to record $275
of expense in June 2022 with $75
remaining to be amortized through December 31, 2022. A $750
payment related to the approval of Rezipres had been capitalized in Q1 2022 and that cost was being amortized over five
years. As a result of the sale to Dr. Reddy’s, amortization of the Rezipres asset was accelerated to record the
remaining $738
in the three-month period ended June 30, 2022. In September 2022, the Company purchased the rights for its Betaine Anhydrous product
for $2,000
and that cost is being amortized over five
years. The intangible assets, net on the Company’s balance sheet reflected $1,777
of accumulated amortization as of September 30, 2022. The Company recorded $135
and $1,398,
respectively, of amortization expense for the three and nine months ended September 30, 2022. During the periods ended September 30,
2022 and 2021, the Company reclassified certain amortization expense of intangible assets to cost of sales to conform with the
current period presentation. The table below shows the estimated remaining amortization for these products for each of the five
years from 2022 to 2026 and thereafter.
Schedule of Intangible Assets Amortization Expense
| | |
| | |
Year | |
Amortization
Expense | |
| Remainder of 2022 | |
$ | 219 | |
| 2023 | |
| 725 | |
| 2024 | |
| 725 | |
| 2025 | |
| 725 | |
| 2026 | |
| 725 | |
| Thereafter | |
| 1,854 | |
| Total estimated amortization
expense | |
$ | 4,973 | |
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized in the Company’s statements of operations for the amount by which the carrying amount
of the asset exceeds the fair value of the asset. No impairment has been recognized since the Company’s inception in 2017.
Debt
Issuance Costs and Debt Discount and Detachable Debt-Related Warrants
Costs
incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying balance sheets. The Company amortizes
debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts related to the relative
fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and accreted over
the expected term of the debt to interest expense using the effective interest method.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Revenue
Recognition for Contracts with Customers
The
Company accounts for contracts with its customers in accordance with ASC 606 — Revenue from Contracts with Customers. ASC 606 applies
to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes
revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity
expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines
are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
At
contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised
within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable
at a customer’s discretion are generally considered options. The Company assesses whether these options provide a material right
to the customer and, if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract
modification for accounting purposes.
The
Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or
as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output
or input method. Any amounts received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized
as revenue within the twelve months following the balance sheet date will be classified as current portion of deferred revenue in the
Company’s balance sheets. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet
date are classified as long-term deferred revenue, net of current portion.
Milestone
Payments – If a commercial contract arrangement includes development and regulatory milestone payments, the Company will
evaluate whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur
before recognizing the associated revenue. Milestone payments that are not within the Company’s control or the licensee’s
control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.
Royalties
– For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are
the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate,
the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which
some or all of the royalty has been allocated has been satisfied or partially satisfied.
Significant
Financing Component – In determining the transaction price, the Company will adjust consideration for the effects of the
time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services to the
licensees will be more than one year.
The
Company sells its Alkindi Sprinkle and Carglumic Acid product to one pharmacy distributor customer which provides order fulfilment and
inventory storage/distribution services. The Company may sell products in the U.S. to wholesale pharmaceutical distributors, who then
sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the
terms of a master agreement, and delivery of individual shipments represent performance obligations under each purchase order. The Company
uses a third-party logistics (“3PL”) vendor to process and fulfill orders and has concluded it is the principal in the sales
to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. The Company has
no significant obligations to wholesalers to generate pull-through sales.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
For
its Alkindi Sprinkle and Carglumic Acid products, the Company bills at the initial product list price which are subject to offsets for
patient co-pay assistance and potential state Medicaid reimbursements which are recorded as a reduction of net revenues at the date of
sale/shipment. Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks
when the wholesalers sell products at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”)
and government programs. Because of the shelf life of the product and the Company’s lengthy return period, there may be a significant
period of time between when the product is shipped and when it issues credits on returned product.
The
Company estimates the transaction price when it receives each purchase order taking into account the expected reductions of the selling
price initially billed to the wholesaler/distributor arising from all of the above factors. The Company has developed estimates for future
returns and chargebacks and the impact of other discounts and fees it pays, although Alkindi Sprinkle and Carglumic Acid sales are not
subject to returns. When estimating these adjustments to the transaction price, the Company reduces it sufficiently to be able to assert
that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.
The
Company stores its Alkindi Sprinkle and Carglumic Acid inventory at its pharmacy distributor customer location, and sales are recorded
when stock is pulled and shipped to fulfill specific patient orders. The Company recognizes revenue and cost of sales from products sold
to wholesalers upon delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title,
bear the risk of loss of ownership and have an enforceable obligation to pay the Company. They also have the ability to direct sales
of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, the Company does
not believe they have a significant incentive to return the product.
Upon
recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt
payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net accounts receivable. The Company
monitors actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts end up differing from its estimates,
it will make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period
of adjustment.
In
addition, the Company anticipates it will receive revenues from product licensing agreements where it has contracted for milestone payments
and royalties from products it has developed or acquired.
Cost
of Sales
Cost
of sales consists of the profit-sharing and royalty fees with the Company’s product licensing and development partners, the purchase
costs for finished products from third-party manufacturers, freight and handling/storage costs from the Company’s 3PL logistics
service providers, and amortization expense of certain intangible assets. The cost of sales for profit-sharing and royalty fees and costs
for purchased finished products and the associated inbound freight expense is recorded when the associated product sale revenue is recognized
in accordance with the terms of shipment to customers while outbound freight and handling/storage fees charged by the 3PL service provider
are expensed as they are incurred. Cost of sales also reflects any write-downs or reserve adjustments for the Company’s inventories.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Research
and Development Expenses
Research
and development (“R&D”) expenses include both internal R&D activities and external contracted services. Internal
R&D activity expenses include salaries, benefits and stock-based compensation and other costs to support the Company’s R&D
operations. External contracted services include product development efforts such as certain product licensor milestone payments, clinical
trial activities, manufacturing and control-related activities and regulatory costs. R&D expenses are charged to operations as incurred.
The Company reviews and accrues R&D expenses based on services performed and relies upon estimates of those costs applicable to the
stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any
reporting period. Actual results could differ from the Company’s estimates.
Upfront
payments and milestone payments made for the licensing of products that are not yet approved by the FDA are expensed as
R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for
use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.
Income
(Loss) Per Share
Basic
net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders for the period by
the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by
dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common and
common equivalent shares, such as unvested restricted stock, stock options and warrants that are outstanding during the period.
Common stock equivalents are excluded from the computation when their inclusion would be anti-dilutive. For the three-month and
nine-month periods ended September 30, 2022, common stock equivalents of 5,349,891
and 5,118,574,
respectively, are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive. For the
three-month and nine-month periods ended September 30, 2021, common stock equivalents of 4,339,508
and 4,279,400,
respectively, are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive. Included in the
basic and diluted net income (loss) per share calculation are RSUs awarded to employees or directors that have vested, but the
issuance and delivery of the common shares are deferred until the director retires from service as a director.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under the provisions of ASC — 718 Compensation — Stock Compensation. The guidance
under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant and record expense
over the related service periods, which are generally the vesting period of the equity awards. The Company estimates the fair value of
stock-based option awards using the Black-Scholes-Merton option-pricing model (“BSM”). The BSM requires the input of subjective
assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying
common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon
U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are
assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods
and the contractual life of the options. Expected volatilities are based on comparable companies’ historical volatility along with
a limited weighting included for the Company’s own volatility, which management believes represents the most accurate basis for
estimating expected future volatility under the current conditions. The Company accounts for forfeitures as they occur. The Company uses
the closing common stock price on the date of grant for the fair value of the common stock.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Fair
Value Measurements
We
measure certain of our assets and liabilities at fair value. Fair value represents the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting
requires characterization of the inputs used to measure fair value into a three-level fair value hierarchy as follows:
Level
1 — Inputs based on quoted prices in active markets for identical assets or liabilities. An active market is a market in
which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level
2 — Observable inputs that reflect the assumptions market participants would use in pricing the asset or liability developed
based on market data obtained from sources independent from the entity.
Level
3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would
use in pricing the asset or liability developed based on the best information available.
Fair
value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment
of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets
and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values stated below take into
account the market for the Company’s financials, assets and liabilities, the associated credit risk and other factors as required.
The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume
to provide pricing information on an ongoing basis.
The
Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities,
and long-term debt obligation. The carrying amounts of these financial instruments, except for the long-term debt obligation, approximate
their fair values due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company,
the carrying value of the long-term debt obligation approximates its fair value.
Impact
of New Accounting Pronouncements
There
were no new accounting pronouncements issued by the FASB during the period that would apply to the Company would have a material impact
on its financial position or results of operations.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
4 – Property and Equipment
Property
and equipment consist of the following:
Schedule of Property and Equipment
| | |
| | | |
| | |
| | |
September
30,
2022 | | |
December
31,
2021 | |
| Computer hardware and software | |
$ | 177 | | |
$ | 157 | |
| Furniture and fixtures | |
| 112 | | |
| 106 | |
| Equipment | |
| 52 | | |
| 132 | |
| Leasehold improvements | |
| 71 | | |
| 71 | |
| Property and equipment,
gross | |
| 412 | | |
| 466 | |
| Less: accumulated
depreciation | |
| (339 | ) | |
| (351 | ) |
| Property
and equipment, net | |
$ | 73 | | |
$ | 115 | |
Depreciation
expense for the three months ended September 30, 2022 and 2021 was $14 and $24, respectively. Depreciation expense for the nine months
ended September 30, 2022 and 2021 was $53 and $132, respectively. The decrease in depreciation expense was associated with the closure
of the Company’s laboratory facility and sale of its equipment in 2021.
Note
5 — Long Term Debt
SWK
Loan
On
November 13, 2019, the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Holdings Corporation
(“SWK”) which provided for up to $10,000 in financing. The Company received proceeds of $5,000 at closing and was
able to borrow an additional $5,000 upon the FDA approval of a second product developed by the Company, excluding its EM-100/Alaway
Preservative-Free eye allergy product (“EM-100”). In March 2020, in conjunction with the Company’s Alkindi Sprinkle
product licensing agreement (see Note 11) and the Company’s March 2020 sale of additional shares of its common stock, the Company
and SWK amended the SWK Credit Agreement. The amendment provided the Company with the option to immediately draw $2,000 and the
ability to borrow an additional $3,000 based upon the FDA approval of EM-100 and Alkindi Sprinkle which subsequently occurred in
September 2020. Accordingly, the Company borrowed an additional $2,000 on August 11, 2020. The term of the SWK Credit Agreement
is for five years and borrowings bear interest at a rate of LIBOR 3-month plus 10.0%, subject to a stated LIBOR floor rate of 2.0%.
A 2.0% unused credit limit fee was assessed during the first twelve months after the date of the SWK Credit Agreement and loan fees
include a 5.0% exit fee based on the principal amounts drawn which is payable at the end of the term of the SWK Credit Agreement. The
Company was required to maintain a minimum cash balance of $3,000, only pay interest on the debt until February 2022 and then pay 5.5%
of the loan principal balance commencing on February 15, 2022 and then every three months thereafter until November 13, 2024 at which
time the remaining principal balance is due. Borrowings under the SWK Credit Agreement are secured by the Company’s assets. The
SWK Credit Agreement contains customary default provisions and covenants which include limits on additional indebtedness. In March 2020,
SWK provided a waiver for the Company to obtain loans with the Small Business Association. In February 2021, the Company notified SWK
that it will not require additional borrowing capacity under the SWK Credit Agreement and terminated the additional borrowing capacity
with SWK.
In
connection with the initial $5,000 borrowed in November 2019, the Company issued warrants to SWK to purchase 51,239 shares
of the Company’s common stock with an exercise price of $5.86 per share. The relative fair value of these 51,239 warrants
was $226 and was estimated using BSM with the following assumptions: fair value of the Company’s common stock at issuance
of $5.75 per share; seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate
of 1.8%.
In
connection with the additional $2,000 borrowed in August 2020, the Company issued warrants for 18,141 shares of its common
stock at an exercise price of $6.62 per share. The relative fair value of the 18,141 warrants was $94 and was estimated
using BSM with the following assumptions: fair value of the Company’s common stock at issuance of $6.85 per share; seven-year
contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 0.4%.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
5 — Long Term Debt (continued)
These
warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance. The SWK
Warrants are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to change
in connection with stock splits, dividends, reclassifications and other conditions.
Interest
expense of $699 was recorded during the nine months ended September 30, 2022, which included $96 of debt discount amortization. Interest
expense of $766 was recorded during the nine months ended September 30, 2021, which included $110 of debt discount amortization. As of
September 30, 2022, $191 of accrued interest is included in accrued liabilities.
On
April 5, 2022, the Company and SWK entered into an amendment to the SWK Credit Agreement which allowed for a deferral of loan principal
payments until May 2023 and reduced the interest rate to LIBOR 3-month plus 8.0%, subject to a stated LIBOR floor rate of 2.0%.
In accordance with the change, the Company has classified $708 as principal due in the next 12 months and the remainder classified as
long-term debt in its balance sheet at September 30, 2022. Because LIBOR was intended to be phased out by the end of 2021, future borrowings
under our Credit Agreement could be subject to reference rates other than LIBOR. However, the cessation date has been deferred to June
30, 2023 and we do not expect the planned discontinuation of LIBOR to have a material impact on interest payments incurred under the
SWK Credit Agreement. The company is in discussions with SWK regarding an alternate reference rate.
The
table below reflects the future payments for the SWK loan principal and interest as of September 30, 2022.
Schedule of Future Payments of Long Term Debt
| | |
| | |
| | |
Amount | |
| 2022 | |
$ | 186 | |
| 2023 | |
| 1,740 | |
| 2024 | |
| 6,504 | |
| Total payments | |
| 8,430 | |
| Less: amount representing
interest | |
| (1,815 | ) |
| Loan payable, gross | |
| 6,615 | |
| Less: current portion of long-term debt | |
| (708 | ) |
| Less: unamortized discount | |
| (229 | ) |
| Long-term debt, net
of unamortized discount | |
$ | 5,678 | |
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
6 — Common Stock
The
Company has 50,000,000 authorized shares of $0.001 par value common stock under its Amended and Restated Certificate of Incorporation.
During
the nine months ended September 30, 2022, a holder of the Company’s common stock warrants exercised 600,000 warrants on a cashless
basis and the Company issued 598,448 shares of its common stock in connection with the warrant exercise. The intrinsic value of the warrant
exercise was $2,268. In June 2022, the Company issued 47,585 shares of its common stock to employees in accordance with its Employee
Stock Purchase Plan (“ESPP”).
Note
7 — Common Stock Warrants
The
Company’s outstanding warrants to purchase shares of its common stock at September 30, 2022 are summarized in the table below.
Summary of Warrants Outstanding
| Description
of Warrants |
|
No.
of Shares |
|
|
Exercise
Price |
|
| Placement
Agent Warrants – 2017 Preferred Stock Offering |
|
|
467,242 |
|
|
$ |
3.00 |
|
| 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 |
|
|
950,622 |
|
|
$ |
5.18
(Avg) |
|
The
holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities
Act of 1933, as amended (the “Securities Act”) for their shares that are converted to common stock, including demand registration
rights and piggyback registration rights. These rights are provided under the terms of a registration rights agreement between the Company
and the investors.
On
June 26, 2022, 467,242 warrants from the 2017 preferred stock offering with an exercise price of $3.00 were set to expire. Prior to the
expiration, the Company entered into an agreement with the warrant holders, whereby it modified the terms of the warrants to extend the
expiration date until December 26, 2022 in exchange for the Company retaining the option of a cashless exercise provision. No other terms
were modified. Due to this modification, the Company incurred a modification expense of $244 that is included in general and administration
expense on the Consolidated Statement of Operations for the nine-month period ended September 30, 2022.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
8 — Share-Based Payment Awards
The
Company’s board of directors and stockholders approved the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan in May 2017 (the
“2017 Plan”), which authorized the issuance of up to 5,000,000 shares of the Company’s common stock. In conjunction
with the Company’s IPO in November 2018, the Company’s stockholders and board of directors approved the 2018 Equity Incentive
Plan (as amended in December 2020, the “2018 Plan”) which succeeded the 2017 Plan. The Company has granted restricted stock
awards (“RSAs”), stock options and restricted stock units (“RSUs”) for its common stock under the 2017 Plan and
2018 Plan as detailed in the tables below. There were 673,773 shares available for future issuance under the 2018 Plan as of September
30, 2022.
Shares
that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the
2018 Plan. In addition, the 2018 Plan provides that commencing January 1, 2019 and through January 1, 2028, the share reserve will be
increased annually by 4% of the total number of shares of common stock outstanding as of the preceding December 31, subject to a reduction
at the discretion of the Company’s board of directors. The exercise price for stock options granted is not less than the fair value
of common stock as determined by the board of directors as of the date of grant. The Company uses the closing stock price on the date
of grant as the exercise price.
To
date, all stock options issued have been non-qualified stock options, and the exercise prices were set at the fair value for the shares
at the dates of grant. Options typically have a ten-year life, except for options to purchase 50,000 shares of the Company’s common
stock granted to product consultants in July 2017 that expired, unexercised, in July 2022 as the Company was not able to file certain
product submissions to the FDA prior to the five-year expiration date. Furthermore, these option awards to the Company’s product
consultants would not vest unless certain product submissions are made to the FDA, and accordingly, the Company has not recorded any
expense for these contingently vesting option awards to its product consultants.
In
July 2022 and September 2022, the Company’s board of directors approved modifications of certain outstanding awards of two senior
executives, one of whom retired in May 2022 and the other whose employment was terminated in July 2022. The combined awards had an exercise
price range of $1.37 to $8.61 which were set to expire 90 days after retirement or termination as the case may be, and the Company extended
the expiration dates to April 2023. No other terms were modified. Due to these modifications, the Company incurred a modification expense
of approximately $16 and $88 that is included in general and administration expense on the Consolidated Statements of Operations for
the three and nine-month periods ended September 30, 2022, respectively.
For
the three months ended September 30, 2022 and 2021, the Company’s total stock-based compensation expense was $ and $1,009, respectively.
Of these amounts, $893 and $838 was recorded in general and administrative expenses, respectively, and $56 and $171 was recorded in research
and development expenses, respectively.
For
the nine months ended September 30, 2022 and 2021, the Company’s total stock-based compensation expense was $3,332 and $2,518,
respectively. Of these amounts, $3,102 and $2,110 was recorded in general and administrative expenses, respectively, and $230 and $408
was recorded in research and development expenses, respectively.
Stock
Options
The
following table summarizes stock option activity during the nine months ended September 30, 2022:
Summary of Stock Option Activity
| | |
Shares | | |
Weighted
Average
Exercise Price | | |
Weighted
Average
Remaining
Contractual
Term
(Yrs) | | |
Aggregate
Intrinsic Value
| |
| Outstanding as of December 31, 2021 | |
| 3,513,719 | | |
$ | 5.22 | | |
| | | |
| | |
| Issued | |
| 1,268,770 | | |
$ | 3.76 | | |
| | | |
| | |
| Exercised | |
| (25,000 | ) | |
$ | 1.38 | | |
| | | |
| | |
| Forfeited/Cancelled | |
| (420,197 | ) | |
$ | 6.04 | | |
| | | |
| | |
| Outstanding as of September 30, 2022 | |
| 4,337,292 | | |
$ | 4.73 | | |
| 7.7 | | |
$ | 437 | |
| Exercisable at September 30, 2022 | |
| 2,789,537 | | |
$ | 4.63 | | |
| 7.1 | | |
$ | 401 | |
Vested
and expected to vest at September 30, 2022 | |
| 4,287,292 | | |
$ | 4.77 | | |
| 7.7 | | |
$ | 401 | |
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
8 — Share-Based Payment Awards (continued)
The
aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair
value of the Company’s common stock at September 30, 2022 for those stock options that had strike prices lower than the fair value
of the Company’s common stock.
Stock-based
compensation related to stock options was $853 and $2,850 for the three and nine months ended September 30, 2022, respectively. As of
September 30, 2022, there was a total of $4,532 of unrecognized compensation costs related to non-vested stock option awards. The weighted
average grant date fair value of stock option awards for the nine-months ended September 30, 2022 was $2.38 per share. In the nine-month
period ended September 30, 2022, there was one stock option exercise which totaled 25,000 shares at an exercise price of $1.38 per share
with an intrinsic value of $31. In the nine-month period ended September 30, 2021, stock option exercises totaled 144,233 shares at an
average exercise price of $2.35 per share with an intrinsic value of $682.
Restricted
Stock Units (RSUs)
The
following table summarizes restricted stock unit activity during the nine months ended September 30, 2022:
Schedule
of Restricted Stock Unit Activity
| | |
Number
of Units | | |
Weighted
Average Grant-Date Fair Value Per Unit | |
| Outstanding and unvested as of December
31, 2021 | |
| — | | |
$ | — | |
| Granted | |
| 373,606 | | |
$ | 2.63 | |
| Vested | |
| — | | |
| — | |
| Forfeited | |
| (4,000 | ) | |
$ | 2.63 | |
| Outstanding and unvested
as of September 30, 2022 | |
| 369,606 | | |
$ | 2.63 | |
Stock-based
compensation related to RSUs was $53 for the three and nine months ended September 30, 2022. As of September 30, 2022, there was $919
of unrecognized stock-based compensation expense related to unvested RSUs which will be recognized over a weighted average period of
4 years.
The
Company’s 2018 Employee Stock Purchase Plan (the “ESPP”) provides for an initial reserve of 150,000 shares and this
reserve is automatically increased on January 1 of each year by the lesser of 1% of the outstanding common shares at December 31 of the
preceding year or 150,000 shares, subject to reduction at the discretion of the Company’s board of directors. As of September 30,
2022, there were 582,595 shares available for issuance under the ESPP.
The
annual offerings consist of two stock purchase periods, with the first purchase period ending in June and the second purchase period
ending in December. The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per
share that is at least the lesser of (1) 85% of the fair market value of a share of common stock on the first date of an offering or
(2) 85% of the fair market value of a share of common stock on the date of purchase. After the initial offering period ended, subsequent
twelve-month offering periods automatically commence over the term of the ESPP on the day that immediately follows the conclusion of
the preceding offering, each consisting of two purchase periods approximately six months in duration.
For
the first nine months of 2022 and 2021 there were 47,585 and 29,326 share issuances, respectively, under the ESPP. The weighted average
grant date fair value of share awards in the first nine months of 2022 and 2021 was $1.32 and $2.83, respectively. Employees contributed
$174 and $192 via payroll deductions during the nine months ended September 30, 2022 and 2021, respectively. The Company recorded an
expense of $97 and $83 related to the ESPP in the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022
and December 31, 2021, the accompanying condensed balance sheets include $65 and $22, respectively, in accrued liabilities for remaining
employee ESPP contributions.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
9 — Related-Party Transactions
Harrow
The
Chief Executive Officer of Harrow Health, Inc. (“Harrow”) was a member of the Company’s board of directors until March
17, 2021 when he retired from service with the board. The Company issued 25,000 shares to the Harrow CEO in April 2021 after
his retirement from the Company’s board associated with RSU’s that were previously fully vested. As of September 30, 2022,
Harrow owned 1,982,000 shares of Eton’s common shares which represents 7.8% of the Company’s common shares outstanding.
In
March 2021, the Company closed its laboratory operation in Lake Zurich, Illinois and in May 2021 it reached an agreement for Imprimis
Pharmaceuticals, a subsidiary of Harrow, to purchase its lab equipment for $700 which was $181 above the Company’s net
book value of the equipment.
Chief
Executive Officer
The
CEO has a partial interest in a company that the Company has partnered with for its EM-100/Alaway Preservative Free eye allergy product
as described below.
The
Company acquired the exclusive rights to sell the EM-100 product in the United States pursuant to a sales and marketing agreement (the
“Eyemax Agreement”) dated August 11, 2017 between the Company and Eyemax LLC (“Eyemax”), an entity affiliated
with the Company’s CEO. The Company also held a right of first refusal to obtain the exclusive license rights for geographic areas
outside of the United States. Pursuant to the Eyemax Agreement, the Company was responsible for all costs of testing and FDA approval
of the product, other than the FDA filing fee which was paid by Eyemax. The Company was also to be responsible for commercializing the
product in the United States at its expense. The Company paid Eyemax $250 upon execution of the Eyemax Agreement, which was recorded
as a component of R&D expense. Under the terms of the original agreement, the Company would pay Eyemax $250 upon FDA approval
and $500 upon the first commercial sale of the product and pay Eyemax a royalty of 10% on the net sales of all products. The
Eyemax Agreement was for an initial term of 10 years from the date of the Eyemax Agreement, subject to successive two-year
renewals unless the Company elected to terminate the Eyemax Agreement.
On
February 18, 2019, the Company entered into an Amended and Restated Agreement with Eyemax amending the Sales Agreement (the “Amended
Agreement”). Pursuant to the Amended Agreement, Eyemax sold the Company all of its right, title and interest in EM-100, including
any such product that incorporates or utilizes Eyemax’s intellectual property rights. Under the Amended Agreement, the Company
assumed certain liabilities of Eyemax under its Exclusive Development & Supply Agreement with Excelvision SAS dated as of July 11,
2013, as amended (the “Excelvision Agreement”), with respect to certain territories and arising during certain time periods.
Pursuant to the Amended Agreement, the Company paid Eyemax two milestone payments: (i) one milestone payment for $250 upon regulatory
approval in the territory by the FDA of the first single agent product and (ii) one milestone payment for $500 following the first
commercial sale of the first single agent product in the territory. Following payment of the milestones, the Company is entitled to retain
all of the non-royalty transaction revenues and royalties up to $2,000 (the “Recovery Amount”). After the Company has
retained the full Recovery Amount, it is entitled to retain half of all royalty and non-royalty transaction revenue. The Company has
realized $1,799 of the non-royalty and royalty revenue as of September 30, 2022. The Amended Agreement also contains customary representations,
warranties, covenants and indemnities by the parties. The EM-100 asset and its associated product rights were sold to Bausch Health on
February 18, 2019 and future potential royalties of twelve percent on Bausch Health sales of the product, named Alaway® Preservative
Free by Bausch, which was approved by the FDA in September 2020, will be split between Eyemax and the Company. The royalty from Bausch
Health is subject to reduction if a competitive product with the same active pharmaceutical ingredient is launched in the U.S. or if
the product’s U.S market share falls below a specified target percentage.
There
were no amounts due to Eyemax under the terms of the Amended Agreement as of September 30, 2022 or December 31, 2021.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
10 — Leases
The
Company recognizes a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases,
including operating leases, and separates lease components from non-lease components related to its office space lease.
The
Company’s operating lease cost as presented in the “Research and Development” and “General and Administrative”
captions in the condensed statements of operations was $0 and $22, respectively, for the three months ended September 30, 2022 and $0
and $21, respectively, for the three months ended September 30, 2021. The Company’s operating lease cost as presented in the “Research
and Development” and “General and Administrative” captions in the condensed statements of operations was $0 and $64,
respectively, for the nine months ended September 30, 2022 and $9 and $64, respectively, for the nine months ended September 30, 2021.
Cash paid for amounts included in the measurement of operating lease liabilities was $66 for the nine months ended September 30, 2022.
The ROU asset amortization for the three-month and nine-month periods ended September 30, 2022 was $21 and $62, respectively, and is
reflected within depreciation and amortization on the Company’s condensed statements of cash flows. The ROU asset amortization
for the three and nine-month periods ended September 30, 2021 was $20 and $69, respectively, and is reflected within depreciation and
amortization on the Company’s condensed statements of cash flows. As of September 30, 2022, the weighted-average remaining lease
term was 0.5 years, and the weighted-average incremental borrowing rate was 5.4%.
The
table below presents the lease-related assets and liabilities recorded on the balance sheet as of September 30, 2022 (in thousands).
Schedule of Lease-related Assets and Liabilities
| Assets | |
Classification | |
| |
| Operating
lease right-of-use assets | |
Operating
lease right-of-use assets, net | |
$ | 42 | |
| Total
leased assets | |
| |
$ | 42 | |
| Liabilities | |
| |
| | |
| Operating
lease liabilities, current | |
Accrued liabilities | |
$ | 36 | |
| Total
operating lease liabilities | |
| |
$ | 36 | |
The
Company’s future lease commitments for its administrative offices in Deer Park, Illinois as of September 30, 2022 is as indicated
below:
Schedule of Future Lease Commitments
| | |
Total | | |
2022 | | |
2023 | | |
2024 | | |
Thereafter | |
| Undiscounted
lease payments | |
$ | 37 | | |
| 22 | | |
| 15 | | |
| — | | |
| — | |
| Less:
Imputed interest | |
| (1 | ) | |
| | | |
| | | |
| | | |
| | |
| Total
lease liabilities | |
$ | 36 | | |
| | | |
| | | |
| | | |
| | |
The
Company is evaluating its future facility needs and has not renewed its lease which expires on March 31, 2023.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
11 — Commitments and Contingencies
Legal
The
Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any
pending or threatened litigation matters at this time that may have a material impact on the operations of the Company.
License
and product development agreements
The
Company has entered into various agreements in addition to those discussed above which are described below.
The
Company acquired the exclusive rights to sell the Cysteine Hydrochloride product in the United States pursuant to a sales and marketing
agreement dated November 17, 2017 with an unaffiliated third party (the “Sales Agreement”). Pursuant to the Sales Agreement,
the licensor is responsible for obtaining FDA approval, at its expense, and the Company was responsible for commercializing the product
in the United States at its expense. In February 2020, the Sales Agreement was amended and under the revised terms, the Company would
be responsible for paragraph IV related litigation and will be entitled to 62.5% of product profit. The initial term was for the
first 10 years following the first commercial sale of the product.
On
February 8, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-202 License Agreement”) with
Sintetica SA (“Sintetica”) for marketing rights in the United States to Biorphen® which is used for the treatment of
clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia. The product was submitted to the
FDA for review and subsequently received FDA approval on October 21, 2019. Pursuant to the terms of the ET-202 License Agreement, the
Company is responsible for marketing activities and Sintetica is responsible for development, manufacturing, and the regulatory activities
related to approval. Sintetica is entitled to receive the first $500 of product profits and all additional profit would be split 50%
to the Company and 50% to Sintetica. The ET-202 License Agreement has a ten-year term from the first commercial sale of Biorphen
which occurred in November 2019.
On
February 8, 2019, the Company also entered into an Exclusive Licensing and Supply Agreement (the “ET-203 License Agreement”)
with Sintetica for marketing rights in the United States to ephedrine HCl (brand name Rezipres®), an injectable product candidate
for use in the hospital setting. Pursuant to the terms of the ET-203 License Agreement, the Company will be responsible for marketing
activities and Sintetica will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory
approval. The product was successfully resubmitted in late 2020 and the Company paid a $600 milestone fee in July 2021 and paid
$750 in April 2022 after the first commercial sale of the product in March 2022. Sintetica is entitled to receive the first $500 of
product profits and all additional profit would be split 50% to the Company and 50% to Sintetica. The ET-203 License Agreement
has a ten-year term from first commercial sale of product which occurred in March 2022.
In
June 2022, the Company sold its rights in the three aforementioned products Cysteine Hydrochloride, Biorphen®, and Rezipres®
to Dr. Reddy’s. Under the terms of the transaction, Dr. Reddy’s assumed immediate ownership of Eton’s rights and interest
in the products. Eton will continue to sell its existing Biorphen inventory until the end of 2022. The Company received $5,000 at closing,
recorded as licensing revenue in the three months ended June 30, 2022, and would receive up to $45,000 of additional payments based on
the achievement of certain event-based and sales-based milestones. Of the $5,000 received at closing, $250 was held in escrow to address
potential indemnity claims during the 12-month period following the effective date of the agreement. In addition, 10% of any additional
payments paid by Dr. Reddy’s during the 12-month period following the effective date will be held in escrow and subsequently released
to Eton upon expiration of the 12-month period following the effective date. In accordance with the terms of the agreement, $812 of Sintetica
profit share receivables were expensed as cost of goods sold in the three months ended June 30, 2022.
The
three oral solution pediatric neurology product candidates discussed below, Topiramate, Zonisamide and Lamotrigine were developed by
the Company and its various product candidate development partners, and the Company subsequently sold all its rights and interests
in these three products to Azurity Pharmaceuticals, Inc. (“Azurity”) in 2021. The Company has recognized $17,000 in
milestone revenues to date from these three products and may receive up to $25,000 in
additional milestone revenues related to FDA product approvals and the future sales levels for the products. Azurity has assumed
royalty or profit share obligations owed to development partners as well as additional milestone payments based on sales volume
targets.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
11 — Commitments and Contingencies (continued)
During
the years ended December 31, 2021, 2020 and 2019, the Company worked with Tulex Pharmaceuticals, Inc. (“Tulex”) as a third-party
contract manufacturer to develop an oral solution for Topiramate (fka ET-101) which targets a neurological condition. The Company subsequently
filed the product with the FDA in October 2020, received approval from the FDA in November 2021, and the product was launched by Azurity
in December 2021. The Company recognized a $5,000 milestone revenue at launch which was reflected in accounts receivable on the
Company’s balance sheet at December 31, 2021 and subsequently collected in January 2022.
On
January 23, 2019, the Company entered into a Licensing and Supply Agreement (the “Agreement”) with Liqmeds Worldwide Limited
(“LMW”) for Zonisamide oral liquid, a development stage product candidate (“ET-104”). Pursuant to the terms of
the Agreement, the Company was responsible for regulatory and marketing activities and LMW was responsible for development and manufacturing
of ET-104. The Company will pay $650 upon issuance of patent covering ET-104 listed in the FDA’s Orange Book and $500 in
the event that product sales in excess of $10,000 were achieved within a calendar year. In addition, the Company was required to
pay the licensor 35% of the net profit from product sales. The Agreement was for an initial term of 10 years from the
date of the first commercial sale of the product. The Company was to retain sole ownership of the NDA after expiration of the Agreement.
On
June 12, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-105 License Agreement”) with
Aucta Pharmaceuticals, Inc. (“Aucta”) for marketing rights in the United States to Lamotrigine, an oral suspension product
candidate for use as an adjunct therapy for partial seizures, primary generalized tonic-clonic seizures, and generalized seizures of
Lennox-Gastaut syndrome in patients two years of age and older. Pursuant to the terms of the ET-105 License Agreement, the Company was
to be responsible for marketing activities and Aucta will be responsible for development, manufacturing, and regulatory activities related
to obtaining regulatory approval. The Company will pay $2,450 upon FDA approval and commercial sales of the product candidate and
another $1,000 upon issuance of an Orange-book listed patent. If Aucta successfully completes a Lamotrigine product line extension
product, Eton will pay $1,500 upon FDA acceptance of the product filing, $1,500 upon FDA approval and commercial sales of the
extension product candidate and $450 if the intellectual property for the extension product is transferred to Azurity. Aucta will
be entitled to receive milestone payments from the Company of up to $3,000 based on commercial success of the product, including
$1,000 when net sales exceed $10 million in a calendar year, and $2,000 when net sales exceed $20 million in a calendar year.
On
March 27, 2020, the Company entered into an Exclusive Licensing and Supply Agreement (the “Alkindi License Agreement”)
with Diurnal Limited (“Diurnal”) for marketing Alkindi Sprinkle in the United States. Alkindi Sprinkle’s New Drug
Application (“NDA”) was approved by the FDA on September 29, 2020 as a replacement therapy in pediatric patients with
adrenocortical insufficiency.
For
the initial licensing milestone fee, the Company paid Diurnal $3,500 in cash and issued 379,474 shares of its common stock
to Diurnal which were valued at $1,264 based on the Company’s closing stock price of $3.33 on March 26, 2020. The total
amount of $4,764 was recorded as a component of research and development expense in the Company’s statement of operations
for the year ended December 31, 2020. The Company will also pay Diurnal $2,500 if the product obtains orphan drug exclusivity status
from the FDA.
On
June 15, 2021, the Company acquired U.S. and Canadian rights to Crossject S.A.’s (“Crossject”) ZENEO®
hydrocortisone needleless autoinjector, which is under development as a rescue treatment for adrenal crisis. The Company paid
Crossject $500 upon
signing, $500
in March 2022 upon a completion of a successful technical batch and could pay up to $4,000 in
additional development milestones and up to $6,000 in
commercial milestones, as well as a 10%
royalty on net sales.
On
October 28, 2021, the Company acquired the U.S. marketing rights to Carglumic Acid Tablets. The product’s Abbreviated New Drug
Application (“ANDA”), which is owned by Novitium Pharma, was approved by the FDA on October 12, 2021. The product is an AB-rated,
substitutable generic version of Carbaglu®. The Company paid $3,250 upon signing and retains 50% of the product profits
with the balance being distributed to the licensor and manufacturer. The Company launched this product in December 2021.
On
September 13, 2022, the Company acquired an FDA approved ANDA for Betaine Anhydrous for oral solution. The ANDA was approved by the FDA
on January 28, 2022. The Company paid $2,000 upon signing and could pay up to $1,000 in commercial milestones. The Company will
retain 65% of the product profits with the balance being distributed to the licensor.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
11 — Commitments and Contingencies (continued)
Indemnification
As
permitted under Delaware law and in accordance with the Company’s Amended and Restated Bylaws, the Company is required to indemnify
its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company
is also party to indemnification agreements with its directors and officers. The Company believes the fair value of the indemnification
rights and agreements is minimal. Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements
as of September 30, 2022 or December 31, 2021.
Note
12 — Subsequent Events
The
Company has evaluated subsequent events through the filing date of this Form 10-Q and has determined that no subsequent events have occurred
that would require recognition in the condensed financial statements or disclosure in the notes thereto.