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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from _________________ to _______________________

 

Commission file number: 001-38738

 

 

ETON PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   37-1858472
(State of incorporation)   (I.R.S. Employer Identification Number)

 

21925 W. Field Parkway, Suite 235

Deer Park, Illinois 60010-7278

(Address of principal executive offices) (Zip code)

 

Registrant’s telephone number, including area code: (847) 787-7361

 

Securities registered pursuant to Section 12(b) of the Act   Trading Symbol   Name of each exchange on which registered
Common stock, $0.001 par value per share   ETON   Nasdaq Global Market

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated Filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of August 9, 2021, Eton Pharmaceuticals, Inc. had outstanding 24,600,175 shares of common stock, $0.001 par value.

 

 

 

   

 

 

Eton Pharmaceuticals, Inc.

 

TABLE OF CONTENTS

 

Part No   Item No   Description  

Page

No.

             
I       FINANCIAL INFORMATION   1
             
    1   Financial Statements   1
             
        Condensed Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020   1
             
        Unaudited Condensed Statements of Operations for the three and six months ended June 30, 2021 and 2020   2
             
        Unaudited Condensed Statements of Stockholders’ Equity for the three months ended June 30, 2021 and 2020   3
             
        Unaudited Condensed Statements of Stockholders’ Equity for the six months ended June 30, 2021 and 2020   4
             
        Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2021 and 2020   5
             
        Notes to Condensed Financial Statements   6
             
    2   Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
             
    3   Quantitative and Qualitative Disclosures About Market Risk   30
             
    4   Controls and Procedures   31
             
II       OTHER INFORMATION   32
             
    1   Legal Proceedings   32
             
    1A   Risk Factors   32
             
    2   Unregistered Sales of Equity Securities and Use of Proceeds   32
             
    3   Defaults Upon Senior Securities   32
             
    4   Mine Safety Disclosures   32
             
    5   Other Information   32
             
    6   Exhibits   32
             
        Index to Exhibits   33
             
        Signatures   34

 

 i 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Eton Pharmaceuticals, Inc.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

 

   June 30, 2021   December 31, 2020 
    (Unaudited)      
Assets          
Current assets:          
Cash and cash equivalents  $25,802   $21,295 
Accounts receivable, net   303    48 
Inventories   1,242    1,242 
Prepaid expenses and other current assets   1,728    2,116 
Total current assets   29,075    24,701 
           
Property and equipment, net   156    811 
Intangible assets, net   500    575 
Operating lease right-of-use assets, net   143    192 
Other long-term assets, net   32    40 
Total assets  $29,906   $26,319 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $1,522   $2,344 
Current portion of long-term debt   749     
PPP loan, current portion       280 
Accrued liabilities   835    1,170 
Total current liabilities   3,106    3,794 
           
Long-term debt, net of discount and including accrued fees   5,856    6,532 
Long-term portion of PPP and EIDL loans   150    231 
Operating lease liabilities, net of current portion   58    99 
           
Total liabilities   9,170    10,656 
           
Commitments and contingencies (Note 12)   -       
           
Stockholders’ equity          
Common stock, $0.001 par value; 50,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 24,600,175 and 24,312,808 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   25    24 
Additional paid-in capital   109,769    107,797 
Accumulated deficit   (89,058)   (92,158)
Total stockholders’ equity   20,736    15,663 
           
Total liabilities and stockholders’ equity  $29,906   $26,319 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 1 

 

 

Eton Pharmaceuticals, Inc.

Condensed Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

   2021   2020   2021   2020 
   For the three months ended   For the six months ended 
   June 30,   June 30,   June 30,   June 30, 
   2021   2020   2021   2020 
Revenues:                
Licensing revenue  $2,500   $   $14,000   $ 
Product sales and royalties   567    20    964    119 
Total net revenues   3,067    20    14,964    119 
                     
Cost of sales:                    
Licensing revenue           1,500     
Product sales and royalties   136    28    226    130 
Total cost of sales   136    28    1,726    130 
                     
Gross profit (loss)   2,931    (8)   13,238    (11)
                     
Operating expenses:                    
Research and development   1,990    1,609    2,876    7,877 
General and administrative   3,266    2,921    7,324    5,531 
Total operating expenses   5,256    4,530    10,200    13,408 
                     
(Loss) income from operations   (2,325)   (4,538)   3,038    (13,419)
                     
Other (expense) income:                    
Interest and other (expense) income, net   (237)   (192)   (484)   (360)
Gain on PPP loan forgiven   365        365     
Gain on equipment sale   181        181     
                     
(Loss) income before income tax expense   (2,016)   (4,730)   3,100    (13,779)
                     
Income tax expense                
                     
Net (loss) income  $(2,016)  $(4,730)  $3,100   $(13,779)
Net loss (income) per share, basic  $(0.08)  $(0.23)  $0.12   $(0.70)
Net loss (income) per share, diluted  $(0.08)  $(0.23)  $0.12   $(0.70)
Weighted average number of common shares outstanding, basic   25,211    21,005    25,133    19,574 
Weighted average number of common shares outstanding, diluted   25,211    21,005    26,486    19,574 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 2 

 

 

Eton Pharmaceuticals, Inc.

Condensed Statements of Stockholders’ Equity

For the three months ended June 30, 2021 and 2020

(in thousands, except share amounts)

(Unaudited)

 

   Shares   Amount   Capital   Deficit   Equity 
   Common Stock   Additional Paid-in   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Balances at March 31, 2021   24,482,616   $24   $108,573   $(87,042)  $21,555 
                          
Stock-based compensation           836        836 
                          
Stock option exercises   63,233         226        226 
                          
Employee stock purchase plan   29,326        134        134 
                          
Common stock issued related to restricted stock units   25,000                 
                          
Net loss               (2,016)   (2,016)
                          
Balances at June 30, 2021   24,600,175   $25   $109,769   $(89,058)  $20,736 

 

   Common Stock   Additional Paid-in   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Balances at March 31, 2020   20,761,960   $21   $83,836   $(73,237)  $10,620 
                          
Stock-based compensation   15,190        714        714 
                          
Stock option exercises   64,878         66        66 
                          
Employee stock purchase plan   14,005        64        64 
                          
Proceeds from sales of common stock, net of offering costs   100,000        297        297 
                          
Net loss               (4,730)   (4,730)
                          
Balances at June 30, 2020   20,956,033   $21   $84,977   $(77,967)  $7,031 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 3 

 

 

Eton Pharmaceuticals, Inc.

Condensed Statements of Stockholders’ Equity

For the six months ended June 30, 2021 and 2020

(in thousands, except share amounts)

(Unaudited)

 

   Common Stock   Additional Paid-in   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Balances at December 31, 2020   24,312,808   $24   $107,797   $(92,158)  $15,663 
                          
Stock-based compensation           1,509        1,509 
                          
Stock option exercises   138,233    1     329        330 
                          
Employee stock purchase plan   29,326        134        134 
                          
Common stock issued related to restricted stock units   25,000                 
                          
Warrant exercises   94,808                 
                          
Net income               3,100    3,100 
                          
Balances at June 30, 2021   24,600,175   $25   $109,769   $(89,058)  $20,736 

 

   Common Stock   Additional Paid-in   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Balances at December 31, 2019   17,877,486   $18   $74,720   $(64,188)  $10,550 
                          
Stock-based compensation   15,190        1,079        1,079 
                          
Stock option exercises   69,878         97        97 
                          
Employee stock purchase plan   14,005        64        64 
                          
Proceeds from sales of common stock, net of offering costs   2,600,000    3    7,753        7,756 
                          
Issuance of common stock for product candidate licensing rights   379,474        1,264        1,264 
                          
Net loss               (13,779)   (13,779)
                          
Balances at June 30, 2020   20,956,033   $21   $84,977   $(77,967)  $7,031 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 4 

 

 

Eton Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Six months ended June 30, 2021  

Six months ended

June 30, 2020

 
Cash flows from operating activities          
Net income (loss)  $3,100   $(13,779)
           
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Stock-based compensation   1,509    1,079 
Common stock issued for product candidate licensing rights       1,264 
Depreciation and amortization   240    326 
Debt discount amortization   73    50 
Gain on forgiveness of debt   (365)    
Gain on sale of equipment   (181)    
Changes in operating assets and liabilities:          
Accounts receivable   (255)   473 
Inventories       (1,329)
Prepaid expenses and other assets   419    1,251 
Accounts payable   (822)   1,378 
Accrued liabilities   (372)   (783)
Net cash used in operating activities   3,346    (10,070)
           
Cash provided by (used in) investing activities          
Proceeds from sale of equipment   700     
Purchases of property and equipment   (3)   (4)
Net cash provided by (used in) financing activities   697    (4)
           
Cash flows from financing activities          
Proceeds from sales of common stock, net of offering costs       7,756 
Proceeds from PPP loan       361 
Proceeds from employee stock purchase plan and stock option exercises   464    161 
Net cash provided by financing activities   464    8,278 
           
Change in cash and cash equivalents   4,507    (1,796)
Cash and cash equivalents at beginning of period   21,295    12,066 
Cash and cash equivalents at end of period  $25,802   $10,270 
           
Supplemental disclosures of cash flow information          
Cash paid for interest  $424   $358 
Cash paid for income taxes  $   $ 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 5 

 

 

Eton Pharmaceuticals, Inc.  

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 1 — Company Overview

 

Eton Pharmaceuticals, Inc. (“Eton” or the “Company”) was incorporated as a Delaware “C” corporation on April 27, 2017 and was initially set up as a wholly-owned subsidiary of Harrow Health, Inc. (“Harrow”, fka Imprimis Pharmaceuticals, Inc.). In June 2017, the Company raised $20,055 in start-up capital through a private sale of preferred stock and a separate management team was then established for Eton with its corporate offices located in Deer Park, Illinois. In November 2018, the Company completed its initial public offering (the “IPO”) and received net proceeds of $21,960, after deducting underwriting discounts and commissions and offering-related expenses. In November 2019, the Company entered into a credit agreement and received net proceeds of $4,750 and in August 2020 the Company received net proceeds of $1,965 under the credit agreement (see Note 5). In March and April 2020, Eton received net proceeds of $7,756 from the sale of shares of its common stock in a private placement and in October 2020, the Company received net proceeds of $21,026 from a public offering for its common stock at an offering price of $7.00 per share.

 

Eton is a specialty pharmaceutical company focused on developing, acquiring, and commercializing innovative products. Eton is primarily focused on hospital injectable and pediatric rare disease products. The Company seeks to improve the formula, delivery system, or safety of existing molecules in order to address unmet patient needs. Eton pursues what it perceives to be low-risk product candidates where existing published literature, historical clinical trials, or physician usage has established safety and/or efficacy of the molecule, thereby reducing the incremental clinical burden required for the Company to bring the product to patients.

 

The Company’s Biorphen® product was approved by the FDA in October 2019 and sales commenced for this product at the end of 2019. Eton’s EM-100 product was sold to Bausch Health and the product was approved by the FDA in September 2020. Bausch Health launched this product under the name of Alaway® Preservative Free in January 2021 and Eton will receive royalties from the sale of the product. In addition, the Company acquired the licensing rights to Alkindi Sprinkle and this product was approved by the FDA in October 2020 and launched in December 2020. In February 2021, the Company sold three pediatric neurology products it had under development to Azurity Pharmaceuticals (“Azurity”) and anticipates additional revenues from Azurity based on various product-related milestones including the commercial launch for these products which are currently under review with the FDA.

 

Note 2 — Liquidity Considerations

 

In the first six months of 2021, the Company generated net cash provided by operating activities of $3,346 primarily from the initial proceeds from the sale of three neurology products. The Company expects further growth in 2021 and beyond in accordance with additional market penetration from its approved products plus additional revenues from licensing and additional products where it anticipates FDA approval. Prior to 2021, the Company had generated limited revenues and had incurred negative cash flows from operating activities since its inception in 2017.

 

The Company currently believes its existing cash and cash equivalents of $25,802 as of June 30, 2021 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 and completing its product development and obtaining regulatory approval for its other product candidates and is unable to obtain such additional financing, operations would need to be scaled back or discontinued.

 

Note 3 — Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company has prepared the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

 6 

 

 

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)

 

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 June 30, 2021 and the results of its operations and its cash flows for the periods ended June 30, 2021 and 2020. The financial data and other information disclosed in these notes related to the three and six-month periods ended June 30, 2021 and 2020 are also unaudited. The results for the six-month period ended June 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, 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 and the impairment of property and equipment, the accrual of research and development expenses and the valuation of common stock, stock options and warrants. 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. Cash equivalents consist of an interest-bearing checking account and a U.S. treasury bill. 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 $85 and $71 as of June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020 consist solely of purchased finished goods. At both June 30, 2021 and December 31, 2020 inventories are shown net of a slow-moving reserve for its Biorphen product of $623 due to the risk of expiry before this entire stock of inventories is sold.

 

 7 

 

 

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.

 

In March 2021, the Company completed an evaluation of its expected needs for product development and testing activities and determined that it would discontinue its laboratory operation in Lake Zurich, Illinois. The Company completed a sale of the lab equipment in May 2021 at a price of $700 which was $181 in excess of the book value for these assets. Accordingly, the $519 net book value of these assets was removed from the property and equipment accounts and the $181 gain is reflected in the Company’s statements of operations for the three and six-month periods ended June 30, 2021. In conjunction with the closing of its laboratory operation, the Company scrapped various furniture and equipment which had a net book value of $31 which has been included in research and development expense in the statements of operations.

 

Intangible Assets

 

The Company capitalizes payments it makes for licensed products when the payment is based on FDA approval for the 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. A $750 payment related to the approval of the Company’s Biorphen product in 2019 has been capitalized and that cost is being amortized over five years. The intangible assets, net on the Company’s balance sheet reflected $250 of accumulated amortization as of June 30, 2021. The Company recorded $37 and $75 of amortization expense for the three and six months ended June 30, 2021, respectively. The Company will record amortization expense of $150 per year for this intangible asset for 2021 through 2023 and then $125 in 2024 when it will be fully amortized.

 

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 relate 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.

 

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.

 

 8 

 

 

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)

 

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. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

 

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 Biorphen 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 of Biorphen 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. In addition, the Company sells its Alkindi Sprinkle product to one pharmacy distributor customer which provides order fulfilment and inventory storage/distribution services.

 

Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sell Biorphen at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. In addition, the Company pays fees to wholesalers for their distribution services, inventory reporting and chargeback processing. The Company pays GPOs fees for administrative services and for access to GPO members and concluded the benefits received in exchange for these fees are not distinct from its sales of Biorphen, and accordingly it applies these amounts to reduce revenues. Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Biorphen 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. For its Alkindi Sprinkle product, 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.

 

 9 

 

 

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)

 

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 of Biorphen and the impact of the other discounts and fees it pays while Alkindi Sprinkle sales to its distributor 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 recognizes revenue from Biorphen product sales and related cost of sales upon product 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. The Company stores its Alkindi Sprinkle inventory at its pharmacy distributor customer location and sales are recorded when stock is pulled and shipped to fulfill specific patient orders.

 

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 of 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 receives revenues from product licensing agreements where it has contracted for milestone payments and royalties from products it has developed or for which it has acquired the rights to a product developed by a third party.

 

Revenues for the three months ended June 30, 2021 reflected $2,500 of licensing milestone fees, $493 in product sales and $74 in royalty revenue. Revenues for the six months ended June 30, 2021 reflected $14,000 of licensing milestone fees, $747 in product sales and $217 in royalty revenue. Revenues for the three and six months ended June 30, 2020 consisted solely of product sales.

 

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 and freight and handling/storage costs from the Company’s 3PL logistics service providers. 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.

 

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 technology for 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.

 

 10 

 

 

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)

 

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. Common stock equivalents (using the treasury stock and “if converted” method) from stock options, unvested RSAs and warrants at June 30, 2021 were 1,352,879 and excluded 1,624,598 shares that were anti-dilutive (see Note 9). Included in the basic and diluted net income (loss) per share calculation are RSUs awarded to directors that have vested, but the issuance and delivery of the common shares are deferred until the director retires from service as a director (see Note 8).

 

Basic weighted average shares for the three and six months ended June 30, 2021 include 600,000 vested warrants to purchase common shares. As the shares underlying these warrants can be purchased for little to no consideration ($0.01 per share exercise price), they are included in the computation of basic earnings per share.

 

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 subsequent to its IPO, 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.

 

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.

 

 11 

 

 

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)

 

The Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, PPP loan and long-term debt obligation. The carrying amounts of these financial instruments, except for the PPP loan and 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 PPP loan and long-term debt obligation approximate their fair values.

 

Impact of New Accounting Pronouncements

 

There were no new accounting pronouncements issued by the FASB during the current period that would apply to the Company and have a material impact on its financial position or results of operations.

 

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, except as disclosed in the notes to these condensed financial statements.

 

Note 4 — Property and Equipment

 

Property and equipment consist of the following:

 

   June 30,
2021
   December 31,
2020
 
Computer hardware and software  $153   $182 
Furniture and fixtures   105    143 
Equipment   132    994 
Leasehold improvements   71    184 
Property and equipment, gross   461    1,503 
Less: accumulated depreciation   (305)   (692)
Property and equipment, net  $156   $811 

 

Depreciation expense for the three-month periods ended June 30, 2021 and 2020 was $24 and $87, respectively. Depreciation expense for the six-month periods ended June 30, 2021 and 2020 was $108 and $174, respectively. The balances at June 30, 2021 reflect the sale of laboratory equipment in May 2021 which had a net book value of $519. In conjunction with the closing of its laboratory operation, the Company scrapped various furniture and equipment which had a net book value of $31, which is included in research and development expense in the statements of operations.

 

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 EM-100. In March 2020, in conjunction with the Company’s Alkindi Sprinkle product licensing agreement (see Note 12) 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 an additional $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 is 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 is required to maintain a minimum cash balance of $3,000, will only pay interest on the debt until February14, 2022 and then will 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.

 

 12 

 

 

Eton Pharmaceuticals, Inc.

 

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 5 — Long Term Debt (continued)

 

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. The Company is currently in the process of negotiating covenant targets for EBITDA and revenue for the SWK Credit Agreement. 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 the 51,239 warrants was $226 and was estimated using the Black-Scholes-Merton option pricing model 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 the Black-Scholes-Merton option pricing model 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%.

 

These warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance. The SWK Warrants contain 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 $513 was recorded during the six months ended June 30, 2021, which included $73 of debt discount amortization. Interest expense of $386 was recorded during the six months ended June 30, 2020, which included $50 of debt discount amortization. As of June 30, 2021, $64 of accrued interest is included in accrued liabilities.

 

The table below reflects the future payments for the SWK loan principal and interest as of June 30, 2021.

 

   Amount 
2021  $384 
2022   2,202 
2023   1,756 
2024   5,300 
Total payments   9,642 
Less: amount representing interest   (2,642)
Loan payable, gross   7,000 
Less: current portion of long-term debt   (749)
Less: unamortized discount   (395)
Long-term debt, net of unamortized discount  $5,856 

 

PPP loan

 

On May 4, 2020, the Company received $361 in loan proceeds under the Paycheck Protection Program (“PPP”) from the Small Business Administration (“SBA”) through its banking relationship with Bank of America. On May 20, 2021, the Company received notice that the loan principal and cumulative interest of $4 was forgiven in full as permitted under the applicable SBA guidelines for PPP loans. The $365 gain on debt extinguishment is reflected in non-operating income for the three and six-month periods ended June 30, 2021.

 

EIDL loan

 

On July 21, 2020, the Company received $150 in loan proceeds under the Economic Injury Disaster Loan program (“EIDL”) from the SBA. The Company paid off the full EIDL loan principal and its cumulative interest of $6 in July 2021.

 

 13 

 

 

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 six months ended June 30, 2021, the Company issued 138,233 shares of its common stock resulting from stock option exercises under its 2018 Equity Incentive Plan (see Note 8). In April 2021, the Company issued 25,000 shares of common stock to a member of its board of directors upon his retirement from the board in connection with previously vested restricted stock units (“RSUs”).

 

During the six months ended June 30, 2021, a holder of the Company’s common stock warrants exercised 135,650 warrants on a cashless basis and the Company issued 94,808 shares of its common stock in connection with the warrant exercise. The intrinsic value of the warrant exercise was $806.

 

In June 2021, the Company issued 29,326 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 June 30, 2021 are summarized in the table below.

 

Description of Warrants  No. of Shares   Exercise Price 
Business Advisory Warrants   600,000   $0.01 
Placement Agent Warrants – 2017 Preferred Stock Offering   471,446   $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   1,554,826   $3.18(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.

 

 14 

 

 

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 January 2021, the “2018 plan”) which succeeded the 2017 Plan. The Company has granted restricted stock awards (“RSAs”), stock options and RSUs for its common stock under the 2017 Plan and 2018 Plan as detailed in the tables below. There were 481,160 shares available for future issuance under the 2018 Plan as of June 30, 2021.

 

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.

 

During the third quarter of 2017, the Company issued 25,000 RSU’s to each of its four outside directors (100,000 total share units). The RSU’s issued to the outside directors were 100% vested at June 30, 2018. The associated 100,000 shares of the Company’s common stock are not issued until the individual director retires from service from the Company’s board of directors. In April 2021, 25,000 of these vested RSU shares were issued to a director after his retirement from the Company’s board. The Company has not issued any additional RSU’s.

 

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 expire within five years if the Company is 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 do 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.

 

For the three months ended June 30, 2021 and 2020, the Company’s total stock-based compensation expense was $836 and $714, respectively. Of these amounts, $691 and $651 was recorded in general and administrative expenses, respectively, and $145 and $63 was recorded in research and development expenses, respectively.

 

For the six months ended June 30, 2021 and 2020, the Company’s total stock-based compensation expense was $1,509 and $1,079, respectively. Of these amounts, $1,272 and $976 was recorded in general and administrative expenses, respectively, and $237 and $103 was recorded in research and development expenses, respectively.

 

 

 15 

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 8 — Share-Based Payment Awards (continued)

 

A summary of stock option activity is as follows:

 

   Shares  

Weighted Average Exercise

Price

   Weighted Average Remaining Contractual Term (Yrs)  

Aggregate Intrinsic

Value

 
Options outstanding as of December 31, 2020   2,824,500   $4.05    8.3   $11,525 
Issued   902,098   $8.61           
Exercised   (138,233)  $2.39           
Forfeited/Cancelled   (12,500)  $7.31           
Options outstanding as of June 30, 2021   3,575,865   $5.25    8.4   $6,335 
Options exercisable at June 30, 2021   1,506,614   $4.21    7.7   $3,556 
Options vested and expected to vest at June 30, 2021   3,525,865   $5.31    8.4   $6,096 

 

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 for those stock options that had strike prices lower than the fair value of the Company’s common stock.

 

The assumptions used to calculate the fair value of options granted during the six months ended June 30, 2021 under the BSM were as follows:

 

Expected dividends     %
Expected volatility     80 %
Risk-free interest rate     0.9 - 1.1 %
Expected term     5.36.3 years  
Weighted average fair value   $ 5.88  

 

Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options granted to employees and directors, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally ten years). The expected term of options granted to non-employees equals the contractual life of the options.

 

Expected Volatility — Due to the Company’s limited operating history and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The Company has continued this methodology plus given some limited weighting to its own volatility in the periods subsequent to its November 2018 IPO. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.

 

Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options.

 

Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and therefore has estimated the dividend yield to be zero.

 

Fair Value of Common Stock —The Company uses the closing stock price on the date of grant for the fair value of the common stock.

 

16

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 8 — Share-Based Payment Awards (continued)

 

As of June 30, 2021, there was a total of $8,242 of unrecognized compensation costs related to non-vested stock option and restricted awards. In the six-month period ended June 30, 2021, there were four stock option exercises which totaled 138,233 shares at an average exercise price of $2.39 per share with an intrinsic value of $661. There were four stock option exercises for 69,878 shares during the six months ended June 30, 2020 at an average exercise price of $1.39 per share with an intrinsic value of $139.

 

In December 2018, the Company’s board of directors approved and adopted an initial offering of the Company’s common stock under the Company’s 2018 ESPP. The Company’s 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 June 30, 2021, there were 500,009 shares available for issuance under the ESPP.

 

The initial offering of the ESPP began on December 17, 2018 and ended on December 10, 2019. 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 six months of 2021 and 2020 there were 29,326 and 14,005 share issuances under the ESPP. The weighted average grant date fair value of share awards in the first six months of 2021 and 2020 was $2.83 and $2.43, respectively. Employees contributed $135 and $66 via payroll deductions during the six months ended June 30, 2021 and 2020, respectively. The Company recorded an expense of $46 and $33 related to the ESPP in the six-month periods ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the accompanying condensed balance sheets include $19 and $9, respectively, in accrued liabilities for remaining employee ESPP contributions.

 

17

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 9 — Earnings (Loss) Per Share

 

Basic and diluted net income (loss) per share was calculated as follows:

 Schedule of Basic and Diluted Net Income (Loss) Per Share

     2021 2020     2021 2020 
   Three months ended June 30,   Six months ended June 30, 
   2021   2020   2021   2020 
Basic net income (loss) per share:                    
Numerator:                    
Net income (loss)  $(2,016)  $(4,730)  $3,100   $(13,779)
Denominator:                    
Weighted-average number of common shares outstanding, basic   25,211,277    21,004,910    25,132,776    19,574,164 
Net income (loss) per share, basic  $(0.08)  $(0.23)  $0.12   $(0.70)
                     
Diluted net income (loss) per share:                    
Numerator:                    
Net income (loss)  $(2,016)  $(4,730)  $3,100   $(13,779)
Denominator:                    
Weighted-average number of common shares outstanding, basic   25,211,277    21,004,910    25,132,776    19,574,164 
Dilutive effect of stock awards and warrants           1,352,879     
Weighted-average number of common shares outstanding, diluted   25,211,277    21,004,910    26,485,655    19,574,164 
Net income (loss) per share, diluted  $(0.08)  $(0.23)  $0.12   $(0.70)
                     
Potential shares of common stock that were excluded from the computation of diluted earnings per common share as their effect was anti-dilutive:
Stock awards and warrants   4,266,079    3,307,335    1,624,598    3,972,785 

 

There was no difference between the Company’s net income (loss) and the net income (loss) attributable to common stockholders for all periods presented.

 

18

 

 

Note 10 — Related Party Transactions

 

Harrow

 

Harrow was issued 3,500,000 shares of the Company’s common stock at the formation of the Company at the $0.001 par value per share price as the paid-in-capital contribution from Harrow. The Company and Harrow signed licensing agreements for two products developed by Harrow whereby Harrow assigned the product rights to the Company. In July 2018, the Company determined that one of the products was not viable for its portfolio of product opportunities and cancelled the licensing agreement whereby Harrow retains the product rights.

 

On May 6, 2019, the Company entered into an Asset Purchase Agreement (the “CT-100 Asset Purchase Agreement”) with Harrow. Pursuant to the CT-100 Asset Purchase Agreement, the Company sold all of its right, title and interest in CT-100 to Harrow, including any such product that incorporates or utilizes its intellectual property rights (a “Product” or, collectively, “Products”). Pursuant to the CT-100 Asset Purchase Agreement, Harrow will make certain payments to the Company upon the achievement of certain development and commercial milestones. In addition, Harrow is required to pay the Company a royalty in the low-single digit percentage range worldwide on a country-by-country basis on net sales for a period of the longer of 15 years from the date of the first commercial sale of a product in a particular country or the time that a valid intellectual property claim on such Product remains in force in the applicable country. The CT-100 Asset Purchase Agreement also contains customary representations, warranties, covenants and indemnities by the parties.

 

As part of the early start-up for the Company’s pharmaceutical business in 2017, key executives at Harrow received a total of 1,500,000 shares of restricted common stock in the Company for consulting services, and certain Harrow managers also received stock options to purchase a total of 130,000 shares of common stock from the Company (20,000 of these options were forfeited in 2018). The restricted stock and stock options vested in full on April 30, 2018.

 

19

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 10 — Related Party Transactions (continued)

 

Additionally, the Chief Executive Officer of 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.

 

In late 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 its our lab equipment for $700 which was $181 above the Companys’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 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 Eyemax 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 was obligated to pay 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 which was paid in October 2020 and (ii) one milestone payment for $500 following the first commercial sale of the first single agent product in the territory which was paid in February 2021. 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 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 EM-100, 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 EM-100 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 June 30, 2021 or December 31, 2020.

 

20

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 11Leases

 

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 June 30, 2021 and $14 and $20, respectively, for the three months ended June 30, 2020. 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 $9 and $43, respectively, for the six months ended June 30, 2021 and $28 and $41, respectively, for the six months ended June 30, 2020. Cash paid for amounts included in the measurement of operating lease liabilities was $43 for the six months ended June 30, 2021. The ROU asset amortization for the three and six-month periods ended June 30, 2021 was $20 and $49, 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 six-month periods ended June 30, 2020 was $33 and $64, respectively, and is reflected within depreciation and amortization on the Company’s condensed statements of cash flows. As of June 30, 2021, the weighted-average remaining lease term was 1.75 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 June 30, 2021 (in thousands).

 

Assets   Classification      
Operating lease right-of-use assets   Operating lease right-of-use assets, net   $ 143  
Total leased assets       $ 143  
Liabilities            
Operating lease liabilities, current   Accrued liabilities   $ 81  
Operating lease liabilities, noncurrent   Operating lease liabilities, net of current portion     58  
Total operating lease liabilities       $ 139  

 

The Company’s future lease commitments for its administrative offices in Deer Park, Illinois as of June 30, 2020 are as indicated below:

 

   Total   2021   2022   2023   Thereafter 
Undiscounted lease payments  $145    43    88    14     
Less: Imputed interest   (6)                    
Total lease liabilities  $139                     

 

21

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 12Commitments 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 injection 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 is responsible for commercializing the product in the United States at its expense. The Company was to pay the third party 50% of the net profit from the sale of the product, however, in February 2020, it executed an amendment to the Sales and Marketing Agreement. Under the revised terms, the Company will be responsible for paragraph IV related litigation and will be entitled to 62.5% of product profit. The initial term is 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. The Company paid Sintetica a licensing payment of $2,000 upon execution of the ET-202 License Agreement and $750 upon the commencement of commercial product shipments. Sintetica will supply Biorphen to the Company at its direct costs and the Company will retain 5% of net sales as a marketing fee. Sintetica is entitled to receive the first $500 of product profits. All additional profit will 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, 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 Company paid Sintetica a licensing payment of $1,000 upon execution of the ET-203 License Agreement which was refunded to Eton in early 2020 due to the FDA not accepting the ET-203 file submission by Sintetica. The refund was reflected as a component of prepaid and other current assets on the Company’s balance sheet at December 31, 2019. The ET-203 product was successfully resubmitted in late 2020 and the Company will pay a $600 milestone fee and will also pay $750 upon FDA approval and the commercial sale of the product candidate. Upon approval, Sintetica will supply ET-203 to the Company at its direct costs. The Company will retain 5% of net sales as a marketing fee. Sintetica will be entitled to receive the first $500 of product profits. All additional profit will 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.

 

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.

 

During the years ended December 31, 2020, 2019 and 2018, 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 and paid a $1,438 filing fee.

 

22

 

 

Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 12 — Commitments and Contingencies (continued)

 

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 to be responsible for regulatory and marketing activities. LMW will be responsible for development and manufacturing of ET-104. The Company paid the licensor $350 upon execution of the Agreement and an additional $350 after receiving successful bioequivalence study results, and $325 upon the FDA’s acceptance of the NDA for review and will pay $325 upon FDA approval of the NDA, $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 paid Aucta a licensing payment of $2,000 in August 2019 upon receiving an acceptance for review letter from the FDA and 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 and $1,950 upon FDA approval and commercial sales of the extension product candidate. Aucta will receive a low double-digit royalty on net sales and will be entitled to receive milestone payments of up to $18,000 based on commercial success of the product, including:

 

  $1,000 when net sales exceed $10 million in a calendar year
  $2,000 when net sales exceed $20 million in a calendar year
  $5,000 when net sales exceed $50 million in a calendar year
  $10,000 when net sales exceed $100 million in a calendar year

 

Eton will remain responsible for certain licensing fee obligations owed to its development partners and Azurity will assume royalty or profit share obligations owed to development partners.

 

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 for pediatric adrenal insufficiency (AI), including congenital adrenal hyperplasia (CAH) in patients from birth to less than 17 years of age.

 

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 six months ended June 30, 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 entered into a Distribution and Promotion License Agreement with Crossject S.A. (“Crossject”) for the U.S. and Canadian rights to Crossject’s ZENEO® hydrocortisone needleless autoinjector, which is under development as a rescue treatment for adrenal crisis. The product complements the Company’s Alkindi Sprinkle product which addresses pediatric adrenal insufficiency. The Company paid Crossject $500 upon execution of the agreement which has been included in research and development expense in the statements of operations and will pay an additional $500 for technical batches of the product if the technical batches are completed by December 31, 2021 and then another $500 for registration batches if those are completed by December 31, 2022. The Company will pay Crossject $1,500 upon FDA acceptance of the product filing and $2,000 upon FDA approval of the product. The acceptance and approval fees are subject to reduction if other hydrocortisone autoinjector intramuscular products receive FDA approval prior to the Crossject product. In addition, the Company will pay Crossject a ten percent royalty on net sales and one-time net sales milestone fees of up to $6,000 as indicated in the table below:

 

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Eton Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

 

Note 12 — Commitments and Contingencies (continued)

 

  $1,000 when net sales exceed $10 million in any four consecutive quarters
  $2,000 when net sales exceed $20 million in any four consecutive quarters
  $3,000 when net sales exceed $30 million in any four consecutive quarters

 

Indemnifications

 

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 June 30, 2021 or December 31, 2020.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with (i) our unaudited interim condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations Included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2021 (the “2020 10-K”).

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