Eton Pharmaceuticals, Inc. 10-K

Item 8. Financial Statements and Supplementary Data ETON PHARMACEUTICALS, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firms (PCAOB ID: 173 and 170) 38 Balance Sheets 41 Statements of Operations 42 Statements of Stockholders’ Equity 43 Statements of Cash Flows 44 Notes to Financial Statements 45 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and the Board of Directors of Eton Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Eton Pharmaceuticals, Inc. (the "Company") as of December 31, 2024, the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. State Medicaid Rebates and Liability Critical Audit Matter Description As described in Note 3 of the Notes to Financial Statements, the Company recognizes revenue from product sales net of estimated sales deductions, including state Medicaid rebates. The state Medicaid rebate and related liability are estimated based on monthly sales, historical experience of claims submitted by the various states and jurisdictions, historical rebate rates and estimated lag time of the rebate invoices. We determined that auditing management’s estimate of the state Medicaid rebates was a critical audit matter because it was especially challenging to evaluate management’s judgments related to the data and significant assumptions used to determine the rebates. These include the identification of product sales subject to state Medicaid rebates as well as the historical rebate percentage applied to eligible sales. Additionally, there can be timing differences between when product sales occur and when the Company receives the related state Medicaid rebate invoices, which can vary based on state Medicaid program requirements. How the Critical Audit Matter was Addressed in the Audit Our audit procedures over management’s estimated state Medicaid rebates and related liability included the following: ● Evaluated management’s method to determine the rebate liability based on (1) product sales subject to state Medicaid rebates and (2) the applicable rebate percentages. ● Tested the completeness and accuracy of state Medicaid rebate-eligible product sales by agreeing sales data to supporting documentation. ● Agreed rebate percentages paid under state Medicaid programs in 2024 to corresponding invoices by product. ● Recalculated the estimated rebate liability. ● Assessed the reasonableness of management’s assumption of timing differences between product sales and the receipt of state Medicaid rebate invoices. ● Evaluated subsequent state Medicaid rebate invoices and related payments to identify any information that might require an adjustment to the recorded liability. 38 Valuation of Acquired Inventory and Intangible Asset for the Increlex Acquisition Critical Audit Matter Description As described in Note 4 of the financial statements, on October 2, 2024, the Company entered into an asset purchase agreement to acquire Increlex from Ipsen S.A., with the transaction closing on December 19, 2024. Management determined that the acquisition should be accounted for as a business combination under ASC 805. We determined that auditing management’s valuation of the acquired inventory and intangible asset was a critical audit matter due to the significant judgment and estimation uncertainty involved in determining the fair value of the acquired inventory and intangible asset. Evaluating the valuation of acquired inventory and intangible asset was complex because it involved management’s estimates and assumptions regarding: ● Costs to complete and sell inventory, which required assessing expected selling prices and estimated costs to complete and sell acquired inventory. ● Future cash flows, contributory asset charges and discount rates used to value the intangible asset. ● Valuation methodologies and significant assumptions, which required specialized knowledge. How the Critical Audit Matter was Addressed in the Audit Our audit procedures over management’s valuation of the acquired inventory and intangible asset for the Increlex acquisition included: ● Assessed the methodologies used to value the acquired inventory and intangible asset with assistance from valuation specialists. ● Performed an inventory observation for the acquired inventory and agreed to management’s identified quantities in the inventory fair value analysis. ● Assessed inventory valuation estimates by evaluating the reasonableness of management’s assumptions for costs to complete and sell acquired inventory. ● Recalculated management’s analysis of the inventory value. ● Assessed the reasonableness of the intangible asset valuation by evaluating projected financial data assumptions, contributory asset charges and discount rates used in valuation models. ● Recalculated management’s analysis of the intangible asset value. ● Evaluated financial statement disclosures to determine whether the fair value measurement considerations were adequately disclosed. /s/ Crowe LLP We have served as the Company’s auditor since 2024. Oakbrook Terrace, Illinois March 18, 2025 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Eton Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheet of Eton Pharmaceuticals, Inc. (the “Company”) as of December 31, 2023, the related statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KMJ Corbin & Company LLP We served as the Company's auditor from 2018 through 2024. Glendora, California March 14, 2024 40 Eton Pharmaceuticals, Inc. BALANCE SHEETS (in thousands, except share and per share amounts) December 31, December 31, 2024 2023 Assets Current assets: Cash and cash equivalents $ 14,936 $ 21,388 Accounts receivable, net 5,361 3,411 Inventories, net 15,232 911 Prepaid expenses and other current assets 5,492 1,129 Total current assets 41,021 26,839 Property and equipment, net 34 58 Intangible assets, net 34,881 4,739 Operating lease right-of-use assets, net 175 92 Other long-term assets, net 12 12 Total assets $ 76,123 $ 31,740 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 4,167 $ 1,848 Current portion of long-term debt, net of discount — 5,380 Accrued Medicaid rebates 6,866 3,627 Accrued liabilities 8,914 5,386 Total current liabilities 19,947 16,241 Long-term debt, net of discount and including accrued fees 29,811 — Operating lease liabilities, net of current portion 107 22 Other long-term liabilities 1,830 — Total liabilities 51,695 16,263 Commitments and contingencies (Note 15) Stockholders’ equity Common stock, $ 0.001 par value; 50,000,000 shares authorized; 26,709,084 and 25,688,062 shares issued and outstanding at December 31, 2024 and 2023, respectively 27 26 Additional paid-in capital 132,294 119,521 Accumulated deficit ( 107,893 ) ( 104,070 ) Total stockholders’ equity 24,428 15,477 Total liabilities and stockholders’ equity $ 76,123 $ 31,740 The accompanying notes are an integral part of these financial statements. 41 Eton Pharmaceuticals, Inc. STATEMENTS OF OPERATIONS (In thousands, except per share amounts) For the years ended December 31, December 31, December 31, 2024 2023 2022 Revenues: Licensing revenue $ 500 $ 5,500 $ 10,000 Product sales and royalties, net 38,511 26,142 11,251 Total net revenues 39,011 31,642 21,251 Cost of Sales: Licensing revenue 270 1,000 1,640 Product sales and royalties 15,330 9,581 5,293 Total cost of sales 15,600 10,581 6,933 Gross profit 23,411 21,061 14,318 Operating expenses: Research and development 3,255 3,322 3,996 General and administrative 22,753 18,931 18,582 Total operating expenses 26,008 22,253 22,578 Loss from operations ( 2,597 ) ( 1,192 ) ( 8,260 ) Other income (expense): Interest and other (expense) income, net ( 1,211 ) 503 ( 761 ) Loss before income tax expense ( 3,808 ) ( 689 ) ( 9,021 ) Income tax expense 15 247 — Net loss $ ( 3,823 ) $ ( 936 ) $ ( 9,021 ) Net loss per share, basic and diluted $ ( 0.15 ) $ ( 0.04 ) $ ( 0.36 ) Weighted average number of common shares outstanding, basic and diluted 25,895 25,645 25,146 The accompanying notes are an integral part of these financial statements. 42 Eton Pharmaceuticals, Inc. STATEMENTS OF STOCKHOLDERS ’ EQUITY (in thousands, except share amounts) Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balances at December 31, 2021 24,626,004 $ 25 $ 111,718 $ ( 94,113 ) $ 17,630 . Stock-based compensation — — 4,218 — 4,218 Stock option exercises 25,000 — 35 — 35 Employee stock purchase plan 69,884 — 171 — 171 Common stock issued related to restricted stock units — — — — — Stock warrant exercises 632,231 — 45 — 45 Net loss — — — ( 9,021 ) ( 9,021 ) Balances at December 31, 2022 25,353,119 25 116,187 ( 103,134 ) $ 13,078 Stock-based compensation — — 3,137 — 3,137 Stock option exercises and vesting of restricted stock units 299,028 1 148 — 149 Employee stock purchase plan 86,782 — 229 — 229 Shares withheld related to net share settlement of stock option exercises ( 50,867 ) — ( 180 ) — ( 180 ) Net loss — — — ( 936 ) ( 936 ) Balances at December 31, 2023 25,688,062 26 119,521 ( 104,070 ) $ 15,477 Common stock issued in private placement offering 583,334 1 6,999 — 7,000 Stock-based compensation — — 3,165 — 3,165 Employee stock purchase plan 80,933 0 248 — 248 Stock option exercises and vesting of restricted stock units 356,755 0 1,191 — 1,191 Relative fair value of warrants issued in connection with debt — — 1,170 — 1,170 Net loss — — — ( 3,823 ) ( 3,823 ) Balances at December 31, 2024 26,709,084 $ 27 $ 132,294 $ ( 107,893 ) $ 24,428 The accompanying notes are an integral part of these financial statements. 43 Eton Pharmaceuticals, Inc. STATEMENTS OF CASH FLOWS (In thousands) For the years ended December 31, December 31, December 31, 2024 2023 2022 Cash flows from operating activities Net loss $ ( 3,823 ) $ ( 936 ) $ ( 9,021 ) Adjustments to reconcile net loss to net cash from operating activities: Stock-based compensation 3,165 3,137 4,218 Depreciation and amortization 1,146 901 1,774 Non-cash lease expense 70 67 62 Debt discount amortization 1,109 117 127 Changes in operating assets and liabilities, net of impact of business acquisition: Accounts receivable ( 3,118 ) ( 1,559 ) 3,619 Inventories ( 1,310 ) ( 354 ) ( 7 ) Prepaid expenses and other assets ( 3,349 ) 94 1,840 Accounts payable 2,318 53 ( 8 ) Accrued Medicaid rebates 3,239 2,818 768 Accrued liabilities 1,484 2,477 1,449 Other non-current assets and liabilities 38 — — Net cash from operating activities 969 6,815 4,821 Cash from investing activities Purchases of property and equipment ( 26 ) — ( 38 ) Acquisition of business ( 30,000 ) — — Purchase of product licensing rights ( 9,988 ) ( 775 ) ( 2,750 ) Net cash from investing activities ( 40,014 ) ( 775 ) ( 2,788 ) Cash flows from financing activities Net proceeds from the issuance of long-term debt 25,309 — — Repayment of long-term debt ( 1,155 ) ( 1,155 ) ( 385 ) Common stock issued in private placement offering 7,000 — — Proceeds from stock option exercises 1,191 149 35 Payment of tax withholding related to net share settlement of stock option exercises — ( 180 ) — Employee stock purchase plan 248 229 171 Stock warrant exercises — — 45 Net cash from financing activities 32,593 ( 957 ) ( 134 ) Change in cash and cash equivalents ( 6,452 ) 5,083 1,899 Cash and cash equivalents at beginning of year 21,388 16,305 14,406 Cash and cash equivalents at end of year $ 14,936 $ 21,388 $ 16,305 Supplemental disclosures of cash flow information Cash paid for interest $ 665 $ 842 $ 730 Cash paid for income taxes $ 82 $ 247 $ — Supplemental disclosures of non-cash investing and financing activities: Debt issuance costs $ 386 $ — $ — Fair value of warrants issued in connection with debt agreement $ 1,170 $ — $ — Adjustment of operating lease right-of-use assets and liabilities due to tenant allowance $ — $ 29 $ — Right-of-use assets obtained in exchange for lease liabilities $ 219 $ — $ 188 The accompanying notes are an integral part of these financial statements. 44 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 1 — Company Overview Eton is an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases. We currently have seven commercial rare disease products: INCRELEX®, ALKINDI SPRINKLE®, GALZIN®, PKU GOLIKE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone. We have six additional product candidates in late-stage development: ET- 400, ET- 600, Amglidia®, ET- 700, ET- 800 and ZENEO® hydrocortisone autoinjector. Note 2 — Liquidity Considerations As of December 31, 2024 , the Company had an accumulated deficit of $ 107,893 and for the year ended December 31, 2024 the Company had a net loss of $ 3,823 . To date, the Company has generated revenues from multiple products and expects further growth in 2025 and beyond in accordance with additional market penetration from these products plus revenues from additional products where it anticipates FDA approval. The Company currently believes its existing cash and cash equivalents of $ 14,936 as of December 31, 2024 will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next twelve months from the date of issuance of these financial statements. 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 may 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 GAAP. Certain prior period amounts, have been reclassified to conform to current year presentation in the financial statements and notes to financial statements and these reclassifications had no impact to prior period financial statements. 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, Medicaid program rebates, valuation of inventories, useful lives of assets and the recoverability of long-lived assets, valuation of deferred tax assets, and the valuation of common stock, stock options, warrants, and restricted stock units (“RSUs”). 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. Acquisitions The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805” ), to determine whether the transaction is a business combination or an asset acquisition. In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screening test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition. If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the acquired set is a business. 45 Note 3 — Summary of Significant Accounting Policies (continued) The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but these assumptions are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s consolidated statements of operations. Segment Information The Company operates the business on the basis of a single reportable segment, which includes seven commercial rare disease products: INCRELEX®, ALKINDI SPRINKLE®, GALZIN®, PKU GOLIKE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone. The Company derives revenues from product sales to specialty pharmacy customers, who then provide order fulfillment, inventory storage and distribution services. The Company’s chief operating decision-maker (“CODM”) is the Chief Executive Officer, who evaluates the Company’s financial performance and results of operations as a single operating segment. The CODM reviews net income or loss as a measure of segment profit or loss in assessing performance and allocating resources. Segment revenues, expenses and profit or loss is reported on the Statements of Operations. Additionally, the measure of segment assets is reported on the Company’s balance sheet as total assets. The Company's revenues and its accounts receivable balances are highly concentrated and consist of sales to and amounts due from AnovoRx and Optime Care for the Company's ALKINDI SPRINKLE®, Carglumic Acid, and Betaine Anhydrous products, as well as from Pentec Heath for sales of the Company’s PKU GOLIKE® product. For the years ended December 31, 2024, 2023 and 2022, AnovoRx product sales represented 93.6 %, 78.2 % and 45.5 % of net revenues, respectively. As of December 31, 2024 and 2023, AnovoRx product sales represented 96.2 % and 97.4 % of net accounts receivable. For the years ended December 31, 2024, 2023 and 2022, the Company's revenues from external customers were entirely derived from U.S operations and did not include any foreign countries. As of December 31, 2024 and 2023, all long-lived assets were domiciled within the U.S. 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. 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 credit losses, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances. The Company considers historical collection rates and the current financial status of its customers, as well as macroeconomic and industry-specific factors when evaluating potential credit losses. Historically, the Company's accounts receivable balances have been highly concentrated with a select number of customers, consisting primarily of specialty pharmacies and large wholesale pharmaceutical distributors. Given the size and creditworthiness of these customers, we have not experienced and do not expect to experience material credit losses. The total for all accounts receivable reserves was $ 238 and $ 129 as of December 31, 2024 and 2023 , 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 records a write-down if an impairment is identified. As of December 31, 2024, inventories consisted of purchased finished goods, semi-finished goods and raw materials. As of December 31, 2023, inventories consisted of purchased finished goods. At December 31, 2024 inventories are shown net of a reserve for Nitisinone, Betaine Anhydrous, ALKINDI SPRINKLE® and PKU GOLIKE® inventory. As of December 31, 2024, inventories included $ 5,000 in prepaid raw materials acquired in the INCRELEX® business acquisition. At December 31, 2023, inventories are shown net of reserve for ALKINDI SPRINKLE® due to the risk of expiry prior to being sold. There was an inventory reserve of $ 605 and $ 76 at December 31, 2024 and 2023 , respectively. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. 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. 46 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) 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 or the product acquisition date in accordance with 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 (see Note 15 ), amortization of that asset was accelerated to record $ 275 of expense in June 2022 and the remaining $ 75 of expense in the last six months of the year ended 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 $ 2,125 and that cost is being amortized over five years. In October 2023, the Company purchased the rights for its Nitisinone product for $ 650 and that cost is being amortized over five years. In March 2024 , the Company purchased the rights for its PKU GOLIKE® product which resulted in a $ 1,868 intangible asset that is being amortized over ten years. In December 2024, the Company completed a business combination of INCRELEX® (mecasermin injection) for $ 21,250 and that cost is being amortized over ten years. In December 2024, the Company acquired GALZIN® (zinc acetate) for $ 8,119 and that cost will be amortized over ten years. The intangible assets, net on the Company’s balance sheet reflected $ 2,381 and $ 1,286 of accumulated amortization as of December 31, 2024 and 2023. The Company recorded $ 1,096 , $ 790 , and $ 1,617 of amortization expense for the years ended December 31, 2024, 2023 and 2022 respectively. The table below shows the estimated remaining amortization for these products for each of the five years from 2025 to 2029 and thereafter. Year Amortization Expense 2025 $ 4,004 2026 4,004 2027 3,880 2028 3,546 2029 3,449 Thereafter 15,998 Total estimated amortization expense $ 34,881 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 was recognized during the years ended December 31, 2024, 2023 and 2022 . 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. 47 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Leases The Company accounts for leases in accordance with ASC Topic 842 — Leases. The Company reviews all relevant facts and circumstances of a contract to determine if it is a lease whereby the terms of the agreement convey the right to control the direct use and receive substantially all the economic benefits of an identified asset for a period of time in exchange for consideration. The associated right-of-use assets and lease liabilities are recognized at lease commencement. The Company measures lease liabilities based on the present value of the lease payments over the lease term discounted using the rate it would pay on a loan with the equivalent payments and term for the lease. The Company does not include the impact for lease term options that would extend or terminate the lease unless it is reasonably certain that it will exercise any such options. The Company accounts for the lease components separately from non-lease components for its operating leases. The Company measures right-of-use assets based on the corresponding lease liabilities adjusted for (i) any prepayments made to the lessor at or before the commencement date, (ii) initial direct costs it incurs, and (iii) any incentives under the lease. In addition, the Company evaluates the recoverability of its right-of-use assets for possible impairment in accordance with its long-lived assets policy. Operating leases are reflected on the balance sheets as operating lease right-of-use assets, current accrued liabilities and long-term operating lease liabilities. The Company does not have any finance leases as of December 31, 2024 and 2023 . The Company commences recognizing operating lease expense when the lessor makes the underlying asset available for use by the Company and the operating lease expense is recognized on a straight-line basis over the term of the lease. Variable lease payments are expensed as incurred. The Company does not recognize right-of-use assets or lease liabilities for leases with a term of twelve months or less; such lease costs are recorded in the Statements of Operations on a straight-line basis over the lease term. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the successful award of a patent and the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses. Concentrations of Credit Risk, Sources of Supply and Significant Customers The Company is subject to credit risk for its cash and cash equivalents, which are invested in money market funds and U.S. treasury bills from time to time. The Company maintains its cash and cash equivalent balances with one major commercial bank and the deposits held with the financial institution exceed the amount of insurance provided on such deposits and is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents to the extent recorded on the balance sheets. The Company believes the associated credit risk to be minimal. The Company is dependent on third -party suppliers for its products and product candidates. In particular, the Company relies, and expects to continue to rely, on a small number of suppliers to manufacture key chemicals, approved products and process its product candidates as part of its development programs. These programs could be adversely affected by a significant interruption in the manufacturing process. 48 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) The Company is also subject to credit risk from its accounts receivable related to product sales as it extends credit based on an evaluation of the customer’s financial condition, and collateral is not required. The Company's accounts receivables are evaluated to determine if any allowance should be recorded based on consideration of the current economic environment, expectations of future economic conditions, specific circumstances and the Company's historical collection experience. Additionally, Management monitors its exposure to accounts receivable by periodically evaluating the collectability of the account receivable based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and any prior customer credit loss experience. Based upon the review of these factors, the Company recorded no allowance for credit losses at December 31, 2024 or 2023. 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. For the years ended December 31, 2022, 2023 and 2024, all revenues recognized in the Statements of Operations were point in time sales to the Company's customers. 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. 49 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) 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. The Company sells its INCRELEX®, ALKINDI SPRINKLE®, PKU GOLIKE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone products to pharmacy distributor customers which provide 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. For its INCRELEX®, ALKINDI SPRINKLE®, PKU GOLIKE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone 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 may be 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. 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 INCRELEX®, ALKINDI SPRINKLE®, PKU GOLIKE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone sales are not subject to returns. The Company stores its INCRELEX®, ALKINDI SPRINKLE®, PKU GOLIKE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone inventory at its pharmacy distributor customer locations, and sales are recorded when stock is pulled and shipped to fulfill specific patient orders. The Company may recognize 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. The state Medicaid rebate and related liability are estimated based on monthly sales, historical experience of claims submitted by the various states and jurisdictions, historical rebate rates and estimated lag time of the rebate invoices. 50 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Cost of Product Sales Cost of product 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, the amortization of certain intangible assets, 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 may, from time to time, make estimates of those costs applicable as to the stage of completion of each project. 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. 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 Series A Preferred, 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. No such adjustments were made for 2024 , 2023 or 2022 as the Company reported a net loss for the years ended December 31, 2024, 2023 and 2022 and including the effects of common stock equivalents in the diluted earnings per share calculation would have been anti-dilutive (see Note 10 ). 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. Compensation expense is recognized over the period during which services are rendered by consultants and non-employees until completed. The Company estimates the fair value of stock-based option awards using the Black-Scholes 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 the Company's historical volatility subsequent to our IPO, which we believe represents the most accurate basis for estimating expected future volatility under the current conditions. The Company accounts for forfeitures as they occur. 51 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Income Taxes As part of the process of preparing the Company’s financial statements, the Company must estimate the actual current tax liabilities and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheets. The Company must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or increase or decrease to this allowance in a period, the impact will be included in income tax expense in the Statements of Operations. As of December 31, 2024 and 2023 , the Company has established a 100 % valuation reserve against its deferred tax assets. The Company accounts for income taxes under the provisions of ASC 740 - Income Taxes. As of December 31, 2024, $ 382 is included in the balance sheets for unrecognized tax positions. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties in its balance sheets at December 31, 2024 or 2023 , and has not recognized interest and penalties in the Statements of Operations for the years ended December 31, 2024, 2023 and 2022 . As of December 31, 2024 , the Company is subject to taxation in the United States and certain individual states – primarily Illinois and Tennessee. The Company’s tax losses from 2017 through 2024 are subject to examination by the federal and state tax authorities due to the carryforward of unutilized net operating losses (“NOLs”). 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. 52 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) 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 takes 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 approximate its fair value. Impact of Recent Accounting Pronouncements The Company’s management has evaluated all of the recently issued, but not yet effective, accounting standards that have been issued or proposed by the FASB or other standards-setting bodies through the filing date of these financial statements and does not believe the future adoption of any such pronouncements will have a material effect on the Company’s financial position, results of operations and cash flows. New Pronouncements Adopted In November 2023, the FASB issued ASU 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures, which enhances reportable segment disclosure requirements primarily through expanded disclosures around significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company adopted the new accounting pronouncement on January 1, 2024. The adoption of this guidance did not have an effect on the Company’s financial position, results of operations and cash flows. New Pronouncements Issued In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for the Company's annual periods beginning January 1, 2025, with early adoption permitted, and may be applied either prospectively or retrospectively. The Company is assessing the guidance, noting the adoption impacts disclosure only. In November 2024, the FASB issued ASU 2024 - 03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220 - 40 ). Additionally, in January 2025, the FASB issued ASU 2025 - 01 to clarify the effective date of ASU 2024 - 03. The standard provides guidance to expand disclosures related to the disaggregation of income statement expenses. The standard requires, in the notes to the financial statements, disclosure of specified information about certain costs and expenses, which includes purchases of inventory, employee compensation, depreciation and intangible asset amortization included in each relevant expense caption. This guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027, on a retrospective or prospective basis, with early adoption permitted. The Company is assessing the guidance, noting the adoption impacts disclosure only. Note 4 – Business Combination On October 2, 2024, the Company and Ipsen Biopharmaceuticals, Inc. (“Ipsen”), a subsidiary of Ipsen S.A., entered into an Asset Purchase Agreement (the “Purchase Agreement”), whereby the Company agreed to acquire Increlex® (mecasermin injection) from Ipsen. Increlex® is a biologic product used to treat children and adolescents from two -to 18 -years-old who suffer from severe primary insulin-like growth factor 1 deficiency (SPIGFD). The primary reason for the Increlex® product acquisition was due to the Company’s expertise and strong relationships in pediatric endocrinology in addition to leveraging the Company’s existing sales team to increase awareness of SPIGFD. Under the terms of the Purchase Agreement, the Company acquired Increlex® for $ 22,500 at closing, plus an additional $ 7,500 for product inventory. The Company will also make payments to Ipsen of $ 2,500 on each of the first and second anniversaries of closing. In addition, the Company will be obligated to purchase additional inventory over 30 months, in an amount not to exceed €15,000. The Company also entered into an amendment to its existing credit agreement with SWK Holdings Corporation (“SWK”) that was contingent upon the closing of the Purchase Agreement. Under the terms of the amendment, the Company expanded its existing credit facility by $ 25,700 to $ 30,000 , extended the facility’s maturity to three years from closing, and reduced the facility’s annual interest rate to Secured Overnight Financing Rate (“ SOFR ”) plus 6.75 %. - refer to Note 6, “Debt” for further details. In connection with the closing of Purchase Agreement, the Company issued a warrant to the lender for the purchase of up to 289,736 shares of common stock at a price of $ 5.32 per share. On December 19, 2024, the Company completed the acquisition of Increlex®. The Company determined that the asset purchase agreement met the definition of a business under ASC 805; therefore, the Company accounted for the Purchase Agreement as a business combination and applied the acquisition method of accounting. 53 Note 4 – Business Combination (continued) The allocation of the purchase consideration was as follows: Purchase Price Allocation Cash consideration $ 30,000 Deferred payments (1) 4,276 Total consideration $ 34,276 Inventory (2) 13,010 Intangible assets (3) 21,250 Goodwill (4) 16 Assets acquired 34,276 Net assets acquired $ 34,276 ( 1 ) Deferred payments represent the acquisition date fair value of the $ 5,000 in deferred consideration to be paid to Ipsen. The Company will make payments of $ 2,500 on each of the first and second anniversaries of closing, which the closing date of the acquisition was December 19, 2024. The Company will accrete the $ 724 , which represents the difference between the total deferred payments amount due of $ 5,000 and the acquisition date fair value of $ 4,276 , to interest expense in its Statements of Operations over the course of the two -year period using the effective interest rate methodology. ( 2 ) Inventory consists of raw materials, semi-finished goods and finished goods. Finished goods, semi-finished goods and raw materials inventory were valued on the acquisition date at fair value and resulted in a $ 5,510 step-up in inventory value compared to a $ 7,500 carrying value. Determining the fair value of inventory included making estimates of costs to complete and to sell semi-finished and finished goods inventory. ( 3 ) Intangible assets consist of the transferred intellectual property as a part of the license agreement. The estimated fair value of the intangible asset was determined using the multi-period excess earnings method (“MPEEM”), which is a form of income approach, which incorporates the estimated future cash flows to be generated from the product utilizing the existing customer base. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated value of contributory assets, including debt-free net working capital, tangible assets, other long-term assets and other identifiable intangible assets. The excess earnings are thereby calculated from each year of a multi-year projection period and discounted to present value. The primary components of this method consist of the discount rate and contributory asset charges. The imputed fair value of the Increlex® intangible asset of $ 21,250 will be amortized over its useful life of ten years. ( 4 ) Goodwill represents the excess of the purchase price consideration over the fair value of the net assets acquired. Due to the immateriality of the implied value of goodwill, the Company elected to expense the $ 16 in goodwill, which was expensed to general and administrative expenses for the year ended December 31, 2024 in the Company Statements of Operations. Transition services agreement Concurrent with the Purchase Agreement, the Company entered into a transition services agreement (the “TSA”) with Ipsen to govern Ipsen providing transitional pharmaceutical marketing services, distribution services and other related support and assistance with operations outside the U.S. The services being provided under the TSA have been priced at market rates, and the Company is not receiving a discount from Ipsen for these services. As a result, there was no portion of the purchase price allocated to the TSA consideration. The separate consideration under the TSA will be expensed as occurred and when services are received. Acquisition related costs For the year ended December 31, 2024, the Company incurred acquisition related costs of $ 415 , which were expensed as incurred and included in general and administrative expenses in the Statements of Operations. 54 Unaudited actual and pro forma information For the year ended December 31, 2024, the Company recognized $ 166 of net sales related to Increlex® in the Statements of Operations. The following unaudited pro forma summary presents information of the Company, including Increlex®, as if the Purchase Agreement had occurred on January 1, 2023: Year Ended December 31, 2024 2023 Net sales $ 53,206 $ 50,362 Net loss $ ( 6,590 ) $ ( 1,612 ) These pro forma results are for illustrative purposes and are not indicative of the actual results of operations that would have been achieved, nor are they indicative of future results of operations. The unaudited pro forma information for all periods presented was adjusted to give effect to pro forma events that are directly attributable to the Purchase Agreement and are factually supportable. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change, and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration. Note 5 – Property and Equipment Property and equipment consist of the following: December 31, December 31, 2024 2023 Computer hardware and software $ 200 $ 187 Furniture and fixtures 125 111 Equipment 52 52 Leasehold improvements 103 103 Property and equipment, gross 480 453 Less: accumulated depreciation and amortization ( 446 ) ( 395 ) Property and equipment, net $ 34 $ 58 Depreciation expense for the years ended December 31, 2024, 2023 and 2022 was $ 50 , $ 44 and $ 66 , respectively. 55 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 6 – Debt SWK Loan In November 2019, the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK which provided for up to $ 10,000 in debt 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. In March 2020, the Company and SWK amended the SWK Credit Agreement, which provided the Company with the option to immediately draw an additional $ 2,000 and the ability to borrow up to another $ 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 in August 2020. Under the terms of the SWK Credit Agreement, the Company was required to maintain a minimum cash balance of $ 3,000 and pay 5.5 % of the loan principal balance commencing in February 2022 and then every three months thereafter until November 2024 at which time the remaining principal balance is due. 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 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 are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to adjustment in connection with stock splits, dividends, reclassifications and other conditions. In April 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 %. Because LIBOR was phased out as of June 2023, the Company amended the Credit Agreement in August 2023 to refer to Term SOFR , with an interest rate of Term SOFR plus 8.26 %, subject to a stated Term SOFR floor rate of 5.0 %. In September 2024, the Company and SWK entered into an amendment to the SWK Credit Agreement, which was contingent upon the closing of the INCRELEX® Purchase Agreement. Under the terms of the amendment, the Company expanded its existing credit facility by $ 25.7 million to $ 30.0 million, extended the facility’s maturity to three years from closing with a loan maturity date of December 17, 2027, and reduced the facility’s annual interest rate to Secured Overnight Financing Rate (“SOFR”) plus 6.75 %. In connection with the amendment to the SWK Credit Agreement, the Company issued a warrant to the SWK for the purchase of up to 289,736 shares of common stock at a price of $ 5.32 per share. The relative fair value of these 289,7369 warrants was $ 1,170 and was estimated using the BSM with the following assumptions: fair value of the Company’s common stock at issuance of $ 6.00 per share with an exercise price of $5.32; seven -year contractual term; 63.8 % volatility; 0 % dividend rate; and a risk-free interest rate of 3.67 %. Interest payments are payable quarterly, with quarterly principal payments of $ 3,000 beginning in May 2026 with a final principal payment of $ 9,000 due at maturity in December 2027. The amended SWK Credit Agreement includes a 5.0 % exit fee payable at maturity and this exit fee payable will be accreted to interest expense in the Company's Statement of Operations using the effective interest expense method. The amended SWK Credit Agreement contains a mandatory prepayment clause that can compel the Company to partially prepay the loan upon certain triggering events, which the Company has deemed to be remote. Borrowing under the amended SWK Credit Agreement is secured by the Company's assets, contains customary default provisions, which include limits on additional indebtedness. As of December 31, 2024 and 2023, the Company was in compliance with all financial covenants. The Company recorded interest expense of $ 2,005 , $ 1,060 and $ 955 in 2024, 2023 and 2022 , respectively, which included $ 1,109 , $ 117 and $ 127 , respectively, of debt discount amortization. For the year ended December 31, 2024, debt discount included $ 1,170 which was associated with the issuance of warrants to SWK. The Company had accrued interest of $ 182 and $ 332 as of December 31, 2024 and 2023 , respectively, which is included in accrued liabilities in the accompanying balance sheets. The table below reflects the future annual payments for the SWK loan principal as of December 31, 2024 . Year Amount 2025 $ — 2026 9,000 2027 21,000 Total payments 30,000 Less: unamortized discount ( 559 ) Plus: accrued exit fees at December 31, 2024 370 Debt, net of unamortized discount and accrued exit fees $ 29,811 Note 7 — 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. 56 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 7 — Common Stock (continued) For the years ended December 31, 2024, 2023 and 2022, the Company issued 266,353 , 207,626 (net shares issued after a portion of 407,808 shares was a cashless exercise) and 25,000 , respectively, of its common stock resulting from stock option exercises under its 2018 Equity Incentive Plan (see Note 9 ). The Company withheld 50,867 shares for payroll tax obligations totaling $ 180 for the year ended December 31, 2023. For the years ended December 31, 2024, 2023 and 2022 , the Company issued 80,933 , 86,782 shares and 69,884 , respectively, under the Company’s Employee Stock Purchase Plan (“ESPP”). For the years ended December 31, 2024, 2023 and 2022, the Company issued 90,402 , 91,402 and 0 , respectively, in shares of its common stock due to the vesting of restricted stock units. On December 10, 2024, the Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company issued 583,334 shares of its common stock at an offering price of $ 12.00 per common share for gross proceeds to the Company of $ 7,000 before deducting any related offering expenses. Note 8 — Common Stock Warrants Warrants outstanding as of December 31, 2024 is listed in the table below: Description of Warrants Warrant Issuance Date No. of Shares Exercise Price SWK Warrants – Debt (Tranche #1) 11/13/2019 51,239 $ 5.86 SWK Warrants – Debt (Tranche #2) 8/11/2020 18,141 $ 6.62 SWK Warrants – Debt (Tranche #3) 9/30/2024 289,736 $ 5.32 Total shares and weighted average exercise price 359,116 $ 5.46 The holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities Act of 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 September 30, 2024, in c onnection with the Company's amendment to expand its existing credit facility to $ 30.0 million with SWK, the Company issued 289,736 warrants to SWK at a price of $ 5.32 per share. The relative fair value of these 289,736 warrants was $ 1,170 and was estimated using the BSM with the following assumptions: fair value of the Company’s common stock at issuance of $ 6.00 per share with an exercise price of $5.32; seven -year contractual term; 63.8 % volatility; 0 % dividend rate; and a risk-free interest rate of 3.67 %. A roll forward of warrants outstanding as of December 31, 2024 is listed in the table below: No. of Shares No. of Shares Balance as of the beginning of the year 69,380 69,380 Issuance of SWK Warrants - Debt (Tranche #3) 289,736 289,736 Balance as of the end of the year 359,116 359,116 There were 1,067,242 warrants exercised on a cashless basis in 2022 resulting in 632,231 shares of common stock being issued by the Company. There were no warrants exercised in 2023 or 2024. `Note 9 — 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 (the “2018 Plan”) which succeeded the 2017 Plan. The Company has granted RSAs, stock options and RSUs for its common stock under the 2017 Plan and 2018 Plan as detailed in the tables below. There were 692,581 shares available for future issuance under the 2018 Plan as of December 31, 2024 . 57 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 9 — Share-Based Payment Awards (continued) 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 by 4 % of the total number of shares outstanding as of the preceding December 31, subject to a reduction at the discretion of the Company’s board of directors. On January 1, 2023, the share reserve was increased by 1,014,124 shares based on the 25,353,119 shares of common stock outstanding at December 31, 2022. On January 1, 2024, the share reserve was increased by 1,027,522 shares based on the 25,688,062 shares of common stock outstanding at December 31, 2023. 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 $ 104 that is included in general and administration expense on the Statement of Operations for the year ended December 31, 2022. In August 2024, the Company’s board of directors approved a modification of certain outstanding awards of a senior executive who retired in August 2024. The combined awards had an exercise price range of $ 3.47 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 November 2025 in conjunction with ongoing consulting services. No other terms were modified. Due to these modifications, the Company incurred a modification expense of $ 75 that is included in general and administration expense on the Statements of Operations for the year ended December 31, 2024. For the years ended December 31, 2024, 2023 and 2022 , the Company’s total stock-based compensation expense was $ 3,165 , $ 3,137 and $ 4,218 , respectively. Of these amounts, $ 2,899 , $ 2,864 , and $ 3,954 was recorded in general and administrative expenses, respectively, and $ 266 , $ 273 , and $ 264 was recorded in R&D expenses, respectively. Stock Options The following table summarizes stock option activity during the year ended December 31, 2024 : Weighted Average Weighted Average Remaining Exercise Contractual Aggregate Intrinsic Shares Price Term Value Options outstanding as of January 1, 2024 4,839,226 $ 4.57 Issued 1,621,118 4.83 Exercised ( 266,353 ) 4.47 Forfeited/Cancelled ( 275,375 ) 4.55 Options outstanding as of December 31, 2024 5,918,616 $ 4.65 7.0 $ 51,316 Options exercisable at December 31, 2024 4,044,105 $ 4.71 6.2 $ 34,837 Options vested and expected to vest at December 31, 2024 5,918,616 $ 4.65 7.0 $ 51,316 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 at December 31. The intrinsic value of the options exercised during 2024 was $ 1,867 . 58 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 9 — Share-Based Payment Awards (continued) For the years ended December 31, 2024, 2023 and 2022, there were 266,353 , 207,626 and 25,000 shares issued for exercise of stock options, respectively f or proceeds of $ 1,190 , $ 149 and $ 35 , respectively. The assumptions used to calculate the estimated fair value of options granted during the years ended December 31, 2024, 2023 and 2022 under the BSM were as follows: December 31, 2024 December 31, 2023 December 31, 2022 Expected dividends — % — % — % Expected volatility 70 % 70 % 70 % Risk-free interest rate 3.5 - 4.4 % 3.5 - 4.7 % 1.5 - 3.9 % Expected term (in years) 6.2 6.3 5.9 Weighted average grant date fair value $ 3.22 $ 2.32 $ 2.32 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 10 years). The expected term of options granted to non-employees equals the contractual life of the options. Expected Volatility — Expected volatilities are based on the Company's historical volatility subsequent to our IPO, which we believe represents the most accurate basis for estimating expected future volatility under the current conditions. 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. As of December 31, 2024 , there was a total of $ 5,390 of unrecognized compensation costs related to non-vested stock option awards which will be recognized over a weighted average period of 2.2 years. Restricted Stock Units (RSUs) The following table summarizes restricted stock unit activity during the year ended December 31, 2024 : Weighted Average Grant-Date December 31, 2024 Fair Value Per Unit Outstanding and unvested as of January 1, 2024 274,204 $ 2.63 Granted 65,266 $ 6.74 Vested ( 90,402 ) $ 2.63 Forfeited ( 23,000 ) $ 2.63 Outstanding and unvested as of December 31, 2024 226,068 $ 3.82 Stock-based compensation related to RSUs was $ 241 , $ 239 and $ 114 for the years ended December 31, 2024, 2023 and 2022 , respectively. As of December 31, 2024 , there was $ 740 of unrecognized stock-based compensation expense related to unvested RSUs which will be recognized over a weighted average period of 2.2 years. 59 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 9 — Share-Based Payment Awards (continued) Employee Stock Purchase Plan In December 2018, the Company’s board of directors adopted an initial offering of the Company’s common stock under the Company’s 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. 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, 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 ending on or around June 10 and December 10 each year, subject to a restart feature if the Company’s stock price drops at the end of a six -month period within the twelve -month offering period. The Company recorded an expense of $ 205 , $ 135 , and $ 128 in 2024, 2023 and 2022 , respectively, related to the ESPP. For the years ended December 31, 2024, 2023 and 2022 , there were 80,933 , 86,782 and 69 ,884 share issuances, respectively, under the ESPP. The weighted average grant date fair value of share awards in 2024, 2023 and 2022 was $ 1.35 , $ 1.27 , and $ 1.17 per share, respectively. Employees contributed $ 283 , $ 230 and $ 174 to the ESPP during 2024, 2023 and 2022 , respectively. Of these amounts, $ 42 and $ 24 at December 31, 2024 and 2023 , respectively, are included in accrued liabilities in the accompanying balance sheets. As of December 31, 2024 , there were 692,581 shares available for issuance under the ESPP. Note 10 — Basic and Diluted Net Loss per Common Share Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Common stock equivalents (using the treasury stock and “if converted” method) from stock options, RSUs, and warrants at December 31, 2024, 2023 and 2022 were 6,389,345 , 5,418,251 , and 5,494,153 respectively, and are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director retires from service as a director. The following table shows the computation of basic and diluted net loss per common share: Year ended Year ended Year ended December 31, December 31, December 31, 2024 2023 2022 Net loss $ ( 3,823 ) $ ( 936 ) $ ( 9,021 ) Weighted average common shares outstanding (basic and diluted) 25,895,086 25,645,366 25,145,657 Net loss per common share (basic and diluted) $ ( 0.15 ) $ ( 0.04 ) $ ( 0.36 ) 60 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 11 — Related-Party Transactions 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. 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, 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. 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. The Company realized $ 1,840 of the non-royalty and royalty revenue throughout the life of the product. 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, were to be split between Eyemax and the Company. There were no amounts due to Eyemax under the terms of the Amended Agreement as of December 31, 2024 or December 31, 2023 , and Bausch Health discontinued sales of Alaway® Preservative Free effective March 24, 2023. Previously, the Company acquired DS- 200 and all related intellectual property pursuant to an asset purchase agreement (the “Selenix Agreement”) dated June 23, 2017 between the Company and Selenix LLC (“Selenix”), an entity affiliated with the CEO. On August 30, 2024, the Company amended the Selenix Agreement in tandem with an agreement to sell DS- 200 in August 2024 ( see Note 15 ). Pursuant to the terms of the amended Selenix Agreement, Selenix waived its rights to future milestone payments and 50 % of DS- 200 profit in exchange for 45 % of proceeds received by Eton from the DS- 200 sale agreement. Selenix is 50 % owned by Messa Holdings LLC (“Messa”), which is 100 % owned by the CEO. The Company paid $ 220 to Selenix in October 2024. Note 12 — 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. In June 2024, the Company renewed its office lease for a two -year period through March 2027 and recorded $ 219 in ROU assets and $ 219 in operating lease liabilities in association with the lease extension. The Company’s operating lease cost as presented as G&A in the Statements of Operations was $ 82 , $ 67 and $ 82 for the years ended December 31, 2024, 2023 and 2022, respectively. For the years ended December 31, 2024, 2023 and 2022, cash paid for amounts included in the measurement of operating lease liabilities was $ 58 , $ 88 and $ 88 , respectively. The ROU asset non-cash lease expense was $ 70 , $ 67 and $ 62 for the years ended December 31, 2024, 2023 and 2022, respectively, and is reflected within non-cash lease expense on the Company’s Statements of Cash Flows. As of December 31, 2024 and 2023, the weighted average remaining lease term was 2.25 and 1.25 years, respectively and as of December 31, 2024 and 2023, the weighted average discount rate was 8.6 % for each period. 61 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 12 — Leases (continued) The table below presents the lease-related assets and liabilities recorded on the balance sheet as of December 31, 2024 : December 31, December 31, Assets Classification 2024 2023 Operating lease right-of-use assets Operating lease right-of-use assets, net $ 175 $ 92 Total leased assets $ 175 $ 92 Liabilities Operating lease liabilities, current Accrued liabilities $ 76 $ 53 Operating lease liabilities, noncurrent Operating lease liabilities, net of current portion 107 22 Total operating lease liabilities $ 183 $ 75 The Company’s future annual lease commitments as of December 31, 2024 are as indicated below: Total 2025 2026 2027 Undiscounted lease payments $ 202 $ 89 $ 90 $ 23 Less: Imputed interest ( 19 ) Total lease liabilities $ 183 Note 13 – Income Taxes The provision for income taxes for the Company consists of the following for the years ended December 31, 2024, 2023 and 2022 : Year ended December 31, December 31, December 31, 2024 2023 2022 Current: Federal $ 24 $ 61 $ — State ( 9 ) 186 — Total current expense 15 247 — Deferred: Federal ( 223 ) ( 85 ) 2,272 State 1,150 ( 31 ) 812 Change in valuation allowance ( 927 ) 116 ( 3,084 ) Total deferred expense — — — Total provision $ 15 $ 247 $ — Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 62 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 13 – Income Taxes (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. The significant components of the Company’s deferred tax assets as of December 31, 2024 and 2023 are as follows: December 31, December 31, 2024 2023 Deferred tax assets: Net operating loss carryforwards $ 14,145 $ 15,447 Stock-based compensation 2,021 3,372 Accruals and other 4,827 2,866 Total deferred tax assets 20,993 21,685 Valuation allowance ( 20,589 ) ( 21,516 ) Deferred tax assets $ 404 $ 169 Deferred tax liabilities: Deferred consideration discount $ ( 182 ) $ — Right-of-use assets ( 45 ) ( 27 ) Other deferred tax liabilities ( 177 ) ( 142 ) Deferred tax liabilities $ ( 404 ) $ ( 169 ) Net deferred tax assets (liabilities) $ — $ — In assessing the realizability of deferred tax assets, the Company considers all available positive and negative evidence to evaluate whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2024, the Company believes it is more likely than not that the Company's net deferred tax assets would not be realized and continues to record a full valuation allowance on its net deferred tax assets. The Company's valuation allowance represents the amount of tax benefits that are likely to not be realized. Based on the uncertainty of future taxable income at this time, Management believes a 100 % valuation reserve for the $ 20,589 and $ 21,516 net deferred tax assets at December 31, 2024 and 2023 , respectively, is appropriate. A reconciliation of the income tax adjustments used to derive income tax expense is shown below for the years ended December 31, 2024, 2023 and 2022 as follows: Year ended December 31, December 31, December 31, 2024 2023 2022 Benefit based on federal statutory rate $ ( 800 ) $ ( 145 ) $ ( 1,894 ) Stock-based compensation 880 254 24 Change in state tax rate 814 - - Warrants - - ( 476 ) State income tax, net of federal tax benefit ( 31 ) ( 45 ) ( 785 ) Section 162(m) limitation 169 - - Other permanent differences 18 299 47 Research and development credits ( 277 ) - - Change in uncertain tax position reserve 382 - - Return to provision ( 213 ) - - Change in valuation allowance ( 927 ) ( 116 ) 3,084 Income tax expense $ 15 $ 247 $ — For the years ended December 31, 2024, 2023 and 2022, the Company's effective income tax rate was ( 0.4 %), ( 35.9 %) and 0.0 %, respectively. As of December 31, 2024, The Company has gross federal net operating loss of $ 49,815 , which can be carried forward indefinitely, and gross state operating loss of $ 52,911 , which begin to expire in 2034. The Company's federal net operating losses, and certain state net operating losses, are subject to an 80% annual utilization limitation. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change (by value) in its equity ownership over a three -year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. The Company recognizes tax benefits from uncertain positions if it is more likely than not that the tax position will be sustained by the tax authority upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. If a tax position meets the more likely than not threshold, the Company measures the tax position as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. A reconciliation of uncertain tax positions at the beginning and end of the years below is as follows: Year ended December 31, December 31, December 31, 2024 2023 2022 Beginning balance $ — $ — $ — Gross increases (decreases) related to prior year positions 243 - - Gross increases (decreases) related to current year positions 139 - - Decreases related to settlements with taxing authorities - - - Reductions related to statute of limitation expirations - - - Ending balance $ 382 $ — $ — 63 Note 14 - Employee Savings Plan The Company established an employee savings plan pursuant to Section 401 (k) of the Internal Revenue Code, effective January 1, 2018. The plan allows participating employees to deposit into tax deferred investment accounts up to 100 % of their salary, subject to annual limits. The Company makes certain matching contributions to the plan in amounts up to 4 % of the participants’ annual cash compensation, subject to annual limits. For the years ended December 31, 2024, 2023 and 2022 , the Company made $ 259 , $ 242 , and $ 172 , respectively, in matching contributions. Note 15 — 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 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 in 2021, but retained rights to certain royalties. The Company has recognized $ 27,500 in milestone revenues to date from these three products, and in June 2023 the Company amended its asset purchase agreement with Azurity and sold the remaining royalty interests it received back to Azurity for $ 5,500 . Azurity will assume royalty or profit share obligations owed to development partners as well as additional milestone payments based on sales volume targets. Prior to January 1, 2022, 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. In November 2021, the product received approval from the FDA and 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 Liquimeds Worldwide (“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 and LMW was responsible for development and manufacturing of ET- 104. The Company paid $ 650 to Azurity upon issuance of patent covering ET- 104 listed in the FDA’s Orange Book in November 2022. 64 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Note 15 — Commitments and Contingencies (continued) In March 2020, the Company entered into an Exclusive Licensing and Supply Agreement (the “Alkindi License Agreement”) with Diurnal for marketing ALKINDI SPRINKLE® in the United States. In September 2020, ALKINDI SPRINKLE®’s New Drug Application (NDA) was approved by the FDA as a replacement therapy for 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 Company paid Diurnal $ 1,000 for a 2023 sales milestone in January 2024 that was recorded as licensing cost of sales in December 2023, and will also pay Diurnal $ 2,500 if the product obtains orphan drug exclusivity status from the FDA. In June 2021, the Company acquired U.S. and Canadian rights to Crossject’s 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 $ 3,500 in additional development milestones and up to $ 6,000 in commercial milestones, as well as a 10 % royalty on net sales. In October 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 in October 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. In June 2022, the Company sold its rights in 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. The Company received $ 5,000 at closing, recorded as licensing revenue in the twelve months ended December 31, 2022. In accordance with the terms of the agreement, $ 812 of Sintetica profit share receivables were expensed as cost of goods sold in the twelve months ended December 31, 2022. In September 2022, the Company acquired an FDA-approved ANDA for Betaine Anhydrous for oral solution. The ANDA was approved by the FDA in January 2022. The Company paid $ 2,000 upon signing and an additional $ 125 in November 2023, 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. In March 2023, the Company acquired rare disease endocrinology product candidate ET- 600 from Tulex. The Company paid $ 450 to Tulex in July 2023 as a result of successful manufacturing of registration batches. The Company will pay Tulex $ 200 upon acceptance by the FDA of the NDA for the product, $ 250 upon first commercial sale of the product, and tiered royalties of 12.5 % to 17.0 % on net sales. In October 2023, the Company acquired an FDA-approved ANDA for Nitisinone. The ANDA was approved by the FDA in May 2023. The Company paid $ 150 to the seller and an additional $ 500 of cure amounts owed to the manufacturer upon signing. The Company will retain 80 % of the product profits with the balance being distributed to the manufacturer. In March 2024, the Company acquired the U.S. rights to PKU GOLIKE® from Relief Therapeutics Holding SA. The Company paid $ 2,200 and could pay up to $ 2,000 in additional commercial milestones, consisting of one -time $ 500 payments when net sales in a year reach $ 4 million, $ 8 million, $ 15 million, and $ 20 million. The Company will pay the seller a royalty of 30 % of net sales, which will include the cost of the product. In August 2024 , the Company entered into an agreement to sell its DS- 200 product candidate. The Company received $ 500 upfront and could receive additional payments of up to $ 6,500 based on the achievement of certain future regulatory and commercial milestones related to DS- 200. The Company will retain 45 % of the proceeds from the transaction with the balance being distributed to other partners. In November 2024, the Company entered into a licensing agreement with AMMTeK. pursuant to which the Company has agreed to acquire the U.S. rights to Amglidia (glyburide oral suspension). Amglidia was approved by the European Medicines Agency in 2018 and has been granted Orphan Drug Designation by the U.S. FDA. AMMTeK. has conducted a post-approval study tracking five years of real-world safety and efficacy in European patients, which will be used to support the Company's s New Drug Application (“NDA”) submission. The Company intends to hold a meeting with the FDA in 2025. Under the terms of the licensing agreement, the Company will not make any upfront payments and retains the right to terminate the licensing agreement based on FDA meeting results prior to any payments being owed. The Company could pay up to $ 2,350 as follows: $ 500 following the receipt of FDA minutes; $ 550 upon NDA acceptance for review by FDA; and $ 1,300 upon NDA approval by the FDA and first commercial sale. The Company would also be required to pay a royalty of 14 % of net sales to AMMTek. In December 2024, the Company acquired GALZIN® (zinc acetate) from Teva Pharmaceuticals USA, Inc and assumed the commercialization of the product in the U.S. during March of 2025. The Company accounted for the purchase as a product acquisition and paid $ 7,000 and paid an additional $ 200 for product inventory. The Company will pay the seller a royalty of 10 % of U.S net sales through the tenth anniversary of the Company's first commercial sales of the product in the U.S. In December 2024, the Company acquired INCRELEX® (mecasermin injection) from Ipsen S.A. The Company paid $ 22,500 and paid an additional $ 7,500 for product inventory. The Company will also make payments to seller of $ 2,500 on each of the first and second anniversaries of closing. The Company determined that the asset purchase agreement met the definition of a business under ASC 805; therefore, the Company accounted for the asset purchase agreement as a business combination and applied the acquisition method of accounting. See Note 4 — Business Combination for further discussion. 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 December 31, 2024 or 2023 . 65 PART II (CONTINUED) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.