What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-16 compared with 2020-03-05 · 791 added, 736 removed, 737 unchanged (67% of the section changed)

15 unchanged sentences

and 2019, the related statements of operations, redeemable convertible preferred stock and stockholders’

(deficit) and cash flows for the years ended December 31, 2019 and 2018, and the period from April 27, 2017

(inception) to December 31, 2017 and the related notes and the financial statement schedule listed in the index at

Item 15 (2) (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, 2019 and 2018,

and the results of its operations and its cash flows for each of the years ended December 31, 2019 and 2018 and the

period from April 27, 2017 (inception) to December 31, 2017, in conformity with accounting principles generally accepted

in the United States of America.

equity (deficit),

and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement

schedule listed in the Index at Item 15(2) (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, 2020

and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020,

in conformity with accounting principles generally accepted in the United States of America.

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 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.

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

conducted our audits in accordance with the standards of the PCAOB.

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We believe that our audits provide a reasonable basis for our opinion.

critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was

communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material

to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of

the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts

or disclosures to which it relates.

Sales Deductions

Audit Matter Description

described in Note 3 to the financial statements under the caption “Revenue Recognition for Contracts with Customers,”

revenues from product sales are recognized net of reductions for estimated returns, chargebacks, distribution fees, prompt payment

discounts, state Medicaid and GPO fees (collectively “sales deductions”), which are established at the time of sale.

the estimation of sales deductions was challenging because of the limited sales history of the Company’s products and the

subjectivity of certain assumptions required to estimate those amounts.

In particular, management estimates potential chargebacks,

which relate to price reductions below the estimated sales price that the wholesalers provide to certain customers, based on historical

industry data for competitive products and adjusted for actual historical experience.

In addition, management estimates its provision

for product returns based on prior experience with similar product launches and considers other factors such as levels of inventory

in the distribution channel, forecasted buying patterns, and product dating and expiration period.

The product sales deductions

are estimated based on current contractual and statutory requirements, market events and trends, and internal and external historical

the Critical Audit Matter Was Addressed in the Audit

test management’s estimated product sales deductions, we obtained management’s calculations for the respective estimates

and performed the following procedures, among others.

We tested management’s estimation process for determining of product

sales discounts accruals by developing an independent expectation of the estimated accrual rate, including a comparison of rates

used in management’s forecast to rates in the underlying contracts and performing a retrospective review of assumptions

to actual activity.

In addition, we assessed subsequent events to determine whether there was any new information that would require

adjustment to the initial accruals, evaluated trends in actual sales and discount accrual balances, compared cash receipts to

product sales.

We also reviewed terms and conditions for a sample of contracts with the Company’s customers, tested a sample

of credits issued and payments made throughout the year and agreed rates to underlying contract terms.

KMJ Corbin & Company LLP

have served as the Company’s auditor since 2018.

Mesa, California

Pharmaceuticals, Inc.

thousands, except share and per share amounts)

December 31, 2020

December 31, 2019

Current assets:

and cash equivalents

Accounts receivable,

expenses and other current assets

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Total current assets

Property and equipment,

Intangible assets,

Operating lease

right-of-use assets, net

long-term assets, net

Property and equipment, net

Intangible assets, net

Operating lease right-of-use assets, net

Other long-term assets, net

Liabilities and stockholders’

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Accounts payable

PPP loan, current portion

Accrued liabilities

Total current liabilities

Long-term debt, net of discount and

including accrued fees

Operating lease

liabilities, net of current portion

Commitments and contingencies

Long-term debt, net of discount and including accrued fees

Long-term portion of PPP and EIDL loans

Operating lease liabilities, net of current portion

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’

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50,000,000 shares authorized as of December 31, 2020 and 2019;

17,877,486 and 17,607,928 shares issued and outstanding at December 31,

2019 and 2018, respectively

24,312,808 and 17,877,486 shares issued and outstanding at December 31, 2020 and 2019, respectively

Additional paid-in capital

Accumulated deficit

stockholders’

liabilities and stockholders’

Total stockholders’

Total liabilities and stockholders’

accompanying notes are an integral part of these financial statements.

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thousands, except per share amounts)

the years ended

from April 27, 2017 (Inception) to

Cost of product

For the years ended

Product sales, net

Licensing revenue

Total net revenues

Cost of product sales

Gross (loss) profit

Operating expenses:

Research and development

and administrative

operating expenses

General and administrative

Total operating expenses

Loss from operations

Other income (expense):

Interest and other

in fair value of warrant liability

Loss before income

Interest and other income (expense), net

Change in fair value of warrant liability

Loss before income tax expense

Income tax expense

Accrued dividends on redeemable convertible

preferred stock

Deemed dividends for accretion of redeemable

convertible preferred stock issuance costs

Deemed dividends

for beneficial conversion feature of redeemable convertible preferred stock

loss attributable to common stockholders

loss per share attributable to common stockholders, basic and diluted

Weighted average

number of common shares outstanding, basic and diluted

Accrued dividends on redeemable convertible preferred stock

Deemed dividends for accretion of redeemable convertible preferred stock issuance costs

Deemed dividends for beneficial conversion feature of redeemable convertible preferred stock

Net loss attributable to common stockholders

Net loss per share attributable to common stockholders, basic and diluted

Weighted average number of common shares outstanding, basic and diluted

accompanying notes are an integral part of these financial statements.

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thousands, except share amounts)

Stockholders’

Balances at April 27, 2017 (Inception)

Common Stock issued to founder

Stock-based compensation

Issuance of Series A redeemable convertible

preferred stock, net of issuance costs

Accrued dividends on redeemable convertible

Redeemable Convertible

Preferred Stock

Deemed dividends for accretion of redeemable

convertible preferred stock issuance costs

Additional Paid-in

Total Stockholders’

Balances at December 31, 2017

Stock-based compensation

Accrued dividends on redeemable convertible

preferred stock

Deemed dividends for accretion of redeemable

convertible preferred stock issuance costs

Issuance of common stock in connection

with initial public offering, including underwriter’s over-allotment, net of offering costs and underwriter’s

Conversion of redeemable convertible

preferred stock (including accrued dividends) to common stock in connection with initial public offering

Reclassification of common stock warrants

from liability to additional paid-in-capital

Beneficial conversion feature on redeemable

convertible preferred stock

Accrued dividends on redeemable convertible preferred stock

Deemed dividends for accretion of redeemable convertible preferred stock issuance costs

Issuance of common stock in connection with initial public offering, including underwriter’s over-allotment, net of offering costs and underwriter’s discount

Conversion of redeemable convertible preferred stock (including accrued dividends) to common stock in connection with initial public offering

Reclassification of common stock warrants from liability to additional paid-in-capital

Beneficial conversion feature on redeemable convertible preferred stock

Balances at December 31, 2018

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Stock option exercises

Common stock issued under employee stock

purchase plan

Common stock issued under employee stock purchase plan

Stock warrant exercises

Relative fair value of warrants to purchase

common stock issued in connection with debt

December 31, 2019

Relative fair value of warrants to purchase common stock issued in connection with debt

Balances at December 31, 2019

Stock-based compensation

Stock option exercises

Employee stock purchase plan

Proceeds from sales of common stock, net of offering costs

Issuance of common stock for product candidate licensing rights

Relative fair value of warrants to purchase common stock issued in connection with debt

Balances at December 31, 2020

accompanying notes are an integral part of these financial statements.

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OF CASH FLOWS

the years ended

from April 27, 2017 (Inception) to

Cash flows from operating

Adjustments to reconcile net loss to

net cash used in operating activities:

For the years ended

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation

Depreciation and

Common stock issued for product candidate licensing rights

Depreciation and amortization

Debt discount amortization

Change in fair value

of warrant liability

Change in fair value of warrant liability

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses

and other assets

Prepaid expenses and other assets

Accounts payable

Accrued liabilities

Net cash used in

operating activities

Cash used in investing

Purchases of property

and equipment

Purchase of product

licensing rights

Net cash used in

investing activities

Cash flows from financing

Proceeds from issuance

of long-term debt, net of issuance costs

Proceeds from initial

public offering, net of underwriting discounts and commissions

Payments of initial

public offering costs

Proceeds from issuance

of redeemable convertible preferred stock, net of issuance costs

Proceeds from issuance

of common stock

Proceeds from employee

stock purchase plan and stock option exercises

Cash provided by financing activities

Change in cash and

cash equivalents

Cash and cash equivalents at beginning

Cash and cash equivalents at end of

Supplemental disclosures

of cash flow information

Net cash used in operating activities

Cash used in investing activities

Purchases of property and equipment

Purchase of product licensing rights

Net cash used in investing activities

Cash flows from financing activities

Proceeds from issuance of long-term debt, net of issuance costs

Proceeds from initial public offering, net of underwriting discounts and commissions

Payments of initial public offering costs

Proceeds from sales of common stock, net of offering costs

Proceeds from PPP and EIDL loans

Proceeds from employee stock purchase plan and stock option exercises

Net cash provided by financing activities

Change in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental disclosures of cash flow information

Cash paid for interest

Cash paid for income

Supplemental disclosures

of non-cash investing and financing activities:

Accrued dividends

on redeemable convertible preferred stock

Deemed dividends

for accretion of redeemable convertible preferred stock issuance costs

Common stock warrant

liability issued with redeemable convertible preferred stock financing

Relative fair value

of common stock warrants issued in connection with debt

Purchase of equipment

included in accounts payable

Beneficial conversion

feature on redeemable convertible preferred stock

Reclassification

of common stock warrants from liability to additional paid-in-capital

Cash paid for income taxes

Supplemental disclosures of non-cash investing and financing activities:

Accrued dividends on redeemable convertible preferred stock

Deemed dividends for accretion of redeemable convertible preferred stock issuance costs

Relative fair value of common stock warrants issued in connection with debt

Purchase of equipment included in accounts payable

Right-of-use assets obtained in exchange for lease liabilities

Beneficial conversion feature on redeemable convertible preferred stock

Reclassification of common stock warrants from liability to additional paid-in-capital

accompanying notes are an integral part of these financial statements.

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Pharmaceuticals, Inc.).

raised $20,055 in start-up capital through the sale of its Series A redeemable convertible preferred stock (“Series A Preferred”)

in June 2017 and a separate management team was then established for Eton with its corporate offices located in Deer Park, Illinois.

Eton is a specialty pharmaceutical company focused on developing and commercializing prescription drug products utilizing the

Food and Drug Administration’s (the “FDA”) 505(b)(2) regulatory pathway.

The Company’s business model

is to develop proprietary innovative product candidates that offer commercial and/or functional advantages to currently available

alternatives.

November 2018, the Company completed an initial public offering (“IPO”), selling 4,140,000 shares of common stock

at an offering price of $6.00 per share, including the underwriter’s exercise in full of its option to purchase additional

The Company received net proceeds of $21,960, after deducting underwriting discounts and commissions and offering-related

expenses (see Note 8).

In June 2017, the Company raised $20,055 in start-up capital through a private sale of preferred stock

and a separate management team was then established for Eton with its corporate offices located in Deer Park, Illinois.

2018, the Company completed an initial public offering (the “IPO”) and received net proceeds of $21,960, after deducting

underwriting discounts and commissions and offering-related expenses.

In November 2019, the Company entered into a credit agreement

and received net proceeds of $4,750 and in August 2020 the Company received net proceeds of $1,965 under the credit agreement

(see Note 5).

In March and April 2020, Eton received net proceeds of $7,756 from the sale of shares of its common stock and in

October 2020, the Company received net proceeds of $21,026 from a public offering for its shares at an offering price of $7.00

per share (see Note 7).

is a specialty pharmaceutical company focused on developing, acquiring, and commercializing innovative products.

Eton is primarily

focused on hospital injectable and pediatric rare disease products.

The Company seeks to improve the formula, delivery system,

or safety of existing molecules in order to address unmet patient needs.

Eton pursues what it perceives to be low-risk product

candidates where existing published literature, historical clinical trials, or physician usage has established safety and/or efficacy

of the molecule, thereby reducing the incremental clinical burden required for the Company to bring the product to patients.

Company’s Biorphen®

product was approved by the FDA in October 2019 and sales commenced for this product at the end

Eton’s EM-100 product was sold to Bausch Health and the product was approved by the FDA in September 2020.

Health launched this product under the name of Alaway®

Preservative Free in January 2021 and Eton will receive royalties from

the sale of the product.

In addition, the Company acquired the licensing rights to Alkindi Sprinkle and this product was approved

by the FDA in October 2020 and launched in December 2020.

Liquidity Considerations

of December 31, 2019, the Company had an accumulated deficit of $64,188 and for the year ended December 31, 2019 the Company

used net cash in operating activities of $18,026.

date, the Company has realized limited revenues from two products, but expects further growth in 2020 and beyond and currently

believes its existing cash and cash equivalents 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.

of December 31, 2020, the Company had an accumulated deficit of $92,158 and for the year ended December 31, 2020 the Company used

net cash in operating activities of $22,346.

date, the Company has generated limited revenues from three products, but expects further growth in 2021 and beyond in accordance

with additional market penetration from these products plus revenues from licensing and additional products where it anticipates

FDA approval.

The Company currently believes its existing cash and cash equivalents of $21,295 as of December 31, 2020 augmented

by the $9,500 of proceeds received from the sale of three neurology products in February 2021 (see Note 16 —

Events), 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.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies

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Significant estimates and assumptions

reflected in these financial statements include, but are not limited to, the useful lives of long-lived assets, the accrual of

research and development expenses and the valuation of common stock, stock options, warrants and derivative instruments.

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.

reflected in these financial statements include, but are not limited to, provisions for uncollectible receivables and sales returns,

valuation of inventories, useful lives of assets and the impairment of property and equipment, the accrual of research and development

expenses and the valuation of common stock, stock options, warrants and derivative instruments.

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

Actual results could differ from those estimates or assumptions.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

Company operates the business on the basis of a single reportable segment, which is the business of developing and commercializing

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cash and cash equivalents are held in U.S.

financial institutions.

Cash equivalents consist of an interest-bearing checking account.

From time to time, amounts deposited exceed federally insured limits.

financial institutions or invested in short-term U.S.

treasury bills.

Cash equivalents

consist of an interest-bearing checking account and a U.S.

treasury bill.

From time to time, amounts deposited with its bank exceed

federally insured limits.

The Company believes the associated credit risk to be minimal.

receivable is recorded at the invoiced amount and is non-interest bearing.

Accounts receivable is recorded net of allowances for

doubtful accounts, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances.

Company values its inventory at the lower of cost or net realizable value using the first-in, first-out method of valuation.

Company reviews its inventory for potential excess or obsolete issues and will record a write-down if an impairment is identified.

Inventory at December 31, 2019 consists solely of purchased finished goods.

receivable are recorded at the invoiced amount and are non-interest bearing.

Accounts receivable are recorded net of allowances

for doubtful accounts, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances.

for these reserves amounted to $71 and $116 as of December 31, 2020 and 2019, respectively.

Company values its inventories at the lower of cost or net realizable value using the first-in, first-out method of valuation.

The Company reviews its inventories for potential excess or obsolete issues on an ongoing basis and will record a write-down if

an impairment is identified.

Inventories at December 31, 2020 and 2019 consist solely of purchased finished goods.

31, 2020, inventories are shown net of a slow-moving reserve for its Biorphen product of $623 due to the risk of expiry before

this entire stock of inventories is sold.

There was no inventory reserve at December 31, 2019.

and Equipment

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and repairs are charged to expense as incurred, while renewals and improvements are capitalized.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

Company capitalizes payments it makes for licensed products when the payment is based on FDA approval for the product and the

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The cost is amortized on a straight-line basis over

the estimated useful life of the product commencing on the approval date in accordance with ASC 350-30.

To date, a $750 payment

related to the approval of its Biorphen product has been capitalized and that cost is being amortized over five years.

the estimated useful life of the product commencing on the approval date in accordance with Accounting Standards Codification

(“ASC”) 350 —

Intangibles - Goodwill and Other.

A $750 payment related to the approval of the Company’s

Biorphen product in 2019 has been capitalized and that cost is being amortized over five years.

The intangible assets, net on

the Company’s balance sheet reflected $175 and $25 of accumulated amortization as of December 31, 2020 and 2019, respectively.

The Company recorded amortization expense of $150 and $25 for the years ended December 31, 2020 and 2019, respectively and will

record amortization expense of $150 per year for this intangible asset for 2021 through 2023 and then $125 in 2024 when it will

be fully amortized.

of Long-Lived Assets

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by which the carrying amount of the asset exceeds the fair value of the asset.

No impairment was recognized during the periods

ended December 31, 2019, 2018 and 2017.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

No impairment was recognized during the years ended

December 31, 2020, 2019 and 2018.

Issuance Costs and Debt Discount and Detachable Debt-Related Warrants

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at the date of the IPO in November 2018.

Company adopted ASC Topic 842- “Leases”, effective January 1, 2019, using the modified retrospective method.

results for fiscal year 2019 reflect the application of ASC Topic 842, while the reported results for prior fiscal years are not

adjusted and continue to be reported under the prior ASC Topic 840 guidance for leases.

Refer to Impact of New Accounting Pronouncements

regarding the adoption impact of ASC Topic 842 in the year ended December 31, 2019.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

Company adopted ASC Topic 842 —

Leases, effective January 1, 2019, using the modified retrospective method.

results for fiscal years 2020 and 2019 reflect the application of ASC Topic 842, while the reported results for the year ended

December 31, 2018 are not adjusted and continue to be reported under the prior ASC Topic 840 guidance for leases.

Company reviews all relevant facts and circumstances of a contract to determine if it is a lease whereby the terms of the agreement

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period of time in exchange for consideration.

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 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

The Company accounts for the lease components separately from non-lease components for its operating leases.

Company measures right-of-use assets based on the corresponding lease liabilities adjusted for (i) any prepayments made to the

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costs are recorded in the statements of operations on a straight-line basis over the lease term.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the

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of Credit Risk, Sources of Supply and Significant Customers

Company is subject to credit risk for its cash and cash equivalents invested in money market funds.

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.

Company is dependent on third-party vendors for its product candidates.

In particular, the Company relies, and expects to continue

to rely, on a small number of vendors to manufacture key chemicals and process its product candidates for its development programs.

These programs could be adversely affected by a significant interruption in the manufacturing process.

Company is subject to credit risk for its cash and cash equivalents which are invested in money market funds and a U.S.

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.

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.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

Company is also subject to credit risk from its accounts receivable related to product sales as it extends credit based on an

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Based upon the review

of these factors, the Company recorded no allowance for doubtful accounts at December 31, 2019.

The accounts receivable balance

at December 31, 2019 and product sales revenue recognized during the year ended December 31, 2019 consist of sales to and amounts

due from AmerisourceBergen Corporation, Cardinal Health Services and McKesson Corporation for sales of its Biorphen product.

of these factors, the Company recorded no allowance for doubtful accounts at December 31, 2020 or 2019.

The accounts receivable

balance at December 31, 2020 and 2019 and product sales revenue recognized during the year ended December 31, 2020 and 2019 consist

of sales to and amounts due from AmerisourceBergen Corporation, Cardinal Health Services and McKesson Corporation for sales of

the Company’s Biorphen product.

The December 31, 2020 accounts receivable balance and sales in 2020 also include sales to

and amounts due from AnovoRx for sales of the Company’s Alkindi Sprinkle product which launched in December 2020.

Recognition for Contracts with Customers

Company accounts for contracts with its customers in accordance with Accounting Standards Codification (“ASC”) 606

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

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;

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.

(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.

contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services

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obligations to wholesalers to generate pull-through sales.

In addition, the Company sells its Alkindi Sprinkle product to one

pharmacy distributor customer which provides order fulfilment and inventory storage/distribution services.

prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers

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when it issues credits on returned product.

For its Alkindi Sprinkle product, the Company bills at the initial product list price

which are subject to offsets for patient co-pay assistance and potential state Medicaid reimbursements which are recorded as a

reduction of net revenues at the date of sale/shipment.

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 arising from all of the above factors.

The Company has developed estimates for

future returns and chargebacks of Biorphen and the impact of the other discounts and fees it pays.

When estimating these adjustments

to the transaction price, the Company reduces it sufficiently to be able to assert that it is probable that there will be no significant

reversal of revenue when the ultimate adjustment amounts are known.

selling price initially billed to the wholesaler/distributor arising from all of the above factors.

The Company has developed

estimates for future returns and chargebacks of Biorphen and the impact of the other discounts and fees it pays while Alkindi

Sprinkle sales to its distributor are not subject to returns.

When estimating these adjustments to the transaction price, the

Company reduces it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue

when the ultimate adjustment amounts are known.

Company recognizes revenue from Biorphen product sales and related cost of sales upon product delivery to the wholesaler location.

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incentive to return the product.

recognition of revenue from product sales of Biorphen, the estimated amounts of credit for product returns, chargebacks, distribution

fees, prompt payment discounts, and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable.

The Company stores its Alkindi Sprinkle inventory at its pharmacy distributor customer location

and sales are recorded when stock is pulled and shipped to fulfill specific patient orders.

recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees,

prompt payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net of accounts

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.

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.

addition, the Company anticipates it will receive revenues from product licensing agreements where it has contracted for milestone

payments and royalties from products it has developed or for which it has acquired the rights to a product developed by a third

of Product Sales

of product sales consists of the profit-sharing fees with the Company’s product licensing and development partners, the

purchase costs for finished products from third-party manufacturers and freight and handling/storage costs from the Company’s

3PL logistics service provider.

The cost of sales for profit-sharing 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.

Pharmaceuticals, Inc.

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Summary of Significant Accounting Policies (continued)

of Product Sales

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 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.

and Development Expenses

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No such adjustments were made for 2020,

2018 or 2017 as the Company reported a net loss for the periods ended December 31, 2019, 2018 and 2017 and including the effects

2019 or 2018 as the Company reported a net loss for the years ended December 31, 2020, 2019 and 2018 and including the effects

of common stock equivalents in the diluted earnings per share calculation would have been antidilutive (see Note 10).

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models were based, in part, on subjective assumptions, including but not limited to stock price volatility, the expected life

of the warrants, the risk-free interest rate and the exercise price of the warrants, and could differ materially in the future.

Changes in the fair value of the warrant liability during the period were recorded as a component of other income (expense) at

the end of each reporting period for changes in fair value until the Company’s IPO in November 2018, which established a

fixed number of shares for these warrants.

At the date of the IPO, the warrant liability amount was reclassified as a component

of additional paid-in-capital.

Company accounts for stock-based compensation under the provisions of the Financial Accounting Standards Board (the “FASB”)

Accounting Standards Codification (“ASC”) —

of the warrants, the risk-free interest rate and the exercise price of the warrants.

Changes in the fair value of the warrant

liability during the period were recorded as a component of other income (expense) at the end of each reporting period for changes

in fair value until the Company’s IPO in November 2018, which established a fixed number of shares for these warrants.

the date of the IPO, the warrant liability amount was reclassified as a component of additional paid-in-capital.

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 for employees

and directors and record expense over the related service periods, which are generally the vesting period of the equity awards.

Awards for consultants are accounted for under ASC 505-50 —

Equity Based Payments to Non-Employees.

Compensation expense

is recognized over the period during which services are rendered by such consultants and non-employees until completed.

end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using

the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes-Merton option-pricing

model (“BSM”).

Company estimates the fair value of stock-based option awards to its employees and directors using the BSM.

The BSM requires the

input of subjective assumptions, including the expected stock price volatility, the calculation of expected term 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

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.

estimates the fair value of stock-based option awards using the Black-Scholes-Merton option-pricing model (“BSM”).

The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected

term, forfeitures and the fair value of the underlying common stock on the date of grant, among other inputs.

The risk-free interest

rate was determined from the implied yields for zero-coupon U.S.

government issues with a remaining term approximating the expected

life of the options or warrants.

Dividends on common stock are assumed to be zero for the BSM valuation of the stock options.

The expected term of

stock options granted is based on vesting periods and the contractual life of the options.

Expected volatilities are based on

comparable companies’

historical volatility, which management believes represents the most accurate basis for estimating

expected future volatility under the current conditions.

The Company accounts for forfeitures as they occur.

The expected term of stock options granted is based on vesting

periods and the contractual life of the options.

Expected volatilities are based on comparable companies’

historical volatility

along with a limited weighting included for the Company’s own volatility subsequent to its IPO, which management believes

represents the most accurate basis for estimating expected future volatility under the current conditions.

The Company accounts

for forfeitures as they occur.

Since the IPO in November 2018, the Company has used the closing common stock price on the date

of grant for the fair value of the common stock.

Pharmaceuticals, Inc.

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As of December 31, 2020 and 2019, the Company has established a 100% valuation reserve against its deferred tax assets.

Company accounts for income taxes under the provisions of FASB ASC 740 - Income Taxes.

As of December 31, 2019 and 2018, there

were no unrecognized tax benefits included in the balance sheets that would, if recognized, affect the effective tax rate.

Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.

had no accrual for interest or penalties in its balance sheets at December 31, 2019 or 2018, and has not recognized interest and

penalties in the statements of operations for the periods ended December 31, 2019, 2018 and 2017.

As of December 31, 2019, the

Company is subject to taxation in the United States and Illinois.

The Company’s tax losses from 2019, 2018 and 2017 are

subject to examination by the federal and state tax authorities due to the carryforward of unutilized net operating losses (“NOLs”).

Company accounts for income taxes under the provisions of ASC 740 - Income Taxes.

As of December 31, 2020 and 2019, there were

no unrecognized tax benefits included in the balance sheets that would, if recognized, affect the effective tax rate.

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, 2020 or 2019, and has not recognized interest and penalties in

the statements of operations for the years ended December 31, 2020, 2019 and 2018.

As of December 31, 2020, 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 2020 are subject to examination by the federal and state tax authorities due to the carryforward of unutilized

net operating losses (“NOLs”).

Tax Cuts and Jobs Act of 2017 (the “Tax Act”) significantly revised U.S.

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in circumstances where estimates cannot be made, to disclose and recognize within a one-year measurement period.

Implementation

of the Tax Act resulted in a $733 charge for the revaluation of the Company’s net deferred tax assets offset by a corresponding

$733 reduction in the valuation reserve for income taxes during the period ended December 31, 2017.

accounting standards include guidance on the accounting for uncertainty in income taxes recognized in the financial statements.

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accounting requires characterization of the inputs used to measure fair value into a three-level fair value hierarchy as follows:

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

Inputs based on quoted prices in active markets for identical assets or liabilities.

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developed based on market data obtained from sources independent from the entity.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Summary of Significant Accounting Policies (continued)

Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants

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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 fair value due to the short-term maturities of these instruments.

Based on borrowing rates currently available to

the Company, the carrying value of the long-term debt obligation approximates its fair value.

PPP and EIDL loans and long-term debt obligation.

The carrying amounts of these financial instruments, except for the PPP and

EIDL loans and long-term debt obligation, approximate their fair values due to the short-term maturities of these instruments.

Based on borrowing rates currently available to the Company, the carrying value of the PPP and EIDL loans and long-term debt obligation

approximate their fair values.

fair values of the Company’s warrant liability at inception and for subsequent mark-to-market fair value measurements were

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the date of the Company’s IPO in November 2018, the fair value was reclassified to additional paid-in-capital as the final

number of shares for the warrants previously reflected as a liability became fixed (see Notes 4 and 9).

number of shares for the warrants previously reflected as a liability became fixed (see Note 6).

of New Accounting Pronouncements

February 2016, the FASB issued ASU 2016-02 (Topic 842) –

Leases (“ASC 842”), which requires the lease rights

and obligations arising from lease contracts, including existing and new arrangements for substantially all leases with terms

more than twelve months to be recognized as assets and liabilities on the balance sheet.

Recognition, measurement and presentation

of expenses depends upon classification as a finance or operating lease.

The Company adopted ASC 842 effective January 1, 2019

utilizing the modified retrospective approach such that prior year financial statements were not recast under the new standard.

The adoption of ASU 2016-02 did not have a material effect on the Company’s financial condition from the recognition of

the lease rights and obligations as assets and liabilities or its results of operations and cash flows.

See Note 13 for additional

information regarding the new standard and its impact on the Company’s financial statements.

June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial

The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected

losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value

through net income.

For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses

rather than a reduction in carrying value of the asset.

Entities will no longer be permitted to consider the length of time that

fair value has been less than amortized cost when evaluating when credit losses should be recognized.

The Company plans to adopt

the new guidance on January 1, 2020 and does not anticipate the adoption will have a material impact on its financial position

or results of operations.

losses to estimate credit losses for most financial assets and certain other instruments that are not measured at fair value through

For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather

than a reduction in carrying value of the asset.

Entities will no longer be permitted to consider the length of time that fair

value has been less than amortized cost when evaluating when credit losses should be recognized.

The Company adopted the new guidance

on January 1, 2020 which did not have a material impact on its financial position or results of operations.

August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).

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disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

The Company plans to adopt the new guidance

on January 1, 2020 and does not anticipate the adoption will have a material impact on its financial position or results of operations.

The Company adopted the new guidance

on January 1, 2020 which did not have a material impact on its financial position or results of operations.

December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes.

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year-to-date losses in interim periods among others.

The Company will adopt ASU 2019-12 in January 2020 and does not anticipate

it will have a material impact on its financial position or results of operations.

The Company adopted ASU 2019-12 in January 2020 and it did not have have

a material impact on its financial position or results of operations.

Pharmaceuticals, Inc.

1 unchanged sentence

thousands, except share and per share amounts)

Fair Value of Financial Assets and Liabilities

of Warrant Liability

Company previously accounted for a warrant to purchase shares of its common stock that was issued to the Company’s placement

agent in connection with the Series A Preferred offering (see Note 9) as a liability.

The fair value of the warrant liability

was determined based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair

value hierarchy.

The Company used the BSM, which incorporates assumptions and estimates, to value the warrant.

Estimates and assumptions

impacting the fair value measurement included the fair value per share of the underlying shares of common stock, the remaining

contractual term of the warrant, risk-free interest rate, expected dividend yield and expected volatility of the price of the

underlying common stock.

The Company determined the fair value per share of the underlying common stock by taking into consideration

the most recent sales of its preferred stock, results obtained from third-party valuations and additional factors that were deemed

The Company historically had been a private company and lacked company-specific historical and implied volatility information

of its common stock.

Therefore, the Company estimated its expected stock volatility based on the historical volatility of publicly

traded peer companies for a term equal to the remaining contractual term of the warrant.

The risk-free interest rate was determined

by reference to the U.S.

Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant.

The Company estimated a 0% expected dividend yield based on the fact that the Company had never paid or declared dividends and

did not intend to do so in the foreseeable future.

November 2018, in connection with the Company’s IPO, the number of shares issuable upon the exercise of the warrant became

fixed (see Note 9).

The Company remeasured the estimated fair value on the date of the IPO and reclassified this amount to additional

paid-in-capital.

following table provides a roll forward of the aggregate fair values of the Company’s warrant liability, for which fair

value was determined using Level 3 inputs:

2017 (inception) to

Balance as of the beginning of the period

Initial fair value of warrant liability

Change in fair value

Warrant liability reclassified to additional paid-in-capital

Balance as of the end of the period

Property and Equipment

and equipment consist of the following:

December 31, 2020

December 31, 2019

Computer hardware and software

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Leasehold improvements

depreciation and amortization

and equipment, net

and amortization expense for the periods ended December 31, 2019, 2018 and 2017 was $283, $51 and $11, respectively.

Construction in progress

accumulated depreciation and amortization

Property and equipment, net

and amortization expense for the years ended December 31, 2020, 2019 and 2018 was $347, $283 and $51, respectively.

Pharmaceuticals, Inc.

1 unchanged sentence

thousands, except share and per share amounts)

Long-term Debt

November 13, 2019, the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Holdings Corporation

(“SWK”) which provides for up to $10,000 in financing.

The Company received proceeds of $5,000 at closing and may

borrow an additional $5,000 upon the FDA approval of a second product developed by the Company, excluding EM-100.

Alternatively,

the Company can borrow $2,000 upon FDA approval of the EM-100 product candidate and then an additional $3,000 upon FDA approval

of another one of its product candidates.

The term of the SWK Credit Agreement is five years and borrowings bear interest at a

rate of LIBOR 3-month plus 10.0%, subject to a stated LIBOR floor rate of 2.0%.

In connection with the SWK Credit Agreement, the

Company paid $250 in cash for issuance costs and issued warrants to SWK to purchase common stock of the Company in an amount equal

to 6.0% of the principal amounts drawn under the SWK Credit Agreement, utilizing the prior ten-day average closing price of the

Company’s common stock as a divisor to calculate the number shares issuable under the warrant.

A 2.0% unused credit limit

fee is assessed during the first twelve months after the date of the SWK Credit Agreement and loan fees include a 5.0% exit fee

based on the principal amounts drawn which is payable at the end of the term of the SWK Credit Agreement.

The Company is required

to maintain a minimum cash balance of $3,000, will only pay interest on the debt until May 2021 and then will pay 4.0% of the

loan principal balance commencing on May 15, 2021 and then every three months thereafter until November 13, 2024 at which time

the remaining principal balance is due.

(“SWK”) which provided for up to $10,000 in financing.

The Company received proceeds of $5,000 at closing and was

able to borrow an additional $5,000 upon the FDA approval of a second product developed by the Company, excluding EM-100.

2020, in conjunction with the Company’s Alkindi Sprinkle product licensing agreement (see Note 15) and the Company’s

March 2020 sale of additional shares of its common stock (see Note 7), the Company and SWK amended the SWK Credit Agreement.

amendment provided the Company with the option to immediately draw $2,000 and the ability to borrow an additional $3,000 based

upon the FDA approval of EM-100 and Alkindi Sprinkle which subsequently occurred in September 2020.

Accordingly, the Company borrowed

an additional $2,000 on August 11, 2020.

The term of the SWK Credit Agreement is for five years and borrowings bear interest at

a rate of LIBOR 3-month plus 10.0%, subject to a stated LIBOR floor rate of 2.0%.

A 2.0% unused credit limit fee is assessed during

the first twelve months after the date of the SWK Credit Agreement and loan fees include a 5.0% exit fee based on the principal

amounts drawn which is payable at the end of the term of the SWK Credit Agreement.

The Company is required to maintain a minimum

cash balance of $3,000, will only pay interest on the debt until May 2022 and then will pay 5.5% of the loan principal balance

commencing on February 15, 2022 and then every three months thereafter until November 13, 2024 at which time the remaining principal

balance is due.

Borrowings under the SWK Credit Agreement are secured by the Company’s assets.

SWK Credit Agreement contains customary default provisions and covenants which include limits on additional indebtedness.

and the Company will negotiate covenant targets for EBITDA and revenue within 180 days of the date of the SWK Credit Agreement.

connection with the SWK Credit Agreement, the Company issued warrants to SWK to purchase 51,239 shares of the Company’s

common stock (the “SWK Warrants”) with an exercise price of $5.86 per share.

The SWK Warrants are exercisable immediately

and have a term of seven years.

The SWK Warrants are subject to a cashless exercise feature, with the exercise price and number

of shares issuable upon exercise subject to change in connection with stock splits, dividends, reclassifications and other conditions.

The relative fair value of the SWK Warrants was $226 and was estimated using the Black-Scholes-Merton option pricing model with

the following assumptions:

The SWK Credit Agreement

contains customary default provisions and covenants which include limits on additional indebtedness.

In March 2020, SWK provided

a waiver for the Company to obtain loans with the Small Business Association.

The Company is currently in the process of negotiating

covenant targets for EBITDA and revenue for the SWK Credit Agreement.

In February 2021, the Company notified SWK that it will

not require additional borrowing capacity under the SWK Credit Agreement and terminated the additional borrowing capacity with

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%.

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

seven-year contractual term;

95% volatility;

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and a risk-free interest rate of 0.4%.

debt discount amortization recorded in 2019 was $16 and $82 was recorded for accrued interest and included in accrued

table below reflects the future payments for the SWK loan principal and interest as of December 31, 2019.

warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance.

The SWK Warrants are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise

subject to change in connection with stock splits, dividends, reclassifications and other conditions.

Company recorded interest expense of $884 and $98 in 2020 and 2019, respectively, which included $121 and $16, respectively, of

debt discount amortization.

The Company had accrued interest of $48 and $82 as of December 31, 2020 and 2019, respectively, which

is included in accrued liabilities in the accompanying balance sheets.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Debt (continued)

table below reflects the future annual payments for the SWK loan principal and interest as of December 31, 2020.

Total payments

representing interest

amount representing interest

Loan payable, gross

Long-term debt,

net of unamortized discount

unamortized discount

Long-term debt, net of unamortized discount

May 4, 2020, the Company received $361 in loan proceeds under the Paycheck Protection Program (“PPP”) from the Small

Business Administration (“SBA”) through its banking relationship with Bank of America.

The loan bears a 1.0% annual

interest rate and is payable in monthly installments commencing in November 2020, subject to a payment deferral period until August

2021 which the Company has elected to use, until the loan is paid in full on May 4, 2022.

The Company recorded $2 in interest

expense for the period ended December 31, 2020.

The Company intends to pursue full or partial forgiveness of the loan as permitted

under the applicable SBA guidelines for PPP loans.

July 21, 2020, the Company received $150 in loan proceeds under the Economic Injury Disaster Loan program (“EIDL”)

from the SBA.

The loan bears a 3.75% annual interest rate and is payable in monthly installments commencing on July 21, 2021 until

paid in full on July 21, 2050.

The Company recorded $3 in interest expense for the year ended December 31, 2020.

Pharmaceuticals, Inc.

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Company has 50,000,000 authorized shares of $0.001 par value common stock as per its Amended and Restated Certificate of Incorporation.

In May 2017, the Company issued 3,500,000 shares of its common stock to Harrow, 1,500,000 shares of restricted stock to certain

executives and staff of Harrow and 1,000,000 shares of restricted stock to the CEO of the Company.

On January 1, 2018, the Company

issued 54,745 restricted shares of its common stock to each of its four outside directors (218,980 total shares) as part of their

compensation for board service to the Company in 2018.

The restricted shares issued to the Harrow executives and staff vested

over a 12-month period, the restricted shares issued to the CEO vest over a 24-month period and the restricted shares issued to

the outside directors vested 25% at each quarter-end in 2018 and were fully vested as of December 31, 2018.

On January 1, 2018, the Company issued 54,745 restricted shares of its common stock to each of its four outside directors (218,980

total shares valued at $300) as part of their compensation for board service to the Company in 2018.

The restricted shares issued

to the outside directors vested 25% at each quarter-end in 2018 and were fully vested as of December 31, 2018.

The Company accounted

for the restricted stock awards (“RSAs”) in accordance with ASC 718 or ASC 505-50.

For the periods ended December

31, 2019, 2018 and 2017, the Company recorded $59, $1,388 and $1,403, respectively, in stock-based compensation expense for these

RSAs (see Note 10).

for the restricted stock awards (“RSAs”) in accordance with ASC 718 (see Note 9).

conjunction with the Company’s IPO in November 2018, the Series A Preferred shares, including accrued dividends, converted

into 7,248,948 shares of the Company’s common stock, and the Company issued 4,140,000 additional shares of its common stock

to investors in its IPO (See Notes 1 and 7).

2019, there were 97,088 warrant shares exercised (all on a cashless basis) resulting in 57,051 shares of common stock being issued

by the Company.

In addition, 167,622 stock option shares were exercised and issued under the Company’s 2018 Equity Incentive

Plan and 44,885 shares were issued under the Company’s Employee Stock Purchase Program.

to investors in its IPO (see Note 1).

March and April 2020, the Company entered into securities purchase agreements with various investors and sold an aggregate of

2,600,000 shares of its common stock at a price of $3.00 per share and received $7,756 in net proceeds after deducting issuance

costs associated with the sale.

March 2020, the Company issued 379,474 shares of its common stock to Diurnal Limited (“Diurnal”) as a milestone fee

for acquiring the U.S.

marketing rights to Alkindi Sprinkle®, an orphan drug product currently under review with the FDA (see

The shares were valued at $1,264 based on the Company’s closing stock price on the date of issuance and this amount

was recorded as a component of the Company’s research and development expense and a corresponding increase to its additional

paid-in-capital.

October 2020, the Company issued 3,220,000 shares of its common stock in a public offering at an offering price of $7.00 per share

and received net proceeds of $21,026.

Pharmaceuticals, Inc.

1 unchanged sentence

thousands, except share and per share amounts)

Common Stock (continued)

the years ended December 31, 2020 and 2019, the Company issued 194,878 and 167,622 shares, respectively, of its common stock resulting

from stock option exercises under its 2018 Equity Incentive Plan (see Note 9).

For the years ended December 31, 2020 and 2019,

the Company issued 25,780 and 44,885 shares, respectively, under the Company’s Employee Stock Purchase Program (“ESPP”).

In April 2020, the Company issued 15,190 shares of its common stock as an RSA to a new employee.

This RSA vests 25% every three

months and will be 100% vested in April 2021.

2019, there were 97,088 warrant shares exercised (all on a cashless basis) resulting in 57,051 shares of common stock being issued

by the Company.

There were no warrant exercises in the 2020 period.

Common Stock Warrants

May 2017, the Company issued a warrant to purchase 600,000 shares of its common stock to consultants for business strategy and

intellectual property advisory services.

The warrant vested at issuance in May 2017 and has a $0.01 exercise price per warrant

share and expires five years from the date of issuance.

The Company used the BSM to value the warrant and the fair value at the

date of issuance was $121 based on an expected term of five years, volatility of 85%, a risk-free interest rate of 1.8% and a

0% rate on expected dividends.

The $121 amount for the consulting warrants was expensed as a component of the Company’s

general and administrative expenses in May 2017.

conjunction with the closing of the Series A Preferred offering in June 2017 (see Note 6), the Company issued a warrant to purchase

10 unchanged sentences

costs for the Series A Preferred in June 2017.

As of December 31, 2017, the fair value of the warrant was $520 and the $41 increase

in fair value during 2017 was recorded as a component of other income and expense.

As of December 31, 2017, the fair value of the warrant was $520.

of November 15, 2018, the fair value of the warrants was $3,103 and the $2,583 increase in fair value during 2018 was recorded

as a component of other income and expense.

The fair value assumptions included an expected term of five years, expected volatility

of 85%, a risk-free interest rate of 2.9% and estimate of the conversion rate.

These warrants were classified as warrant liability

on the Company’s balance sheets prior to the IPO in November 2018.

In connection with the Company’s IPO, the number

of shares issuable upon the exercise of these warrants became fixed at 704,184 shares which eliminated the fair value adjustment

after that date.

At the IPO date, the warrant liability was reclassified to additional paid-in-capital.

November 2018, in connection with the IPO, the Company issued warrants for 414,000 shares of its common stock to the placement

agent at an exercise price of $7.50 per share.

connection with the SWK Credit Agreement, the Company issued warrants to SWK to purchase 51,239 shares of the Company’s

13 unchanged sentences

The $226 relative fair value for these

warrants was reflected as a component of paid-in-capital in the Company’s balance sheet.

of November 15, 2018, the fair value of the warrants was $3,103 and the $2,583 increase in fair value during 2018 was recorded

as a component of other income and expense.

The fair value assumptions included an expected term of five years, expected volatility

of 85%, a risk-free interest rate of 2.9% and estimate of the conversion rate.

These warrants were classified as warrant liability

on the Company’s balance sheets prior to the IPO in November 2018.

In connection with the Company’s IPO, the number

of shares issuable upon the exercise of these warrants became fixed at 704,184 shares which eliminated the fair value adjustment

after that date.

At the IPO date, the warrant liability was reclassified to additional paid-in-capital.

November 2018, in connection with the IPO, the Company issued warrants for 414,000 shares of its common stock to the placement

agent at an exercise price of $7.50 per share.

warrants was reflected as a component of additional paid-in-capital in the Company’s balance sheet.

connection with the additional $2,000 borrowed in August 2020 under the SWK Credit Agreement, 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%.

The $94 relative fair value for these warrants was reflected as a component of additional paid-in-capital in the

Company’s balance sheet.

weighted average exercise price of the outstanding warrants for the consultant, placement agent and debt holder as of December

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below is a summary of warrants outstanding as of December 31, 2020:

Business Advisory Warrants

Placement Agent Warrants - Series A

Description of Warrants

Exercise Price

Business Advisory Warrants –

Placement Agent Warrants –

2017 Preferred Stock Offering

Placement Agent Warrants - IPO

SWK Warrants –

Debt (Tranche #1)

SWK Warrants –

Debt (Tranche #2)

holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities

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rollforward of the warrants outstanding is listed in the table below:

as of the beginning of the year

Issuance of SWK Warrants with long-term

Placement Agent Warrants exercised –

Series A Preferred

as of the end of the year

2019, 97,088 warrants were exercised (all on a cashless basis) resulting in 57,051 shares of common stock being issued by the

The intrinsic value of the warrants exercised was $401.

Balance as of the beginning of the year

Issuance of SWK Warrants with long-term debt

Balance as of the end of the year

were no warrant exercises in 2020.

During 2019, 97,088 warrants were exercised (all on a cashless basis) resulting in 57,051 shares

of common stock being issued by the Company.

The intrinsic value of the warrants exercised in 2019 was $401.

Share-Based Payment Awards

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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, 2019, the share reserve was increased by

704,317 shares based on the 17,607,928 shares of common stock outstanding at December 31, 2018.

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, 2019, the share reserve was increased by 704,317 shares

based on the 17,607,928 shares of common stock outstanding at December 31, 2018.

On January 1, 2020, the share reserve was increased

by 715,099 shares based on the 17,877,486 shares of common stock outstanding at December 31, 2019.

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

Prior to the IPO, the Company’s board of directors valued the Company’s common stock, taking into

consideration its most recently available valuation of common stock performed by third parties as well as additional factors

which might have changed since the date of the most recent contemporaneous valuation through the date of grant.

Following the

IPO, the Company has used the closing stock price on the date of grant as the exercise price.

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.

Prior to the IPO, the Company’s board of directors valued the Company’s common stock, taking into consideration its

most recently available valuation of common stock performed by third parties as well as additional factors which might have changed

since the date of the most recent contemporaneous valuation through the date of grant.

Following the IPO, the Company has used

the closing stock price on the date of grant as the exercise price.

Pharmaceuticals, Inc.

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at December 31, 2018.

In April 2020, the Company issued 15,190 shares of its common stock as an RSA to a new employee.

vests 25% every three months and will be 100% vested in April 2021.

date, all stock options issued have been non-qualified stock options and the exercise prices were set at the fair value for the

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any expense for these contingently vesting option awards to its product consultants.

the periods ended December 31, 2019, 2018 and 2017, the Company’s total stock-based compensation expense was $1,888, $1,850

the years ended December 31, 2020, 2019, and 2018, the Company’s total stock-based compensation expense was $2,576, $1,888

and $1,850, respectively.

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summary of stock option activity is as follows:

Average Exercise

Average Remaining

outstanding as of January 1, 2019

Weighted Average Exercise

Weighted Average Remaining

Aggregate Intrinsic

Options outstanding as of January 1, 2020

Forfeited/Cancelled

outstanding as of December 31, 2019

Options outstanding as of December 31, 2020

Options exercisable at December 31, 2020

Options vested and expected to vest

at December 31, 2019

Options vested and expected to vest at December 31, 2020

aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and

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the Company’s common stock at December 31.

The intrinsic value of the options exercised was $932.

were 167,622 shares issued for exercises of stock options during the year ended December 31, 2019 for proceeds of $214.

assumptions used to calculate the fair value of options granted during the periods ended December 31, 2019, 2018 and 2017 under

The intrinsic value of the options exercised during 2020 was $1,049.

were 194,878 shares issued for exercise of stock options during the year ended December 31, 2020 for proceeds of $255.

assumptions used to calculate the fair value of options granted during the years ended December 31, 2020, 2019, and 2018 under

the BSM were as follows:

December 31, 2020

December 31, 2019

December 31, 2018

Expected dividends

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shares during the equivalent period of the calculated expected term of the stock-based awards.

The Company has

continued this methodology plus given some limited weighting to its own volatility in the periods subsequent to its November 2018

Interest Rate —

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summary of activity for RSAs and RSUs is as follows:

Restricted Stock Awards

Number of shares

Unvested as of January 1, 2020

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Unvested as of December 31, 2020

RSA’s were issued in 2019 and the weighted average grant date fair value of the RSAs issued during the year ended December

31, 2018 was $1.37.

The fair value of the RSAs vested during the periods ended December 31, 2019, 2018 and 2017 was $66, $2,784

and $0, respectively.

RSUs were issued in 2019 or 2018 and no RSU’s were unvested at December 31, 2019 or 2018.

The fair value of the RSUs vesting

during the periods ended December 31, 2019, 2018 and 2017 was $0, $69 and $69, respectively.

grant date fair value per share for the RSA issued in 2020 was $3.95.

No RSAs were issued in 2019 and the weighted average grant

date fair value of the RSAs issued during the year ended December 31, 2018 was $1.37 per share.

The fair value of the RSAs vested

during the years ended December 31, 2020, 2019 and 2018 was $30, $66 and $2,784, respectively.

RSUs were issued in 2020, 2019 and 2018 and no RSU’s were unvested at December 31, 2020 or 2019.

The fair value of the RSUs

vested during the years ended December 31, 2020, 2019 and 2018 was $0, $0 and $69, respectively.

of December 31, 2020, there was a total of $4,375, $18 and $0 of unrecognized compensation costs related to non-vested stock option

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December 2018, the Company’s board of directors adopted an initial offering of the Company’s common stock under the

Company’s 2018 Employee Stock Purchase Plan (the “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.

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.

initial offering began on December 17, 2018 and ended on December 10, 2019.

The initial offering consisted of two purchase periods,

with the first purchase period ending on June 10, 2019 and the second purchase period ending on December 10, 2019.

with the first purchase period ended on June 10, 2019 and the second purchase period ended on December 10, 2019.

the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per share that is at least the

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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.

Company recorded an expense of $71, $112 and $5 in 2020, 2019 and 2018, respectively, related to the ESPP.

The weighted average grant date

fair value of share awards in 2019 and 2018 was $2.56 and $2.59 per share, respectively.

Employees contributed $247 and $8 to

the ESPP during 2019 and 2018, respectively.

Of these amounts, $16 and $8 at December 31, 2019 and 2018, respectively, is included

in accrued liabilities in the accompanying balance sheets.

The weighted average

grant date fair value of share awards in 2020, 2019 and 2018 was $2.32, $2.56 and $2.59 per share, respectively.

Employees contributed

$115 and $247 to the ESPP during 2020 and 2019, respectively.

Of these amounts, $18 and $16 at December 31, 2020 and 2019, respectively,

is included in accrued liabilities in the accompanying balance sheets.

Basic and Diluted Net Loss per Common Share

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method) from stock options, unvested

RSAs and RSUs, warrants and convertible preferred stock at December 31, 2019, 2018 and 2017 were 3,590,465, 8,262,381 and 6,977,547,

respectively, and are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive.

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.

RSAs and RSUs, and warrants at December 31, 2020, 2019 and 2018 were 3,371,489, 3,590,465, and 8,262,381, 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.

following table shows the computation of basic and diluted net loss per common share:

April 27, 2017

December 31, 2018

Series A Preferred

Series A Preferred –

dividends (accrued and deemed)

loss attributable to common stockholders

Weighted average

common shares outstanding (basic and diluted)

common share (basic and diluted)

Net loss attributable to common stockholders

Weighted average common shares outstanding (basic and diluted)

Net loss per common share (basic and diluted)

Pharmaceuticals, Inc.

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The Company recorded stock-based compensation expense of $0, $0 and $970

for the Harrow restricted common stock and $0, $51 and $112 for Harrow stock options, respectively, for the periods ended December

for the Harrow restricted common stock and $0, $0 and $51 for Harrow stock options, respectively, for the years ended December

31, 2020, 2019 and 2018 as a component of its general and administrative expenses.

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Executive Officer

CEO has a partial interest in several companies that the Company is working with for product development and potential marketing

if the products are approved by the FDA as detailed below.

CEO has a partial interest in a company that the Company has partnered with for its EM-100 product as described below.

Company acquired the exclusive rights to sell the EM-100 product in the United States pursuant to a sales and marketing agreement

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for geographic areas outside of the United States.

Pursuant to the Eyemax Agreement, the Company is responsible for all costs

of testing and FDA approval of the product, other than the FDA filing fee which will be paid by Eyemax.

The Company was also responsible

for commercializing the product in the United States at its expense.

The Company paid Eyemax $250 upon execution of the Eyemax

Agreement, which was recorded as a component of R&D expense.

Under the terms of the original agreement, the Company would

pay Eyemax $250 upon FDA approval and $500 upon the first commercial sale of the product and pay Eyemax a royalty of 10% on the

net sales of all products.

The Eyemax Agreement was for an initial term of 10 years from the date of the Eyemax Agreement, subject

to successive two-year renewals unless the Company elected to terminate the Eyemax Agreement.

There were no amounts due under

the terms of the Eyemax Agreement as of December 31, 2019 or 2018.

Pursuant to the Eyemax Agreement, the Company was responsible for all costs

of testing and FDA approval of the product, other than the FDA filing fee which was paid by Eyemax.

The Company was also to be

responsible for commercializing the product in the United States at its expense.

The Company paid Eyemax $250 upon execution of

the Eyemax Agreement, which was recorded as a component of R&D expense.

Under the terms of the original agreement, the Company

would pay Eyemax $250 upon FDA approval and $500 upon the first commercial sale of the product and pay Eyemax a royalty of 10%

on the net sales of all products.

The Eyemax Agreement was for an initial term of 10 years from the date of the Eyemax Agreement,

subject to successive two-year renewals unless the Company elected to terminate the Eyemax Agreement.

There were no amounts due

under the terms of the Eyemax Agreement as of December 31, 2020 or 2019.

Pharmaceuticals, Inc.

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(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.

payment of the milestones, the Company is entitled to retain all of the non-royalty transaction revenues and royalties up to $2,000

(the “Recovery Amount”).

After the Company has retained the full Recovery Amount, it is entitled to retain half of

all royalty and non-royalty transaction revenue.

The Amended Agreement also contains customary representations, warranties, covenants

and indemnities by the parties.

The EM-100 asset and its associated product rights were sold to Bausch on February 18, 2019 and

future potential royalties on Bausch sales of EM-100, pending an FDA approval for EM-100, will be split between Eyemax and the

There were no amounts due under the terms of the Amended Agreement as of December 31, 2019 or 2018.

Company acquired the exclusive rights to sell the DS-100 product in the United States pursuant to an exclusive development and

supply agreement (the “Andersen Agreement”) dated July 9, 2017 between the Company and Andersen Pharma, LLC, an entity

affiliated with the CEO (“Andersen”).

The Company also holds an option to purchase the DS-100 product and all related

intellectual property and government approvals at a price of one dollar.

Pursuant to the Andersen Agreement, Andersen is responsible

for obtaining FDA approval at its expense and manufacturing the product for sale to the Company at its cost.

The Company is responsible

for commercializing the product in the United States at its expense.

The Company paid Andersen $750 upon execution of the Andersen

Agreement, which was recorded as a component of R&D expense and will pay Andersen $750 upon successful completion of three

registration batches of product, $750 upon submission of a New Drug Application (“NDA”) and $750 upon FDA approval.

The Company will also pay Andersen 50% of the net profit from the sale of the product.

The Andersen Agreement is for an initial

term of five years from the first commercial sale of the product, subject to successive two-year renewals unless either party

elects to terminate the Andersen Agreement.

There were no amounts due under the terms of the Andersen Agreement as of December

31, 2019 or 2018.

The aforementioned option to purchase the product and all related intellectual property and government approvals

was considered to represent variable interest in the affiliated entity.

The affiliated entity was not considered to be a variable

interest entity.

Company acquired the DS-200 product and all related intellectual property and government approvals 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 Company’s CEO.

Pursuant to the Selenix Agreement, the Company paid Selenix $1,500 at signing,

which was recorded as a component of R&D expense and paid $1,500 in April 2019 upon submission of an NDA on March 13, 2019

which was reflected as a component of R&D expense for the nine-month period ended September 30, 2019.

The Company will pay

$1,000 upon FDA approval of the DS-200 product.

The Company has also agreed to pay Selenix 50% of the net profit from the sale

of the product for the first 10 years following the date of the Selenix Agreement.

There were no amounts due under the terms of

the Selenix Agreement as of December 31, 2019 or 2018.

January 1, 2019, the Company adopted ASC 842, which requires an entity to recognize a right-of-use (“ROU”) asset and

a lease liability on the balance sheet for substantially all leases, including operating leases, using the modified retrospective

The Company elected to use the package of practicable expedients which allows companies to not reassess the following:

(1) the lease classification for any expired or existing leases, (2) the treatment of initial direct costs as they related to

existing leases, and (3) whether expired or existing contracts are or contain leases.

The Company did not elect the use of the

hindsight practical expedient, but did elect to separate lease components from non-lease components related to its office space

adoption of ASC 842, the Company had non-cancellable operating leases for its office and laboratory space subject to recognition

as ROU assets.

Accordingly, on January 1, 2019 the Company recorded $281 in ROU assets and $272 in operating lease liabilities

(the difference of $9 related to existing prepaid rent as of December 31, 2018).

The Company has not entered into any other lease

arrangements through December 31, 2019.

(ii) one milestone payment for $500 following the first commercial sale of the first single agent product in the territory which

was paid in February 2021.

Following payment of the milestones, the Company is entitled to retain all of the non-royalty transaction

revenues and royalties up to $2,000 (the “Recovery Amount”).

After the Company has retained the full Recovery Amount,

it is entitled to retain half of all royalty and non-royalty transaction revenue.

The Amended Agreement also contains customary

representations, warranties, covenants and indemnities by the parties.

The EM-100 asset and its associated product rights were

sold to Bausch Health on February 18, 2019 and future potential royalties of twelve percent on Bausch Health sales of EM-100,

which was approved by the FDA in September 2020, will be split between Eyemax and the Company.

The royalty from Bausch Health

is subject to reduction if a competitive product with the same active pharmaceutical ingredient is launched in the U.S.

the EM-100 U.S market share falls below a specified target percentage.

There were no amounts due under the terms of the Amended

Agreement as of December 31, 2020 or 2019.

Pharmaceuticals, Inc.

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thousands, except share and per share amounts)

Leases (continued)

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.

January 12, 2018, the Company signed an amended lease agreement to lease additional office space adjacent to its current corporate

office space in Deer Park, Illinois.

The amended lease runs through the end of March 2021.

On March 7, 2018, the Company entered

into a lease for laboratory space at a complex in Lake Zurich, Illinois.

The lease commenced on March 7, 2018 and runs through

the end of February 2021.

The amended lease was scheduled to expire at the end of March 2021.

In October 2020, the

Company renewed its office lease for a two-year period through March 31, 2023 and recorded $195 in ROU assets and $195 in operating

lease liabilities associate with the lease extension.

On March 7, 2018, the Company entered into a lease for laboratory space

at a complex in Lake Zurich, Illinois.

The lease commenced on March 7, 2018 and was scheduled to expire in February 2021.

2020, this laboratory lease was extended to June 2021 as the Company evaluates its future laboratory operations requirements.

Company does not have any lease contracts that contain:

(1) an option to extend that the Company is reasonably certain to exercise,

(2) an option to terminate that the Company is reasonably certain not to exercise, or (3) an option to extend (or not to terminate)

(2) an option to terminate that the Company is reasonably certain to exercise, or (3) an option to extend (or not to terminate)

in which exercise of the option is controlled by the lessor.

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value guarantees or material restrictive covenants.

For leases already commenced, the lease term was determined to be the remaining

months in the lease term as of January 1, 2019, the date of adoption.

Lease liabilities and their corresponding right-of-use assets

have been recorded based on the present value of the future lease payments over the expected lease term.

One of the Company’s

lease agreements contains provisions for escalating rent payments over the term of the lease.

Lease liabilities and their corresponding right-of-use assets have been recorded

based on the present value of the future lease payments over the expected lease term.

One of the Company’s lease agreements

contains provisions for escalating rent payments over the term of the lease.

Company’s leases do not contain readily determinable implicit discount rates, and therefore, the Company was required to

use its incremental borrowing rate of 7.8% to discount the future lease payments based on information available at lease commencement.

The incremental borrowing rate was estimated by determining the rate of interest that the Company would have to pay to borrow

on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

the periods ended December 31, 2019, 2018 and 2017, the Company recorded $140, $115 and $14, respectively, in rent expense

In October 2020, the new discount rate for the office lease extension was estimated at 5.4%.

The incremental borrowing rate was

estimated by determining the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar

term an amount equal to the lease payments in a similar economic environment.

the years ended December 31, 2020, 2019 and 2018, the Company recorded $139, $140, and $115, respectively, in rent expense.

Company’s operating lease cost as presented in the “Research and Development”

and “General and Administrative”

captions in the statements of operations was $55 and $85 for the year ended December 31, 2019.

Cash paid for amounts included

in the measurement of operating lease liabilities was $120 for year ended December 31, 2019.

The ROU asset amortization for year

ended December 31, 2019 was $121 and is reflected in depreciation and amortization in the Company’s statements of cash flows.

As of December 31, 2019, the weighted-average remaining lease term was 1.2 years, and the weighted-average incremental borrowing

rate was 7.8%.

captions in the statements of operations was $55 and $84 and $55 and $85 for the years ended December 31, 2020 and 2019, respectively.

Cash paid for amounts included in the measurement of operating lease liabilities was $131 and $120 for years ended December 31,

2020 and 2019, respectively.

The ROU asset amortization for years ended December 31, 2020 and 2019 was $129 and $121, respectively,

and is reflected in depreciation and amortization in the Company’s statements of cash flows.

As of December 31, 2020, the

weighted-average remaining lease term was 2.2 years, and the weighted-average discount rate was 5.4%.

table below presents the lease-related assets and liabilities recorded on the balance sheet as of December 31, 2020:

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Total operating lease liabilities

Company’s future lease commitments as of December 31, 2019 are as indicated below:

Company’s future annual lease commitments as of December 31, 2020 are as indicated below:

Undiscounted lease payments

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Total lease liabilities

Company’s future operating lease payments as of December 31, 2018 were as follows:

Pharmaceuticals, Inc.

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thousands, except share and per share amounts)

provision for income taxes for the Company consists of the following for the periods ended December 31, 2019, 2018 and

provision for income taxes for the Company consists of the following for the years ended December 31, 2020, 2019 and 2018:

Total current expense

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on the uncertainty of future taxable income at this time management believes a 100% valuation reserve for the $17,903 and

deferred tax asset at December 31, 2019 and 2018, respectively, is appropriate.

$9,731 deferred tax assets at December 31, 2020 and 2019, respectively, is appropriate.

reconciliation of the statutory federal tax rate to effective tax rate is shown below:

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Year ended December 31,

April 27, 2017

Benefit at statutory rate

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thousands, except share and per share amounts)

Tax Act significantly revised U.S.

corporate income tax law by, among other things, reducing the corporate income tax rate from

34% to 21% and implementing a modified territorial tax system.

Implementation of the Tax Act resulted in a $733 charge for the

revaluation of the Company’s net deferred tax assets offset by a corresponding $733 reduction in the valuation reserve for

income taxes during the period ended December 31, 2017.

Company has a federal and state NOL carryforward of $31,151 as of December 31, 2019, of which $5,652 will

begin to expire in 2037 and 2039, respectively.

Under the Tax Act, federal NOLs incurred in taxable years ending after December

31, 2017, may be carried forward indefinitely, but the deductibility of federal NOLs generated in tax years beginning before

December 31, 2017, is limited.

It is uncertain if and to what extent various states will conform to the Tax Act.

Income Taxes (continued)

Company has a federal and state NOL carryforward of $57,008 as of December 31, 2020.

Under the Tax Act, federal NOLs incurred

in taxable years ending after December 31, 2017 in the amount of $51,356 may be carried forward indefinitely, but the deductibility

of federal NOLs generated in tax years beginning before December 31, 2017 in the amount of $5,652 will expire in 2037.

state NOL carry forward will begin to expire in 2029.

addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law,

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other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited.

The Company is

currently performing a study to determine if it has triggered an “ownership change”

limitation and tax attributions

will be adjusted when the study is complete, if required.

14 - Employee Savings Plan

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cash compensation, subject to annual limits.

For the periods ended December 31, 2019, 2018 and 2017, the Company made $113, $62

and $0 in matching contributions, respectively.

For the years ended December 31, 2020, 2019 and 2018, the Company made $117, $113

and $62, respectively, in matching contributions.

Commitments and Contingencies

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of any pending or threatened litigation matters at this time that may have a material impact on the operations of the Company.

and Product Development Agreements

Company has entered into various agreements in addition to those discussed above which are described below.

Company acquired the exclusive rights to sell the DS-300 product in the United States pursuant to a sales and marketing agreement

dated November 17, 2017 with an unaffiliated third party (the “Sales Agreement”).

Pursuant to the Sales Agreement,

the licensor is responsible for obtaining FDA approval, at its expense, and the Company is responsible for commercializing the

product in the United States at its expense.

The Company was to pay the third party 50% of the net profit from the sale of the

product, however, in February 2020, it executed an amendment to the Sales and Marketing Agreement.

Under the revised terms, the

Company will be responsible for paragraph IV related litigation and will be entitled to 62.5% of product profit.

The initial term

is for the first 10 years following the first commercial sale of the product.

Company acquired the exclusive license to develop, manufacture and sell ET-103 in the United States pursuant to an Exclusive License

and Supply Agreement dated August 3, 2018 between the Company and Liqmeds Worldwide Limited (“LMW”), an unaffiliated

Pursuant to the agreement, the Company will be responsible for, and will own, all regulatory filings and approvals at

its expense, provided that it shall have the right to recoup 35% of any regulatory filing fees from the initial profits from the

sale of ET-103 and, provided further, the licensor shall be responsible for any bioequivalence study and shall be responsible

for 60% of the costs of such study.

An affiliate of the licensor shall manufacture the ET-103 and sell it to the Company at its

The Company paid the licensor $350 upon execution of the agreement and will pay the licensor $1,500 upon the FDA’s

acceptance of an NDA for review, $1,000 upon FDA approval, $1,500 upon issuance of patent covering ET-103 listed in the FDA’s

Orange Book and $500 in the event of product sales in excess of $10,000 in any calendar year.

In addition, the Company is required

to pay the licensor 35% of the net profit from product sales.

The license agreement is for an initial term of 10 years from the

date of the first commercial sale of the product, subject to two-year renewals unless either party elects to terminate no less

than 12 months prior to the then current term.

The agreement also contains customary representations, warranties, covenants and

indemnities by the parties.

Pharmaceuticals, Inc.

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Commitments and Contingencies (continued)

January 23, 2019 the Company entered into a Licensing and Supply Agreement (the “Agreement”) with LMW for ET-104 oral

liquid, a development stage product candidate (“ET-104”).

Pursuant to the terms of the Agreement, the Company will

be responsible for regulatory and marketing activities.

LMW will be responsible for development and manufacturing of ET-104.

Company paid the licensor $350 upon execution of the Agreement and an additional $350 after receiving successful bioequivalence

study results, and will pay $325 upon the FDA’s acceptance of an NDA for review, $325 upon FDA approval of the NDA, $650

upon issuance of patent covering ET-104 listed in the FDA’s Orange Book and $500 in the event that product sales in excess

of $10,000 are achieved within a calendar year.

In addition, the Company is required to pay the licensor 35% of the net profit

from product sales.

The Agreement is for an initial term of 10 years from the date of the first commercial sale of the product.

The Company will retain sole ownership of the NDA after expiration of the Agreement

and Product Development Agreements

Company has entered into various agreements in addition to those discussed above which are described below.

Company acquired the exclusive rights to sell the Cysteine injection product in the United States pursuant to a sales and marketing

agreement dated November 17, 2017 with an unaffiliated third party (the “Sales Agreement”).

Pursuant to the Sales

Agreement, the licensor is responsible for obtaining FDA approval, at its expense, and the Company is responsible for commercializing

the product in the United States at its expense.

The Company was to pay the third party 50% of the net profit from the sale of

the product, however, in February 2020, it executed an amendment to the Sales and Marketing Agreement.

Under the revised terms,

the Company will be responsible for paragraph IV related litigation and will be entitled to 62.5% of product profit.

term is for the first 10 years following the first commercial sale of the product.

Company acquired the exclusive license to develop, manufacture and sell oral solution Levothyroxine in the United States pursuant

to an Exclusive License and Supply Agreement dated August 3, 2018 between the Company and Liqmeds Worldwide Limited (“LMW”),

an unaffiliated entity.

Pursuant to the agreement, the Company was to be responsible for, and would own, all regulatory filings

and approvals at its expense, provided that it would have the right to recoup 35% of any regulatory filing fees from the initial

profits from the sale of ET-103 and, provided further, the licensor would be responsible for any bioequivalence study and would

be responsible for 60% of the costs of such study.

An affiliate of the licensor was to manufacture the ET-103 and sell it to the

Company at its cost.

The Company paid the licensor $350 upon execution of the agreement and was to pay the licensor $1,500 upon

the FDA’s acceptance of an NDA for review, $1,000 upon FDA approval, $1,500 upon issuance of patent covering ET-103 listed

in the FDA’s Orange Book and $500 in the event of product sales in excess of $10,000 in any calendar year.

the Company was required to pay the licensor 35% of the net profit from product sales.

The license agreement was for an initial

term of 10 years from the date of the first commercial sale of the product, subject to two-year renewals unless either party elects

to terminate no less than 12 months prior to the then current term.

The agreement also contained customary representations, warranties,

covenants and indemnities by the parties.

In November 2020, the Company terminated the development agreement with LMW due to new

adverse market competitive factors.

February 8, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-202 License Agreement”)

5 unchanged sentences

Pursuant to the terms of the ET-202 License

Agreement, the Company will be responsible for marketing activities and Sintetica is responsible for development, manufacturing,

and regulatory activities related to obtaining regulatory approval.

The Company paid Sintetica a licensing payment of $2,000 upon

execution of the ET-202 License Agreement and $750 upon the commencement of commercial product shipments.

Sintetica will supply

Biorphen to the Company at its direct costs and the Company will retain 5% of net sales as a marketing fee.

Sintetica is entitled

to receive the first $500 of product profits.

Agreement, the Company is responsible for marketing activities and Sintetica is responsible for development, manufacturing, and

the regulatory activities related to approval.

The Company paid Sintetica a licensing payment of $2,000 upon execution of the

ET-202 License Agreement and $750 upon the commencement of commercial product shipments.

Sintetica will supply Biorphen to the

Company at its direct costs and the Company will retain 5% of net sales as a marketing fee.

Sintetica is entitled to receive the

first $500 of product profits.

All additional profit will be split 50% to the Company and 50% to Sintetica.

ET-202 License Agreement has a ten-year term from the first commercial sale of Biorphen which occurred in November 2019.

February 8, 2019, the Company also entered into an Exclusive Licensing and Supply Agreement (the “ET-203 License Agreement”)

with Sintetica for marketing rights in the United States to ET-203, an injectable product candidate for use in the hospital setting.

Pursuant to the terms of the ET-203 License Agreement, the Company will be responsible for marketing activities and Sintetica

will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory approval.

paid Sintetica a licensing payment of $1,000 upon execution of the ET-203 License Agreement which was refunded to Eton in early

2020 due to the FDA not accepting the ET-203 file submission by Sintetica.

The refund was reflected as a component of prepaid

and other current assets on the Company’s balance sheet at December 31, 2019.

The Company expects the submission will be

successfully resubmitted in the near future and will pay the $1,000 milestone at that time.

The Company will pay $750 upon FDA

approval and the commercial sale of the product candidate.

Upon approval, Sintetica will supply ET-203 to the Company at its direct

The ET-202 License

Agreement has a ten-year term from the first commercial sale of Biorphen which occurred in November 2019.

There was a gross loss

for Biorphen for the year ended December 31, 2020 due to slower than anticipated sales and a product price reduction through the

Company’s wholesale customers.

February 8, 2019, the Company also entered into an Exclusive Licensing and Supply Agreement (the “ET-203 License

Agreement”) with Sintetica for marketing rights in the United States to ephedrine, an injectable product candidate for

use in the hospital setting.

Pursuant to the terms of the ET-203 License Agreement, the Company will be responsible for

marketing activities and Sintetica will be responsible for development, manufacturing, and regulatory activities related to

obtaining regulatory approval.

The Company paid Sintetica a licensing payment of $1,000 upon execution of the ET-203 License

Agreement which was refunded to Eton in early 2020 due to the FDA not accepting the ET-203 file submission by Sintetica.

refund was reflected as a component of prepaid and other current assets on the Company’s balance sheet at December 31,

The ET-203 product was successfully resubmitted in late 2020 and the Company will pay a $600 milestone fee and will

also pay $750 upon FDA approval and the commercial sale of the product candidate.

Upon approval, Sintetica will supply ET-203

to the Company at its direct costs.

The Company will retain 5% of net sales as a marketing fee.

Sintetica will be entitled to receive the first $500 of product

Sintetica will be entitled to

receive the first $500 of product profits.

All additional profit will be split 50% to the Company and 50% to Sintetica.

The ET-203 License Agreement has a ten-year

term from first commercial sale of product.

ET-203 License Agreement has a ten-year term from first commercial sale of product.

Pharmaceuticals, Inc.

TO FINANCIAL STATEMENTS

thousands, except share and per share amounts)

Commitments and Contingencies (continued)

three oral solution pediatric neurology product candidates discussed below, Topiramate, Zonisamide and Lamotrigine were developed

by the Company and its various product candidate development partners and the Company subsequently sold all its rights

and interests in these three products to Azurity Pharmaceuticals, Inc.

(“Azurity”) in 2021 (see Note 16 —

Subsequent Events).

the years ended December 31, 2020, 2019 and 2018, the Company worked with Tulex Pharmaceuticals, Inc.

(“Tulex”)

as a third-party contract manufacturer to develop an oral solution for Topiramate (fka ET-101) which targets a neurological condition.

The Company subsequently filed the product with the FDA in October 2020 and paid a $1,438 filing fee.

January 23, 2019, the Company entered into a Licensing and Supply Agreement (the “Agreement”) with LMW for Zonisamide

oral liquid, a development stage product candidate (“ET-104”).

Pursuant to the terms of the Agreement, the Company

was to be responsible for regulatory and marketing activities.

LMW will be responsible for development and manufacturing of ET-104.

The Company paid the licensor $350 upon execution of the Agreement and an additional $350 after receiving successful bioequivalence

study results, and $325 upon the FDA’s acceptance of the NDA for review and will pay $325 upon FDA approval of the

NDA, $650 upon issuance of patent covering ET-104 listed in the FDA’s Orange Book and $500 in the event that product sales

in excess of $10,000 were achieved within a calendar year.

In addition, the Company was required to pay the licensor 35% of the

net profit from product sales.

The Agreement was for an initial term of 10 years from the date of the first commercial sale of

The Company was to retain sole ownership of the NDA after expiration of the Agreement.

June 12, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-105 License Agreement”)

with Aucta Pharmaceuticals, Inc.

(“Aucta”) for marketing rights in the United States to ET-105, a product candidate

for use as an adjunct therapy for partial seizures, primary generalized tonic-clonic seizures, and generalized seizures of Lennox-Gastaut

syndrome in patients two years of age and older.

Pursuant to the terms of the ET-105 License Agreement, the Company will be responsible

for marketing activities and Aucta will be responsible for development, manufacturing, and regulatory activities related to obtaining

regulatory approval.

The Company paid Aucta a licensing payment of $2,000 in August 2019 upon receiving an acceptance for review

letter from the FDA and will pay $2,000 upon FDA approval and commercial sales of the product candidate and another $1,000 upon

issuance of an Orange-book listed patent.

Aucta will receive a low double-digit royalty on net sales and will be entitled to receive

milestone payments of up to $18,000 based on commercial success of the product, including:

(“Aucta”) for marketing rights in the United States to Lamotrigine, an oral suspension

product candidate for use as an adjunct therapy for partial seizures, primary generalized tonic-clonic seizures, and generalized

seizures of Lennox-Gastaut syndrome in patients two years of age and older.

Pursuant to the terms of the ET-105 License Agreement,

the Company was to be responsible for marketing activities and Aucta will be responsible for development, manufacturing, and regulatory

activities related to obtaining regulatory approval.

The Company paid Aucta a licensing payment of $2,000 in August 2019 upon

receiving an acceptance for review letter from the FDA and will pay $2,450 upon FDA approval and commercial sales of the

product candidate and another $1,000 upon issuance of an Orange-book listed patent.

If Aucta successfully completes a Lamotrigine

product line extension product, Eton will pay $1,500 upon FDA acceptance of the product filing and $1,950 upon FDA approval and

commercial sales of the extension product candidate.

Aucta will receive a low double-digit royalty on net sales and will be

entitled to receive milestone payments of up to $18,000 based on commercial success of the product, including:

when net sales exceed $10 million in a calendar year

2 unchanged sentences

when net sales exceed $100 million in a calendar year

will remain responsible for certain licensing fee obligations owed to its development partners and Azurity will assume royalty

or profit share obligations owed to development partners

Pharmaceuticals, Inc.

2 unchanged sentences

Commitments and Contingencies (continued)

March 27, 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.

Alkindi Sprinkle’s New Drug Application (NDA) was approved

by the FDA on September 29, 2020 as a replacement therapy for pediatric adrenal insufficiency (AI), including congenital adrenal

hyperplasia (CAH) in patients from birth to less than 17 years of age.

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 (see Note 7).

The total amount of $4,764 was recorded as a component of research and development expense in the Company’s statement of

operations for the year ended December 31, 2020.

The Company will also pay Diurnal $2,500 if the product obtains orphan drug exclusivity

status from the FDA.

Indemnification

6 unchanged sentences

indemnification rights and agreements as of December 31, 2020 or 2019.

Summary of Unaudited Quarterly Financial Information

following is a summary of our unaudited quarterly results for the years ended December 31, 2019 and 2018 (in thousands):

For the Quarter Ended

September 30,

(in thousands except per share amounts)

Operating expenses

Net loss attributable to common stockholders

Net loss per share attributable to common stockholders- basic and diluted

Weighted average shares outstanding, basic and diluted

For the Quarter Ended

September 30,

(in thousands except per share amounts)

Operating expenses

Net loss attributable to common stockholders (1)

Net loss per share attributable to common stockholders- basic and diluted

Weighted average shares outstanding, basic and diluted

loss attributable to common stockholders for the quarter ended December 31, 2018 included $21,747 related to deemed dividends

for the beneficial conversion feature of the Company’s redeemable convertible preferred stock.

Subsequent Events

Company has performed an evaluation of events occurring subsequent to December 31, 2019 through the filing date of this Annual

Report and determined that no subsequent events have occurred that would require recognition in the financial statements or

disclosures in the notes thereto.

February 2021, the Company sold its pediatric neurology portfolio to Azurity Pharmaceuticals (“Azurity”).

The portfolio

included the Company’s Lamotrigine (ET-105), Zonisamide (ET-104), and Topiramate (ET-101) product candidates, which have

all been submitted to the U.S.

Food and Drug Administration as new drug applications and are currently under review by the FDA.

will assume control of all three products and will be responsible for commercialization following regulatory approval.

will support Azurity in the transition and through regulatory approval.

Under the terms of the transaction, the Company will receive

up to $45,000 in payments from Azurity under the following schedule:

at closing, of which $9,500 was received in February 2021 and $5,500 is held in escrow until certain product-related milestones

are achieved;

upon achievement of FDA approval and product launch milestones;

upon achievement of commercial sales milestones.

addition, the Company will receive a single digit percentage royalty on Azurity’s net sales of the products.

will remain responsible for certain licensing fee obligations owed to its development partners (see Note 15) and Azurity will

assume royalty or profit share obligations owed to the development partners.

The Company paid milestones of $550 to Aucta

Pharmaceuticals and $200 to Tulex Pharmaceuticals in February 2021 in conjunction with the sale of the pediatric neurology

products to Azurity.

The Company’s proceeds from the transaction will be used for business development activities targeting

additional late-stage orphan drug products.

Pharmaceuticals, Inc.

and Qualifying Accounts

at Beginning of Period

Balance at Beginning of Period

End of Period

For the year ended

December 31, 2019

receivable allowances (1)

For the year ended

December 31, 2018

receivable allowances (1)

For the period

ended December 31, 2017

receivable allowances (1)

are for chargebacks, prompt payment discounts, distribution fees, and returns & allowances related to Biorphen product

For the year ended December 31, 2020

Accounts receivable allowances (1)

Inventories reserve

For the year ended December 31, 2019

Accounts receivable allowances (1)

For the year ended December 31, 2018

Accounts receivable allowances (1)

are for chargebacks, prompt payment discounts, distribution fees, and returns & allowances related to Biorphen and Alkindi

Sprinkle product sales.

The inventories reserve is for Biorphen that is at risk of expiry before it can be sold.

II (CONTINUED)

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data