Eton Pharmaceuticals, Inc. 10-K

Item 8. Financial Statements and Supplementary Data ETON PHARMACEUTICALS, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 170 ) 54 Balance Sheets 55 Statements of Operations 56 Statements of Stockholders’ Equity 57 Statements of Cash Flows 58 Notes to Financial Statements 59 53 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Eton Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Eton Pharmaceuticals, Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The 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. Product Sales Deductions Critical Audit Matter Description As 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. Auditing 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 data. How the Critical Audit Matter Was Addressed in the Audit To 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, and compared cash receipts to product sales. We also examined 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. /s/ KMJ Corbin & Company LLP We have served as the Company’s auditor since 2018. Irvine, California March 16, 2022 54 Eton Pharmaceuticals, Inc. BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 14,406 $ 21,295 Accounts receivable, net 5,471 48 Inventories 550 1,242 Prepaid expenses and other current assets 3,177 2,116 Total current assets 23,604 24,701 Property and equipment, net 115 811 Intangible assets, net 3,621 575 Operating lease right-of-use assets, net 104 192 Other long-term assets, net 21 40 Total assets $ 27,465 $ 26,319 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,774 $ 2,344 PPP loan, current portion — 280 Current portion of long-term debt 1,418 — Accrued liabilities 1,366 1,170 Total current liabilities 4,558 3,794 Long-term debt, net of discount and including accrued fees 5,262 6,532 Long-term portion of PPP and EIDL loans — 231 Operating lease liabilities, net of current portion 15 99 Total liabilities 9,835 10,656 Commitments and contingencies (Note 14) Stockholders’ equity Common stock, $ 0.001 par value; 50,000,000 shares authorized; 24,626,004 and 24,312,808 shares issued and outstanding at December 31, 2021 and 2020, respectively 25 24 Additional paid-in capital 111,718 107,797 Accumulated deficit ( 94,113 ) ( 92,158 ) Total stockholders’ equity 17,630 15,663 Total liabilities and stockholders’ equity $ 27,465 $ 26,319 The accompanying notes are an integral part of these financial statements. 55 Eton Pharmaceuticals, Inc. STATEMENTS OF OPERATIONS (In thousands, except per share amounts) 2021 2020 2019 For the years ended December 31, December 31, December 31, 2021 2020 2019 Revenues: Licensing revenue $ 19,000 $ — $ 500 Product sales and royalties, net 2,832 39 459 Total net revenues 21,832 $ 39 959 Cost of Sales: Licensing revenue 1,500 — — Product sales and royalties 1,123 286 453 Total cost of sales 2,623 286 453 Gross profit (loss) 19,209 ( 247 ) 506 Operating expenses: Research and development 6,235 14,104 11,555 General and administrative 14,469 12,760 7,552 Total operating expenses 20,704 26,864 19,107 Loss from operations ( 1,495 ) ( 27,111 ) ( 18,601 ) Other income (expense): Interest and other income (expense), net ( 1,006 ) ( 859 ) 281 Gain on PPP loan forgiveness 365 — — Gain on equipment sale 181 — — Loss before income tax expense ( 1,955 ) ( 27,970 ) ( 18,320 ) Income tax expense — — — Net loss $ ( 1,955 ) $ ( 27,970 ) $ ( 18,320 ) Net loss per share, basic and diluted $ ( 0.08 ) $ ( 1.33 ) $ ( 1.03 ) Weighted average number of common shares outstanding, basic and diluted 25,207 21,010 17,761 The accompanying notes are an integral part of these financial statements. 56 Eton Pharmaceuticals, Inc. STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) Shares Amount Capital Deficit Equity Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balances at December 31, 2018 17,607,928 $ 18 $ 72,153 $ ( 45,868 ) $ 26,303 Stock-based compensation — — 1,888 — 1,888 Stock option exercises 167,622 — 214 — 214 Proceeds from sales of common stock, net of offering costs Proceeds from sales of common stock, net of offering costs, shares Issuance of common stock for product candidate licensing rights Issuance of common stock for product candidate licensing rights, shares Common stock issued related to restricted stock units Common stock issued related to restricted stock units, shares Common stock issued under employee stock purchase plan 44,885 — 239 — 239 Stock warrant exercises 57,051 — — — — Relative fair value of warrants to purchase common stock issued in connection with debt — — 226 — 226 Net loss — — — ( 18,320 ) ( 18,320 ) Balances at December 31, 2019 17,877,486 $ 18 $ 74,720 $ ( 64,188 ) $ 10,550 Stock-based compensation 15,190 — 2,576 — 2,576 Stock option exercises 194,878 — 255 — 255 Employee stock purchase plan 25,780 — 112 — 112 Proceeds from sales of common stock, net of offering costs 5,820,000 6 28,776 — 28,782 Issuance of common stock for product candidate licensing rights 379,474 — 1,264 — 1,264 Relative fair value of warrants to purchase common stock issued in connection with debt — — 94 — 94 Net loss — — — ( 27,970 ) ( 27,970 ) Balances at December 31, 2020 24,312,808 $ 24 $ 107,797 $ ( 92,158 ) $ 15,663 Stock-based compensation — — 3,381 — 3,381 Stock option exercises 144,233 1 338 — 339 Employee stock purchase plan 49,155 — 202 — 202 Common stock issued related to restricted stock units 25,000 — — — — Stock warrant exercises 94,808 — — — — Net loss — — — ( 1,955 ) ( 1,955 ) Balances at December 31, 2021 24,626,004 $ 25 $ 111,718 $ ( 94,113 ) $ 17,630 The accompanying notes are an integral part of these financial statements. 57 Eton Pharmaceuticals, Inc. STATEMENTS OF CASH FLOWS (In thousands) 2021 2020 2019 For the years ended December 31, December 31, December 31, 2021 2020 2019 Cash flows from operating activities Net loss $ ( 1,955 ) $ ( 27,970 ) $ ( 18,320 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 3,381 2,576 1,888 Common stock issued for product candidate licensing rights — 1,264 — Depreciation and amortization 462 651 447 Debt discount amortization 148 121 16 Gain on forgiveness of PPP loan ( 365 ) — — Gain on sale of equipment ( 181 ) — — Changes in operating assets and liabilities: Accounts receivable ( 5,423 ) 425 ( 473 ) Inventories 692 ( 862 ) ( 380 ) Prepaid expenses and other assets ( 1,026 ) ( 20 ) ( 1,361 ) Accounts payable ( 570 ) 1,769 ( 377 ) Accrued liabilities 116 ( 300 ) 534 Net cash used in operating activities ( 4,721 ) ( 22,346 ) ( 18,026 ) Cash used in investing activities Proceeds from sale of equipment 700 — — Purchases of property and equipment ( 9 ) ( 50 ) ( 1,096 ) Purchase of product licensing rights ( 3,250 ) — ( 750 ) Net cash used in investing activities ( 2,559 ) ( 50 ) ( 1,846 ) Cash flows from financing activities Proceeds from issuance of long-term debt, net of issuance costs — 1,965 4,750 Proceeds from sales of common stock, net of offering costs — 28,782 — Proceeds from PPP and EIDL loans — 511 — EIDL loan payoff ( 150 ) — — Proceeds from employee stock purchase plan and stock option exercises 541 367 453 Net cash provided by financing activities 391 31,625 5,203 Change in cash and cash equivalents ( 6,889 ) 9,229 ( 14,669 ) Cash and cash equivalents at beginning of year 21,295 12,066 26,735 Cash and cash equivalents at end of year $ 14,406 $ 21,295 $ 12,066 Supplemental disclosures of cash flow information Cash paid for interest $ 815 $ 797 $ — Cash paid for income taxes $ — $ — $ — Supplemental disclosures of non-cash investing and financing activities: Relative fair value of common stock warrants issued in connection with debt $ — $ 94 $ 226 Right-of-use assets obtained in exchange for lease liabilities $ — $ 195 $ — The accompanying notes are an integral part of these financial statements. 58 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 1 — Company Overview Eton Pharmaceuticals, Inc. (“Eton” or the “Company”) was incorporated as a Delaware “C” corporation on April 27, 2017 and was initially set up as a wholly-owned subsidiary of Harrow Health, Inc. (“Harrow”, fka Imprimis Pharmaceuticals, Inc.). In June 2017, the Company raised $ 20,055 in start-up capital through a private sale of preferred stock and a separate management team was then established for Eton with its corporate offices located in Deer Park, Illinois. In November 2018, the Company completed 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 6). Eton is a specialty pharmaceutical company focused on developing, acquiring, and commercializing innovative products. Eton is primarily focused on hospital injectable and rare disease products. The Company seeks to improve the formula, delivery system, or safety of existing molecules in order to address unmet patient needs. Eton pursues what it perceives to be low-risk product candidates where existing published literature, historical clinical trials, or physician usage has established safety and/or efficacy of the molecule, thereby reducing the incremental clinical burden required for the Company to bring the product to patients. The Company’s Biorphen® product was approved by the FDA in October 2019 and sales commenced for this product at the end of 2019. Eton’s EM-100 product was sold to Bausch Health and the product was approved by the FDA in September 2020. Bausch Health launched this product under the name of Alaway® Preservative Free in January 2021 and Eton receives royalties from the sale of the product. 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. The Company entered into a co-promotion agreement with Tolmar Pharmaceuticals in November 2021 whereby Tolmar will promote Alkindi Sprinkle through its 60+ person salesforce in exchange for a royalty on net sales. In addition, the Company launched Carglumic Acid tablets in December 2021 as the first and only FDA-approved generic version of Carbaglu®. Note 2 — Liquidity Considerations As of December 31, 2021, the Company had an accumulated deficit of $ 94,113 and for the year ended December 31, 2021 the Company used net cash in operating activities of $ 4,721 . To date, the Company has generated revenues from six products and expects further growth in 2022 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 $ 14,406 as of December 31, 2021 augmented by the $ 5,000 milestone payment received in January 2022 for the commercial launch of EPRONTIA™ (Topiramate oral solution) by Azurity Pharmaceuticals (“Azurity”), 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. 59 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies Basis of Presentation The Company has prepared the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, provisions for uncollectible receivables, chargebacks and sales returns, valuation of inventories, useful lives of assets and the impairment of property and equipment, the accrual of research and development expenses and the valuation of common stock, stock options and warrants. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates or assumptions. Segment Information The Company operates the business on the basis of a single reportable segment, which is the business of developing and commercializing prescription drug products. The Company’s chief operating decision-maker is the Chief Executive Officer (“CEO”), who evaluates the Company as a single operating segment. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. All cash and cash equivalents are held in U.S. financial institutions or invested in short-term U.S. treasury bills. Cash equivalents consist of an interest-bearing checking account and a U.S. treasury bill. From time to time, amounts deposited with its bank exceed federally insured limits. The Company believes the associated credit risk to be minimal. Accounts Receivable Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are recorded net of allowances for doubtful accounts, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances. The total for these reserves amounted to $ 96 and $ 71 as of December 31, 2021 and 2020, respectively. Inventories The Company values its inventories at the lower of cost or net realizable value using the first-in, first-out method of valuation. The Company reviews its inventories for potential excess or obsolete issues on an ongoing basis and will record a write-down if an impairment is identified. Inventories at December 31, 2021 and 2020 consist solely of purchased finished goods. At December 31, 2021, inventories are shown net of a slow-moving reserve for its Biorphen product of $ 1,414 due to the risk of expiry before this entire stock of inventories is sold. There was an inventory reserve of $ 1,414 and $ 623 at December 31, 2021 and 2020, respectively. Property and Equipment Property and equipment are stated at cost. Depreciation of property and equipment is computed utilizing the straight-line method based on the following estimated useful lives. Computer hardware and software is depreciated over three years . Equipment, furniture and fixtures is depreciated over five years . Leasehold improvements are amortized over their estimated useful lives or the remaining lease term , whichever is shorter. Construction in progress is capitalized but not depreciated until it is placed into service. Maintenance and repairs are charged to expense as incurred, while renewals and improvements are capitalized. 60 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Intangible Assets The Company capitalizes payments it makes for licensed products when the payment is based on FDA approval for the product and the cost is recoverable based on expected future cash flows from the product. The cost is amortized on a straight-line basis over the estimated useful life of the product commencing on the approval date 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 . A $ 3,250 payment related to the approval of the Company’s Carglumic Acid product in December 2021 has been capitalized and that cost is being amortized over ten years. The intangible assets, net on the Company’s balance sheet reflected $ 379 and $ 175 of accumulated amortization as of December 31, 2021 and 2020, respectively. The Company recorded amortization expense of $ 204 , $ 150 and $ 25 for the years ended December 31, 2021, 2020 and 2019, respectively, and will record amortization expense of $ 475 per year for these intangible assets for 2022 through 2023 and then $ 450 in 2024 when the Biorphen asset will be fully amortized. For 2025 through 2030, the Company will incur amortization expense of $ 325 and then $ 271 in 2031 when the Carglumic Acid asset will be fully amortized. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the Company’s statements of operations for the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment was recognized during the years ended December 31, 2021, 2020 and 2019. Debt Issuance Costs and Debt Discount and Detachable Debt-Related Warrants Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest method. 61 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Leases The Company accounts for leases in accordance with ASC Topic 842 — Leases. The Company reviews all relevant facts and circumstances of a contract to determine if it is a lease whereby the terms of the agreement convey the right to control the direct use and receive substantially all of the economic benefits of an identified asset for a period of time in exchange for consideration. The associated right-of-use assets and lease liabilities are recognized at lease commencement. The Company measures lease liabilities based on the present value of the lease payments over the lease term discounted using the rate it would pay on a loan with the equivalent payments and term for the lease. The Company does not include the impact for lease term options that would extend or terminate the lease unless it is reasonably certain that it will exercise any such options. The Company accounts for the lease components separately from non-lease components for its operating leases. The Company measures right-of-use assets based on the corresponding lease liabilities adjusted for (i) any prepayments made to the lessor at or before the commencement date, (ii) initial direct costs it incurs, and (iii) any incentives under the lease. In addition, the Company evaluates the recoverability of its right-of-use assets for possible impairment in accordance with its long-lived assets policy. Operating leases are reflected on the balance sheets as operating lease right-of-use assets, current accrued liabilities and long-term operating lease liabilities. The Company does no t have any finance leases as of December 31, 2021 and 2020. The Company commences recognizing operating lease expense when the lessor makes the underlying asset available for use by the Company and the operating lease expense is recognized on a straight-line basis. Variable lease payments are expensed as incurred. The Company does not recognize right-of-use assets or lease liabilities for leases with a term of twelve months or less; such lease costs are recorded in the statements of operations on a straight-line basis over the lease term. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the successful award of a patent and the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses. Concentrations of Credit Risk, Sources of Supply and Significant Customers The Company is subject to credit risk for its cash and cash equivalents which are invested in money market funds and U.S. treasury bills from time to time. The Company maintains its cash and cash equivalent balances with one major commercial bank and the deposits held with the financial institution exceed the amount of insurance provided on such deposits and is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents to the extent recorded on the balance sheets. The Company 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. 62 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) The Company is also subject to credit risk from its accounts receivable related to product sales as it extends credit based on an evaluation of the customer’s financial condition, and collateral is not required. Management monitors its exposure to accounts receivable by periodically evaluating the collectability of the account receivable based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. Based upon the review of these factors, the Company recorded no allowance for doubtful accounts at December 31, 2021 or 2020. The accounts receivable balance at December 31, 2021 and 2020 and product sales revenue recognized during the year ended December 31, 2021 and 2020 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, 2021 accounts receivable balance and sales in 2021 also include a $ 5,000 milestone from Azurity, in accordance with the Eprontia™ (topiramate oral solution) product, amounts due from AnovoRx for sales of the Company’s Alkindi Sprinkle product and its Carglumic Acid product, which launched in December 2021. Revenue Recognition for Contracts with Customers The Company accounts for contracts with its customers in accordance with ASC 606 — Revenue from Contracts with Customers. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses whether these options provide a material right to the customer and, if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Any amounts received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized as revenue within the twelve months following the balance sheet date will be classified as current portion of deferred revenue in the Company’s balance sheets. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet date are classified as long-term deferred revenue, net of current portion. Milestone Payments – If a commercial contract arrangement includes development and regulatory milestone payments, the Company will evaluate whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur before recognizing the associated revenue. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. 63 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. Significant Financing Component – In determining the transaction price, the Company will adjust consideration for the effects of the time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services to the licensees will be more than one year. The Company sells Biorphen in the U.S. to wholesale pharmaceutical distributors, who then sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments of Biorphen represent performance obligations under each purchase order. The Company uses a third-party logistics (“3PL”) vendor to process and fulfill orders and has concluded it is the principal in the sales to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. The Company has no significant obligations to wholesalers to generate pull-through sales. In addition, the Company sells its Alkindi Sprinkle and Carglumic Acid product to one pharmacy distributor customer which provides order fulfilment and inventory storage/distribution services. Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sell Biorphen at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. In addition, the Company pays fees to wholesalers for their distribution services, inventory reporting and chargeback processing. The Company pays GPOs fees for administrative services and for access to GPO members and concluded the benefits received in exchange for these fees are not distinct from its sales of Biorphen, and accordingly it applies these amounts to reduce revenues. Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Biorphen and the Company’s lengthy return period, there may be a significant period of time between when the product is shipped and when it issues credits on returned product. For its Alkindi Sprinkle and Carglumic Acid products, the Company bills at the initial product list price which are subject to offsets for patient co-pay assistance and potential state Medicaid reimbursements which are recorded as a reduction of net revenues at the date of sale/shipment. The Company estimates the transaction price when it receives each purchase order taking into account the expected reductions of the selling price initially billed to the wholesaler/distributor arising from all of the above factors. The Company has developed estimates for future returns and chargebacks of Biorphen and the impact of the other discounts and fees it pays while Alkindi Sprinkle and Carglumic Acid sales to its distributor are not subject to returns. When estimating these adjustments to the transaction price, the Company reduces it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known. The Company recognizes revenue from Biorphen product sales and related cost of sales upon product delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership, and have an enforceable obligation to pay the Company. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, the Company does not believe they have a significant incentive to return the product. The Company stores its Alkindi Sprinkle and Carglumic Acid inventory at its pharmacy distributor customer location and sales are recorded when stock is pulled and shipped to fulfill specific patient orders. Upon recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable. The Company monitors actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts end up differing from its estimates, it will make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment. In addition, the Company 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 party. 64 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Cost of Product Sales Cost of product sales consists of the profit-sharing and royalty fees with the Company’s product licensing and development partners, the purchase costs for finished products from third-party manufacturers and freight and handling/storage costs from the Company’s 3PL logistics service providers. The cost of sales for profit-sharing and royalty fees and costs for purchased finished products and the associated inbound freight expense is recorded when the associated product sale revenue is recognized in accordance with the terms of shipment to customers while outbound freight and handling/storage fees charged by the 3PL service provider are expensed as they are incurred. Cost of sales also reflects any write-downs or reserve adjustments for the Company’s inventories. Research and Development Expenses Research and development (“R&D”) expenses include both internal R&D activities and external contracted services. Internal R&D activity expenses include salaries, benefits and stock-based compensation and other costs to support the Company’s R&D operations. External contracted services include product development efforts such as certain product licensor milestone payments, clinical trial activities, manufacturing and control-related activities and regulatory costs. R&D expenses are charged to operations as incurred. The Company reviews and accrues R&D expenses based on services performed and relies upon estimates of those costs applicable to the stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. Upfront payments and milestone payments made for the licensing of technology for products that are not yet approved by the FDA are expensed as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed. Earnings (Loss) Per Share Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as Series A Preferred, unvested restricted stock, stock options and warrants that are outstanding during the period. Common stock equivalents are excluded from the computation when their inclusion would be anti-dilutive. No such adjustments were made for 2021, 2020 or 2019 as the Company reported a net loss for the years ended December 31, 2021, 2020 and 2019 and including the effects of common stock equivalents in the diluted earnings per share calculation would have been anti-dilutive (see Note 9). Basic weighted average shares for the year ended December 31, 2021 include 600,000 vested warrants to purchase common shares. As the shares underlying these warrants can be purchased for little to no consideration ($ 0.01 per share exercise price), they are included in the computation of basic earnings per share. Stock-Based Compensation The Company accounts for stock-based compensation under the provisions of ASC — 718 Compensation — Stock Compensation. The guidance under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant and record expense over the related service periods, which are generally the vesting period of the equity awards. The Company estimates the fair value of stock-based option awards using the Black-Scholes-Merton option-pricing model (“BSM”). The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods and the contractual life of the options. Expected volatilities are based on comparable companies’ historical volatility along with a limited weighting included for the Company’s own volatility, which management believes represents the most accurate basis for estimating expected future volatility under the current conditions. The Company accounts for forfeitures as they occur. The Company uses the closing common stock price on the date of grant for the fair value of the common stock. 65 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Income Taxes As part of the process of preparing the Company’s financial statements, the Company must estimate the actual current tax liabilities and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheets. The Company must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or increase or decrease to this allowance in a period, the impact will be included in income tax expense in the statements of operations. As of December 31, 2021 and 2020, the Company has established a 100 % valuation reserve against its deferred tax assets. The Company accounts for income taxes under the provisions of ASC 740 - Income Taxes. As of December 31, 2021 and 2020, 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, 2021 or 2020, and has not recognized interest and penalties in the statements of operations for the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021, 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 2021 are subject to examination by the federal and state tax authorities due to the carryforward of unutilized net operating losses (“NOLs”). Current accounting standards include guidance on the accounting for uncertainty in income taxes recognized in the financial statements. Such standards also prescribe a recognition threshold and measurement model for the financial statement recognition of a tax position taken, or expected to be taken, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company believes that the ultimate deductibility of all tax positions is highly certain, although there is uncertainty about the timing of such deductibility. As a result, no liability for uncertain tax positions was recorded as of December 31, 2021 or 2020. 66 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 3 — Summary of Significant Accounting Policies (continued) Fair Value Measurements We measure certain of our assets and liabilities at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting requires characterization of the inputs used to measure fair value into a three-level fair value hierarchy as follows: Level 1 — Inputs based on quoted prices in active markets for identical assets or liabilities. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 — Observable inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent from the entity. Level 3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available. Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values stated below takes into account the market for the Company’s financials, assets and liabilities, the associated credit risk and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. The Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, PPP loan and long-term debt obligation. The carrying amounts of these financial instruments, except for the PPP loan and long-term debt obligation, approximate their fair values due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying value of the PPP loan and long-term debt obligation approximate their respective fair values. Impact of New Accounting Pronouncements There were no new accounting pronouncements issued by the FASB during the current period that would apply to the Company and have a material impact on its financial position or results of operations. 67 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 4 – Property and Equipment Property and equipment consist of the following: Schedule of Property and Equipment December 31, 2021 December 31, 2020 Computer hardware and software $ 157 $ 182 Furniture and fixtures 106 143 Equipment 132 994 Leasehold improvements 71 184 Construction in progress — — Property and equipment, gross 466 1,503 Less: accumulated depreciation and amortization ( 351 ) ( 692 ) Property and equipment, net $ 115 $ 811 Depreciation and amortization expense for the years ended December 31, 2021, 2020 and 2019 was $ 155 , $ 347 and $ 283 , respectively. The balances at December 31, 2021 reflect the sale of laboratory equipment in May 2021 which had a net book value of $ 519 . 68 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 5 – Debt SWK Loan On November 13, 2019, the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Holdings Corporation (“SWK”) which provided for up to $ 10,000 in financing. The Company received proceeds of $ 5,000 at closing and was able to borrow an additional $ 5,000 upon the FDA approval of a second product developed by the Company, excluding EM-100. In March 2020, in conjunction with the Company’s Alkindi Sprinkle product licensing agreement (see Note 14) and the Company’s March 2020 sale of additional shares of its common stock (see Note 6), the Company and SWK amended the SWK Credit Agreement. The amendment provided the Company with the option to immediately draw $ 2,000 and the ability to borrow an additional $ 3,000 based upon the FDA approval of EM-100 and Alkindi Sprinkle which subsequently occurred in September 2020. Accordingly, the Company borrowed an additional $ 2,000 on August 11, 2020. The term of the SWK Credit Agreement is for five years and borrowings bear interest at a rate of LIBOR 3-month plus 10.0 %, subject to a stated LIBOR floor rate of 2.0 %. A 2.0 % unused credit limit fee 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 , only pay interest on the debt until February 2022 and then pay 5.5% of the loan principal balance commencing on February 15, 2022 and then every three months thereafter until November 13, 2024 at which time the remaining principal balance is due. Borrowings under the SWK Credit Agreement are secured by the Company’s assets. The SWK Credit Agreement contains customary default provisions and covenants which include limits on additional indebtedness. In March 2020, SWK provided a waiver for the Company to obtain loans with the Small Business Association. In February 2021, the Company notified SWK that it will not require additional borrowing capacity under the SWK Credit Agreement and terminated the additional borrowing capacity with SWK. In connection with the initial $ 5,000 borrowed in November 2019, the Company issued warrants to SWK to purchase 51,239 shares of the Company’s common stock with an exercise price of $ 5.86 per share. The relative fair value of these 51,239 warrants was $ 226 and was estimated using the Black-Scholes-Merton option pricing model with the following assumptions: fair value of the Company’s common stock at issuance of $ 5.75 per share; seven -year contractual term; 95 % volatility; 0 % dividend rate; and a risk-free interest rate of 1.8 %. In connection with the additional $ 2,000 borrowed in August 2020, the Company issued warrants for 18,141 shares of its common stock at an exercise price of $ 6.62 per share. The relative fair value of the 18,141 warrants was $ 94 and was estimated using the Black-Scholes-Merton option pricing model with the following assumptions: fair value of the Company’s common stock at issuance of $ 6.85 per share; seven -year contractual term; 95 % volatility; 0 % dividend rate; and a risk-free interest rate of 0.4 %. These warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance. The SWK Warrants are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to change in connection with stock splits, dividends, reclassifications and other conditions. The Company recorded interest expense of $ 1,042 , $ 884 and $ 98 in 2021, 2020 and 2019, respectively, which included $ 148 $ 121 and $ 16 , respectively, of debt discount amortization. The Company had accrued interest of $ 134 and $ 48 as of December 31, 2021 and 2020, respectively, which is included in accrued liabilities in the accompanying balance sheets. 69 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 5 – Debt (continued) The table below reflects the future annual payments for the SWK loan principal and interest as of December 31, 2021. Schedule of Future Payments of Long Term Debt Amount 2022 $ 2,202 2023 1,756 2024 5,300 Total payments 9,258 Less: amount representing interest ( 2,258 ) Loan payable, gross 7,000 Less: current portion of long-term debt ( 1,418 ) Less: unamortized discount ( 320 ) Long-term debt, net of unamortized discount $ 5,262 PPP loan On May 4, 2020, the Company received $ 361 in loan proceeds under the Paycheck Protection Program (“PPP”) from the Small Business Administration (“SBA”) through its banking relationship with Bank of America. On May 20, 2021, the Company received notice that the loan principal and cumulative interest of $ 4 was forgiven in full as permitted under the applicable SBA guidelines for PPP loans. The $ 365 gain on debt extinguishment is reflected in non-operating income for the year ended December 31, 2021. EIDL loan On July 21, 2020, the Company received $ 150 in loan proceeds under the Economic Injury Disaster Loan program (“EIDL”) from the SBA. The Company paid off the full EIDL loan principal and its cumulative interest of $ 6 in July 2021. 70 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 6 — Common Stock The Company has 50,000,000 authorized shares of $ 0.001 par value common stock as per its Amended and Restated Certificate of Incorporation. In 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. In 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 Note 14). 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. In 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 . For the years ended December 31, 2021 and 2020, the Company issued 144,233 and 194,878 shares, respectively, of its common stock resulting from stock option exercises under its 2018 Equity Incentive Plan (see Note 8). For the years ended December 31, 2021 and 2020, the Company issued 49,155 and 25,780 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 vested 25 % every three months and was 100 % vested in April 2021. In April 2021, the Company issued 25,000 shares of its common stock to a member of its board of directors upon his retirement from the board in connection with previously vested restricted stock units (“RSUs”). During 2021, there were 135,650 warrants exercised (all on a cashless basis) resulting in 94,808 shares of common stock being issued by the Company. 71 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 7 — Common Stock Warrants Listed below is a summary of warrants outstanding as of December 31, 2021: Summary of Warrants Outstanding Description of Warrants No. of Shares Exercise Price Business Advisory Warrants – 2017 600,000 $ 0.01 Placement Agent Warrants – 2017 Preferred Stock Offering 471,446 $ 3.00 Placement Agent Warrants - IPO 414,000 $ 7.50 SWK Warrants – Debt (Tranche #1) 51,239 $ 5.86 SWK Warrants – Debt (Tranche #2) 18,141 $ 6.62 Total 1,554,826 $ 3.18 (Avg) The holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities Act of their shares that are converted to common stock, including demand registration rights and piggyback registration rights. These rights are provided under the terms of a registration rights agreement between the Company and the investors. A rollforward of the warrants outstanding is listed in the table below: Summary of Rollforward of The Warrants Outstanding No. of Shares Balance as of the beginning of the year 1,690,476 Exercise of Placement Agent Warrants – 2017 Preferred Stock Offering ( 135,650 ) Balance as of the end of the year 1,554,826 There were 135,650 warrants exercised (all on a cashless basis) in 2021 resulting in 94,808 shares of common stock being issued by the Company. There were no warrant exercises is 2020. The intrinsic value of the warrants exercised in 2021 was $ 806 . Note 8 — Share-Based Payment Awards The Company’s board of directors and stockholders approved the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan in May 2017 (the “2017 Plan”), which authorized the issuance of up to 5,000,000 shares of the Company’s common stock. In conjunction with the Company’s IPO in November 2018, the Company’s stockholders and board of directors approved the 2018 Equity Incentive Plan, as amended (the “2018 Plan”) which succeeded the 2017 Plan. The Company has granted RSAs, stock options and RSUs for its common stock under the 2017 Plan and 2018 Plan as detailed in the tables below. There were 537,306 shares available for future issuance under the 2018 Plan as of December 31, 2021. Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the 2018 Plan. In addition, the 2018 Plan provides that commencing January 1, 2019 and through January 1, 2028, the share reserve will be increased 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. On January 1, 2021, the share reserve was increased by 972,512 shares based on the 24,312,808 shares of common stock outstanding at December 31, 2020. The exercise price for stock options granted is not less than the fair value of common stock as determined by the board of directors as of the date of grant. The Company uses the closing stock price on the date of grant as the exercise price. 72 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 8 — Share-Based Payment Awards (continued) In April 2020, the Company issued 15,190 shares of its common stock as an RSA to a new employee. This RSA vested 25 % every three months and was 100 % vested in April 2021. To date, all stock options issued have been non-qualified stock options and the exercise prices were set at the fair value for the shares at the dates of grant. Options generally have a ten -year life, except for options to purchase 50,000 shares of the Company’s common stock granted to product consultants that expire within five years if the Company is not able to successfully file certain product submissions to the FDA prior to the five-year expiration date. Furthermore, these option awards to the Company’s product consultants do not vest unless certain product submissions are made to the FDA, and accordingly, the Company has not recorded any expense for these contingently vesting option awards to its product consultants. For the years ended December 31, 2021, 2020, and 2019, the Company’s total stock-based compensation expense was $ 3,381 , $ 2,576 and $ 1,888 , respectively. Of these amounts, $ 2,838 , $ 2,295 and $ 1,574 was recorded in general and administrative expenses, respectively, and $ 543 , $ 281 and $ 314 was recorded in R&D expenses, respectively. A summary of stock option activity is as follows: Summary of Stock Option Activity Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Options outstanding as of January 1, 2021 2,824,500 $ 4.05 8.3 $ 11,525 Issued 1,017,098 8.31 Exercised ( 144,233 ) 2.35 Forfeited/Cancelled ( 183,646 ) 6.63 Options outstanding as of December 31, 2021 3,513,719 $ 5.22 7.9 $ 2,711 Options exercisable at December 31, 2021 2,096,630 $ 4.37 7.3 $ 2,257 Options vested and expected to vest at December 31, 2021 3,463,719 $ 5.27 7.9 $ 2,565 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had strike prices lower than the fair value of the Company’s common stock at December 31. The intrinsic value of the options exercised during 2021 was $ 682 . There were 144,233 shares issued for exercise of stock options during the year ended December 31, 2021 for proceeds of $ 339 . The assumptions used to calculate the fair value of options granted during the years ended December 31, 2021, 2020, and 2019 under the BSM were as follows: Schedule of Assumptions Used to Calculate Fair Value of Options Granted December 31, 2021 December 31, 2020 December 31, 2019 Expected dividends — % — % — % Expected volatility 70 - 80 % 95 % 90 % Risk-free interest rate 0.9 - 1.4 % 0.4 - 0.7 % 1.9 - 2.5 % Expected term 6.0 years 5.9 years 5.9 years Weighted average fair value $ 5.64 $ 3.06 $ 5.54 73 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 8 — Share-Based Payment Awards (continued) Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options granted to employees and directors, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). The expected term of options granted to non-employees equals the contractual life of the options. Expected Volatility — Due to the Company’s limited operating history and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company has also applied some limited weighting to its own volatility. Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options. Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and therefore has estimated the dividend yield to be zero . Fair value of Common Stock —The Company uses the closing stock price on the date of grant for the fair value of the common stock. A summary of activity for RSAs is as follows: Summary of Activity for Restricted Stock Awards Restricted Stock Awards Number of shares Unvested as of January 1, 2021 7,595 Issued — Vested ( 7,595 ) Forfeited/Cancelled — Unvested as of December 31, 2021 — The grant date fair value per share for the RSA issued in 2020 was $ 3.95 . No RSAs were issued in 2021 or 2019. The fair value of the RSAs vested during the years ended December 31, 2021, 2020 and 2019 was $ 30 , $ 30 and $ 66 , respectively. As of December 31, 2021, there was a total of $ 6,025 of unrecognized compensation costs related to non-vested stock option awards. 74 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 8 — Share-Based Payment Awards (continued) In December 2018, the Company’s board of directors adopted an initial offering of the Company’s common stock under the Company’s ESPP. The Company’s ESPP provides for an initial reserve of 150,000 shares and this reserve is automatically increased on January 1 of each year by the lesser of 1% of the outstanding common shares at December 31 of the preceding year or 150,000 shares, subject to reduction at the discretion of the Company’s board of directors . The 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 ended on June 10, 2019 and the second purchase period ended on December 10, 2019. The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per share that is at least the lesser of (1) 85% of the fair market value of a share of common stock on the first date of an offering or (2) 85% of the fair market value of a share of common stock on the date of purchase. After the initial offering period, subsequent twelve-month offering periods automatically commence over the term of the ESPP on the day that immediately follows the conclusion of the preceding offering, each consisting of two purchase periods approximately six months in duration ending on or around June 10 and December 10 each year, subject to a restart feature if the Company’s stock price drops at the end of a six-month period within the twelve-month offering period . The Company recorded an expense of $ 73 , $ 71 and $ 112 in 2021, 2020 and 2019, respectively, related to the ESPP. The weighted average grant date fair value of share awards in 2021, 2020 and 2019 was $ 2.50 , $ 2.32 and $ 2.56 per share, respectively. Employees contributed $ 205 and $ 115 to the ESPP during 2021 and 2020, respectively. Of these amounts, $ 22 and $ 18 at December 31, 2021 and 2020, respectively, is included in accrued liabilities in the accompanying balance sheets. Note 9 — Basic and Diluted Net Loss per Common Share Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Common stock equivalents (using the treasury stock and “if converted” method) from stock options, unvested RSAs and RSUs, and warrants at December 31, 2021, 2020 and 2019 were 4,286,687 , 3,371,489 and 3,590,465 , respectively, and are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director retires from service as a director. The following table shows the computation of basic and diluted net loss per common share: Computation of Basic and Diluted Net Loss Per Common Share Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Net loss $ ( 1,955 ) $ ( 27,970 ) $ ( 18,320 ) Weighted average common shares outstanding (basic and diluted) 25,207,299 21,010,058 17,760,761 Net loss per common share (basic and diluted) $ ( 0.08 ) $ ( 1.33 ) $ ( 1.03 ) 75 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 10 — Related Party Transactions Harrow Harrow was issued 3,500,000 shares of the Company’s common stock at the formation of the Company at the $ 0.001 par value per share price as the paid-in-capital contribution from Harrow. In April 2021, Harrow sold 1,518,000 shares of the Eton common stock it owned in an underwritten public offering. As of December 31, 2021, Harrow owned 1,982,000 shares of Eton’s common shares which represents 8.0 % of the Company’s common shares outstanding. The Company and Harrow signed licensing agreements for two products developed by Harrow whereby Harrow assigned the product rights to the Company. In July 2018, the Company determined that one of the products was not viable for its portfolio of product opportunities and cancelled the licensing agreement whereby Harrow retains the product rights. On May 6, 2019, the Company entered into an Asset Purchase Agreement (the “CT-100 Asset Purchase Agreement”) with Harrow. Pursuant to the CT-100 Asset Purchase Agreement, the Company sold all of its right, title and interest in CT-100 to Harrow, including any such product that incorporates or utilizes its intellectual property rights (a “Product” or, collectively, “Products”). Pursuant to the CT-100 Asset Purchase Agreement, Harrow will make certain payments to the Company upon the achievement of certain development and commercial milestones. In addition, Harrow is required to pay the Company a royalty in the low-single digit percentage range worldwide on a country-by-country basis on net sales for a period of the longer of 15 years from the date of the first commercial sale of a product in a particular country or the time that a valid intellectual property claim on such Product remains in force in the applicable country. The CT-100 Asset Purchase Agreement also contains customary representations, warranties, covenants and indemnities by the parties. To date, there have not been any sales of the CT-100 product and therefore no earned royalties to the Company for this product. Additionally, the Chief Executive Officer of Harrow was a member of the Company’s board of directors until March 17, 2021 when he retired from service with the board. The Company issued 25,000 shares to the Harrow CEO in April 2021 after his retirement from the Company’s board associated with RSU’s that were previously fully vested. In late March 2021, the Company closed its laboratory operation in Lake Zurich, Illinois and in May 2021 it reached an agreement for Imprimis Pharmaceuticals, a subsidiary of Harrow, to purchase its lab equipment for $ 700 which was $ 181 above the Company’s net book value of the equipment. Chief Executive Officer The CEO has a partial interest in a company that the Company has partnered with for its EM-100 product as described below. The Company acquired the exclusive rights to sell the EM-100 product in the United States pursuant to a sales and marketing agreement (the “Eyemax Agreement”) dated August 11, 2017 between the Company and Eyemax LLC (“Eyemax”), an entity affiliated with the Company’s CEO. The Company also held a right of first refusal to obtain the exclusive license rights for geographic areas outside of the United States. Pursuant to the Eyemax Agreement, the Company was responsible for all costs of testing and FDA approval of the product, other than the FDA filing fee which was paid by Eyemax. The Company was also to be responsible for commercializing the product in the United States at its expense. The Company paid Eyemax $ 250 upon execution of the Eyemax Agreement, which was recorded as a component of R&D expense. Under the terms of the original agreement, the Company would pay Eyemax $ 250 upon FDA approval and $ 500 upon the first commercial sale of the product and pay Eyemax a royalty of 10 % on the net sales of all products. The Eyemax Agreement was for an initial term of 10 years from the date of the Eyemax Agreement, subject to successive two-year renewals unless the Company elected to terminate the Eyemax Agreement . There were no amounts due under the terms of the Eyemax Agreement as of December 31, 2021 or 2020. 76 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 10 — Related Party Transactions (continued) On February 18, 2019, the Company entered into an Amended and Restated Agreement with Eyemax amending the Sales Agreement (the “Amended Agreement”). Pursuant to the Amended Agreement, Eyemax sold the Company all of its right, title and interest in EM-100, including any such product that incorporates or utilizes Eyemax’s intellectual property rights. Under the Amended Agreement, the Company assumed certain liabilities of Eyemax under its Exclusive Development & Supply Agreement with Excelvision SAS dated as of July 11, 2013, as amended (the “Excelvision Agreement”), with respect to certain territories and arising during certain time periods. Pursuant to the Amended Agreement, the Company paid Eyemax two milestone payments: (i) one milestone payment for $ 250 upon regulatory approval in the territory by the FDA of the first single agent product and (ii) one milestone payment for $ 500 following the first commercial sale of the first single agent product in the territory. Following payment of the milestones, the Company is entitled to retain all of the non-royalty transaction revenues and royalties up to $ 2,000 (the “Recovery Amount”). After the Company has retained the full Recovery Amount, it is entitled to retain half of all royalty and non-royalty transaction revenue. The Company has realized $ 1,735 of the non-royalty and royalty revenue as of December 31, 2021. The Amended Agreement also contains customary representations, warranties, covenants and indemnities by the parties. The EM-100 asset and its associated product rights were sold to Bausch Health on February 18, 2019 and future potential royalties of twelve percent on Bausch Health sales of EM-100, which was approved by the FDA in September 2020, will be split between Eyemax and the Company. The royalty from Bausch Health is subject to reduction if a competitive product with the same active pharmaceutical ingredient is launched in the U.S. or if the EM-100 U.S market share falls below a specified target percentage. There were no amounts due Eyemax under the terms of the Amended Agreement as of December 31, 2021 or 2020. 77 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 11 — Leases The Company recognizes a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, including operating leases, and separates lease components from non-lease components related to its office space lease. On 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 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. In November 2020, this laboratory lease was extended to June 2021 and was not extended after that date as the Company completed an evaluation its laboratory operations requirements and determined it would discontinue the laboratory activities and outsource its requirements. The 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 to exercise, or (3) an option to extend (or not to terminate) in which exercise of the option is controlled by the lessor. Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants. 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. The 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. 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. For the years ended December 31, 2021, 2020 and 2019, the Company recorded $ 113 , $ 139 , and $ 140 , respectively, in rent expense. The Company’s operating lease cost as presented in the “Research and Development” and “General and Administrative” captions in the statements of operations was $ 9 , $ 55 and $ 55 and $ 86 , $ 84 and $ 85 for the years ended December 31, 2021, 2020 and 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $ 83 and $ 131 for years ended December 31, 2021 and 2020, respectively. The ROU asset amortization for years ended December 31, 2021, 2020 and 2019 was $ 88 , $ 129 and $ 121 , respectively, and is reflected in depreciation and amortization in the Company’s statements of cash flows. As of December 31, 2021, the weighted-average remaining lease term was 1.25 years, and the weighted-average discount rate was 5.4 %. The table below presents the lease-related assets and liabilities recorded on the balance sheet as of December 31, 2021: Schedule of Lease-related Assets and Liabilities Assets Classification Operating lease right-of-use assets Operating lease right-of-use assets, net $ 104 Total leased assets $ 104 Liabilities Operating lease liabilities, current Accrued liabilities $ 84 Operating lease liabilities, noncurrent Operating lease liabilities, net of current portion 15 Total operating lease liabilities $ 99 The Company’s future annual lease commitments as of December 31, 2021 are as indicated below: Schedule of Future Lease Commitments Total 2022 2023 Thereafter Undiscounted lease payments $ 102 $ 87 $ 15 $ — Less: Imputed interest ( 3 ) Total lease liabilities $ 99 78 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 12 – Income Taxes The provision for income taxes for the Company consists of the following for the years ended December 31, 2021, 2020 and 2019: Schedule of Provision for Income Taxes Year ended Year ended Year ended December 31, December 31, December 31, 2021 2020 2019 Current: Federal $ — $ — $ — State — — — Total current expense — — — Deferred: Federal 460 6,020 3,961 State 185 2,151 1,415 Change in valuation allowance ( 645 ) ( 8,171 ) ( 5,376 ) Total deferred expense — — — Total provision $ — $ — $ — Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets as of December 31, 2021 and 2020 are as follows: Schedule of Deferred Tax Assets December 31, December 31, 2021 2020 Net operating losses $ 15,871 $ 16,250 Stock-based expenses 2,135 1,257 Accruals and other 542 396 Total deferred tax assets 18,548 17,903 Valuation allowance ( 18,548 ) ( 17,903 ) Net deferred tax assets $ — $ — Based on the uncertainty of future taxable income at this time management believes a 100 % valuation reserve for the $ 18,548 and $ 17,903 deferred tax assets at December 31, 2021 and 2020, respectively, is appropriate. A reconciliation of the statutory federal tax rate to effective tax rate is shown below: Schedule of Reconciliation of Statutory Federal Tax Rate Year ended December 31 Year ended December 31, Year ended December 31, 2021 2020 2019 Benefit at statutory rate ( 21.0 )% ( 21.0 )% ( 21.0 )% Permanent items (primarily warrants and stock compensation) ( 2.5 ) ( 0.5 ) ( 0.6 ) State tax benefit ( 9.5 ) ( 7.7 ) ( 7.7 ) Federal rate change — — — Other items — — — Establishment of valuation allowance 33.0 29.2 29.3 Income tax expense — % — % — % 79 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 12 – Income Taxes (continued) The Company has a federal and state NOL carryforward of $ 55,675 as of December 31, 2021. Under the Tax Act, federal NOLs incurred in taxable years ending after December 31, 2017 in the amount of $ 50,023 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. The state NOL carry forward will begin to expire in 2029. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 % change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. Note 13 - Employee Savings Plan The Company established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code, effective January 1, 2018. The plan allows participating employees to deposit into tax deferred investment accounts up to 100 % of their salary, subject to annual limits. The Company makes certain matching contributions to the plan in amounts up to 4 % of the participants’ annual cash compensation, subject to annual limits. For the years ended December 31, 2021, 2020 and 2019, the Company made $ 154 , $ 117 and $ 113 , respectively, in matching contributions. 80 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 14 — Commitments and Contingencies Legal The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any pending or threatened litigation matters at this time that may have a material impact on the operations of the Company. License and Product Development Agreements The Company has entered into various agreements in addition to those discussed above which are described below. The Company acquired the exclusive rights to sell the Cysteine injection product in the United States pursuant to a sales and marketing agreement dated November 17, 2017 with an unaffiliated third party (the “Sales Agreement”). Pursuant to the Sales Agreement, the licensor is responsible for obtaining FDA approval, at its expense, and the Company is responsible for commercializing the product in the United States at its expense. The Company was to pay the third party 50 % of the net profit from the sale of the product, however, in February 2020, it executed an amendment to the Sales and Marketing Agreement. Under the revised terms, the Company will be responsible for paragraph IV related litigation and will be entitled to 62.5 % of product profit. The initial term is for the first 10 years following the first commercial sale of the product. On February 8, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-202 License Agreement”) with Sintetica SA (“Sintetica”) for marketing rights in the United States to Biorphen® which is used for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia. The product was submitted to the FDA for review and subsequently received FDA approval on October 21, 2019. Pursuant to the terms of the ET-202 License Agreement, the Company is responsible for marketing activities and Sintetica is responsible for development, manufacturing, and the regulatory activities related to approval. The Company paid Sintetica a licensing payment of $ 2,000 upon execution of the ET-202 License Agreement and $ 750 upon the commencement of commercial product shipments. Sintetica supplies Biorphen to the Company at its direct costs and the Company retains 5 % of net sales as a marketing fee. Sintetica is entitled to receive the first $ 500 of product profits. All additional profit will be split 50 % to the Company and 50 % to Sintetica. The ET-202 License Agreement has a ten-year term from the first commercial sale of Biorphen which occurred in November 2019. There was a gross loss for Biorphen for the years ended December 31, 2021 and 2020 due to slower than anticipated sales and a product price reduction through the Company’s wholesale customers. On February 8, 2019, the Company also entered into an Exclusive Licensing and Supply Agreement (the “ET-203 License Agreement”) with Sintetica for marketing rights in the United States to ephedrine HCl (brand name Rezipres®), an injectable product candidate for use in the hospital setting. Pursuant to the terms of the ET-203 License Agreement, the Company will be responsible for marketing activities and Sintetica will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory approval. The Company paid Sintetica a licensing payment of $ 1,000 upon execution of the ET-203 License Agreement which was refunded to Eton in early 2020 due to the FDA not accepting the ET-203 file submission by Sintetica. The Rezipres product was successfully resubmitted in late 2020 and the Company paid a $ 600 milestone fee in July 2021 and will pay $ 750 upon the commercial sale of the product. Sintetica supplies Rezipres to the Company at its direct costs. The Company will retain 5 % of net sales as a marketing fee. Sintetica will be entitled to receive the first $ 500 of product profits. All additional profit will be split 50 % to the Company and 50 % to Sintetica. The ET-203 License Agreement has a ten-year term from first commercial sale of product. 81 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 14 — Commitments and Contingencies (continued) The three oral solution pediatric neurology product candidates discussed below, Topiramate, Zonisamide and Lamotrigine were developed by the Company and its various product candidate development partners and the Company subsequently sold all its rights and interests in these three products to Azurity in 2021. The Company has recognized $ 17,000 in milestone revenues to date from these three products and may receive up to $ 25,000 in additional milestone revenues related to FDA product approvals and the future sales levels for the products. During the years ended December 31, 2021, 2020 and 2019, the Company worked with Tulex Pharmaceuticals, Inc. (“Tulex”) as a third-party contract manufacturer to develop an oral solution for Topiramate (fka ET-101) which targets a neurological condition. The Company subsequently filed the product with the FDA in October 2020 and paid a $ 1,438 filing fee. In November 2021, the product received approval from the FDA and was launched by Azurity in December 2021. The Company recognized a $ 5,000 milestone revenue at launch which was reflected in accounts receivable on the Company’s balance sheet at December 31, 2021 and subsequently collected in January 2022. On January 23, 2019, the Company entered into a Licensing and Supply Agreement (the “Agreement”) with LMW for Zonisamide oral liquid, a development stage product candidate (“ET-104”). Pursuant to the terms of the Agreement, the Company was to be responsible for regulatory and marketing activities. LMW will be responsible for development and manufacturing of ET-104. The Company paid the licensor $ 350 upon execution of the Agreement and an additional $ 350 after receiving successful bioequivalence study results, and $ 325 upon the FDA’s acceptance of the NDA for review and will pay $ 325 upon FDA approval of the NDA, $ 650 upon issuance of patent covering ET-104 listed in the FDA’s Orange Book and $ 500 in the event that product sales in excess of $ 10,000 were achieved within a calendar year. In addition, the Company was required to pay the licensor 35 % of the net profit from product sales. The Agreement was for an initial term of 10 years from the date of the first commercial sale of the product. The Company was to retain sole ownership of the NDA after expiration of the Agreement. On June 12, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-105 License Agreement”) with Aucta Pharmaceuticals, Inc. (“Aucta”) for marketing rights in the United States to Lamotrigine, an oral suspension product candidate for use as an adjunct therapy for partial seizures, primary generalized tonic-clonic seizures, and generalized seizures of Lennox-Gastaut syndrome in patients two years of age and older. Pursuant to the terms of the ET-105 License Agreement, the Company was to be responsible for marketing activities and Aucta will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory approval. The Company paid Aucta a licensing payment of $ 2,000 in August 2019 upon receiving an acceptance for review letter from the FDA and will pay $ 2,450 upon FDA approval and commercial sales of the product candidate and another $ 1,000 upon issuance of an Orange-book listed patent. If Aucta successfully completes a Lamotrigine product line extension product, Eton will pay $ 1,500 upon FDA acceptance of the product filing, $ 1,500 upon FDA approval and commercial sales of the extension product candidate and $ 450 if the intellectual property for the extension product is transferred to Azurity. Aucta will be entitled to receive milestone payments from the Company of up to $ 3,000 based on commercial success of the product, including: ● $ 1,000 when net sales exceed $10 million in a calendar year ● $ 2,000 when net sales exceed $20 million in a calendar year Azurity will assume royalty or profit share obligations owed to development partners as well as additional milestone payments based on sales volume targets. 82 Eton Pharmaceuticals, Inc. NOTES TO FINANCIAL STATEMENTS ( in thousands, except share and per share amounts) Note 14 — Commitments and Contingencies (continued) On 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. For the initial licensing milestone fee, the Company paid Diurnal $ 3,500 in cash and issued 379,474 shares of its common stock to Diurnal which were valued at $ 1,264 based on the Company’s closing stock price of $ 3.33 on March 26, 2020 (see Note 6). The total amount of $ 4,764 was recorded as a component of research and development expense in the Company’s statement of operations for the year ended December 31, 2020. The Company will also pay Diurnal $ 2,500 if the product obtains orphan drug exclusivity status from the FDA. On June 15, 2021, the Company acquired U.S. and Canadian rights to Crossject’s ZENEO® hydrocortisone needleless autoinjector, which is under development as a rescue treatment for adrenal crisis. The Company expects to submit the New Drug Application (NDA) to the FDA in 2023 and plans to request orphan drug designation. The Company paid Crossject $ 500 upon signing and could pay up to $ 4,500 in development milestones and up to $ 6,000 in commercial milestones, as well as a 10 % royalty on net sales. On October 28, 2021, the Company acquired the U.S. marketing rights to Carglumic Acid Tablets. The product’s Abbreviated New Drug Application (“ANDA”), which is owned by Novitium Pharma, was approved by the FDA on October 12, 2021. The product is an AB-rated, substitutable generic version of Carbaglu®. The Company paid $ 3,250 upon signing and will retain 50 % of future product profits with the balance being distributed to the licensor and manufacturer. Indemnification As permitted under Delaware law and in accordance with the Company’s Amended and Restated Bylaws, the Company is required to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its directors and officers. The Company believes the fair value of the indemnification rights and agreements is minimal. Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of December 31, 2021 or 2020. 83 PART II (CONTINUED) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.