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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended June 30, 2024

OR

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

Commission file number: 001-38738

ETON PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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

21925 W. Field Parkway, Suite 235

Deer Park, Illinois 60010-7278

(Address of principal executive offices) (Zip code)

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

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

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

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

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

Large accelerated filer | ☐ | Accelerated filer | ☐
Non-accelerated filer | ☒ | Smaller reporting company | ☒
|  | Emerging growth company | ☐

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

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

As of August 1, 2024, Eton Pharmaceuticals, Inc. had outstanding 25,836,204 shares of common stock, $0.001 par value.

Table of Contents

Eton Pharmaceuticals, Inc.

TABLE OF CONTENTS

Part No |  | Item No |  | Description |  | Page No.
I |  |  |  | FINANCIAL INFORMATION |  | 1
|  | 1 |  | Financial Statements |  | 1
|  |  |  | Condensed Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023 |  | 1
|  |  |  | Unaudited Condensed Statements of Operations for the three and six months ended June 30, 2024 and 2023 |  | 2
|  |  |  | Unaudited Condensed Statements of Stockholders’ Equity for the three and six months ended June 30, 2024 and 2023 |  | 3
|  |  |  | Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2024 and 2023 |  | 5
|  |  |  | Notes to Condensed Financial Statements |  | 6
|  | 2 |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 22
|  | 3 |  | Quantitative and Qualitative Disclosures About Market Risk |  | 26
|  | 4 |  | Controls and Procedures |  | 27
II |  |  |  | OTHER INFORMATION |  | 28
|  | 1 |  | Legal Proceedings |  | 28
|  | 1A |  | Risk Factors |  | 28
|  | 2 |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 28
|  | 3 |  | Defaults Upon Senior Securities |  | 28
|  | 4 |  | Mine Safety Disclosures |  | 28
|  | 5 |  | Other Information |  | 28
|  | 6 |  | Exhibits |  | 28
|  |  |  | Exhibit Index |  | 29
|  |  |  | Signatures |  | 30

i

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eton Pharmaceuticals, Inc.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

|  | June 30, 2024 |  |  | December 31, 2023 |
|  | (Unaudited) |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 17,694 |  |  | $ | 21,388 |
Accounts receivable, net |  |  | 4,873 |  |  |  | 3,411 |
Inventories |  |  | 2,068 |  |  |  | 911 |
Prepaid expenses and other current assets |  |  | 799 |  |  |  | 1,129 |
Total current assets |  |  | 25,434 |  |  |  | 26,839 |
Property and equipment, net |  |  | 45 |  |  |  | 58 |
Intangible assets, net |  |  | 6,122 |  |  |  | 4,739 |
Operating lease right-of-use assets, net |  |  | 210 |  |  |  | 92 |
Other long-term assets, net |  |  | 12 |  |  |  | 12 |
Total assets |  | $ | 31,823 |  |  | $ | 31,740 |
Liabilities and stockholders’ equity |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 2,133 |  |  | $ | 1,848 |
Debt, net of unamortized discount |  |  | 4,658 |  |  |  | 5,380 |
Accrued liabilities |  |  | 11,425 |  |  |  | 9,013 |
Total current liabilities |  |  | 18,216 |  |  |  | 16,241 |
Operating lease liabilities, net of current portion |  |  | 145 |  |  |  | 22 |
Total liabilities |  |  | 18,361 |  |  |  | 16,263 |
Commitments and contingencies (Note 11) |  |  |  |  |  |  |  |
Stockholders’ equity |  |  |  |  |  |  |  |
Common stock, $0.001 par value; 50,000,000 shares authorized; 25,745,802 and 25,688,062 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively |  |  | 26 |  |  |  | 26 |
Additional paid-in capital |  |  | 121,358 |  |  |  | 119,521 |
Accumulated deficit |  |  | (107,922 | ) |  |  | (104,070 | )
Total stockholders’ equity |  |  | 13,462 |  |  |  | 15,477 |
Total liabilities and stockholders’ equity |  | $ | 31,823 |  |  | $ | 31,740 |

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

1

Table of Contents

Eton Pharmaceuticals, Inc.

Condensed Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

|  | For the three months ended |  |  | For the six months ended |
|  | June 30, |  |  | June 30, |  |  | June 30, |  |  | June 30, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Licensing revenue |  | $ | — |  |  | $ | 5,500 |  |  | $ | — |  |  | $ | 5,500 |
Product sales and royalties |  |  | 9,074 |  |  |  | 6,497 |  |  |  | 17,040 |  |  |  | 11,801 |
Total net revenues |  |  | 9,074 |  |  |  | 11,997 |  |  |  | 17,040 |  |  |  | 17,301 |
Cost of sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Licensing revenue |  |  | — |  |  |  | — |  |  | $ | — |  |  |  | — |
Product sales and royalties |  |  | 3,448 |  |  |  | 2,315 |  |  |  | 6,407 |  |  |  | 4,273 |
Total cost of sales |  |  | 3,448 |  |  |  | 2,315 |  |  |  | 6,407 |  |  |  | 4,273 |
Gross profit |  |  | 5,626 |  |  |  | 9,682 |  |  |  | 10,633 |  |  |  | 13,028 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 2,970 |  |  |  | 1,125 |  |  |  | 3,621 |  |  |  | 1,660 |
General and administrative |  |  | 5,591 |  |  |  | 4,674 |  |  |  | 10,747 |  |  |  | 10,019 |
Total operating expenses |  |  | 8,561 |  |  |  | 5,799 |  |  |  | 14,368 |  |  |  | 11,679 |
Income (loss) from operations |  |  | (2,935 | ) |  |  | 3,883 |  |  |  | (3,735 | ) |  |  | 1,349 |
Other income (expense): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other income |  |  | — |  |  |  | 800 |  |  |  | — |  |  |  | 800 |
Interest expense, net |  |  | (52 | ) |  |  | (124 | ) |  |  | (63 | ) |  |  | (250 | )
Total other income (expense) |  |  | (52 | ) |  |  | 676 |  |  |  | (63 | ) |  |  | 550 |
Income (loss) before income tax expense |  |  | (2,987 | ) |  |  | 4,559 |  |  |  | (3,798 | ) |  |  | 1,899 |
Income tax expense |  |  | 54 |  |  |  | — |  |  |  | 54 |  |  |  | — |
Net income (loss) |  | $ | (3,041 | ) |  | $ | 4,559 |  |  | $ | (3,852 | ) |  | $ | 1,899 |
Net income (loss) per share, basic |  | $ | (0.12 | ) |  | $ | 0.18 |  |  | $ | (0.15 | ) |  | $ | 0.07 |
Weighted average number of common shares outstanding, basic |  |  | 25,778 |  |  |  | 25,593 |  |  |  | 25,771 |  |  |  | 25,560 |
Net income (loss) per share, diluted |  | $ | (0.12 | ) |  | $ | 0.18 |  |  | $ | (0.15 | ) |  | $ | 0.07 |
Weighted average number of common shares outstanding, diluted |  |  | 25,778 |  |  |  | 25,983 |  |  |  | 25,771 |  |  |  | 25,949 |

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

2

Table of Contents

Eton Pharmaceuticals, Inc.

Condensed Statements of Stockholders’ Equity

For the three months ended June 30, 2024 and 2023

(in thousands, except share amounts)

(Unaudited)

|  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balances at March 31, 2024 |  |  | 25,690,562 |  |  | $ | 26 |  |  | $ | 120,349 |  |  | $ | (104,881 | ) |  | $ | 15,494 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 840 |  |  |  | — |  |  |  | 840 |
Employee stock purchase plan |  |  | 55,240 |  |  |  | — |  |  |  | 169 |  |  |  | — |  |  |  | 169 |
Stock option exercises |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,041 | ) |  |  | (3,041 | )
Balances at June 30, 2024 |  |  | 25,745,802 |  |  | $ | 26 |  |  | $ | 121,358 |  |  | $ | (107,922 | ) |  | $ | 13,462 |

|  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balances at March 31, 2023 |  |  | 25,504,378 |  |  | $ | 26 |  |  | $ | 117,009 |  |  | $ | (105,794 | ) |  | $ | 11,241 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 785 |  |  |  | — |  |  |  | 785 |
Employee stock purchase plan |  |  | 57,616 |  |  |  | — |  |  |  | 140 |  |  |  | — |  |  |  | 140 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4,559 |  |  |  | 4,559 |
Balances at June 30, 2023 |  |  | 25,561,994 |  |  | $ | 26 |  |  | $ | 117,934 |  |  | $ | (101,235 | ) |  | $ | 16,725 |

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

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Eton Pharmaceuticals, Inc.

Condensed Statements of Stockholders’ Equity

For the six months ended June 30, 2024 and 2023

(in thousands, except share amounts)

(Unaudited)

|  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balances at December 31, 2023 |  |  | 25,688,062 |  |  | $ | 26 |  |  | $ | 119,521 |  |  | $ | (104,070 | ) |  | $ | 15,477 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 1,661 |  |  |  | — |  |  |  | 1,661 |
Employee stock purchase plan |  |  | 55,240 |  |  |  | — |  |  |  | 169 |  |  |  | — |  |  |  | 169 |
Stock option exercises |  |  | 2,500 |  |  |  | — |  |  |  | 7 |  |  |  | — |  |  |  | 7 |
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,852 | ) |  |  | (3,852 | )
Balances at June 30, 2024 |  |  | 25,745,802 |  |  | $ | 26 |  |  | $ | 121,358 |  |  | $ | (107,922 | ) |  | $ | 13,462 |

|  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balances at December 31, 2022 |  |  | 25,353,119 |  |  | $ | 25 |  |  | $ | 116,187 |  |  | $ | (103,134 | ) |  | $ | 13,078 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 1,657 |  |  |  | — |  |  |  | 1,657 |
Employee stock purchase plan |  |  | 57,616 |  |  |  | — |  |  |  | 140 |  |  |  | — |  |  |  | 140 |
Stock option exercises |  |  | 202,126 |  |  |  | 1 |  |  |  | 131 |  |  |  | — |  |  |  | 132 |
Shares withheld related to net share settlement of stock option exercises |  |  | (50,867 | ) |  |  | — |  |  |  | (181 | ) |  |  | — |  |  |  | (181 | )
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,899 |  |  |  | 1,899 |
Balances at June 30, 2023 |  |  | 25,561,994 |  |  | $ | 26 |  |  | $ | 117,934 |  |  | $ | (101,235 | ) |  | $ | 16,725 |

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

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Eton Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

|  | Six months ended |  |  | Six months ended |
|  | June 30, 2024 |  |  | June 30, 2023 |
Cash flows from operating activities |  |  |  |  |  |  |  |
Net loss |  | $ | (3,852 | ) |  | $ | 1,899 |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |  |  |  |  |  |  |
Stock-based compensation |  |  | 1,661 |  |  |  | 1,657 |
Depreciation and amortization |  |  | 513 |  |  |  | 385 |
Non-cash lease expense |  |  | 36 |  |  |  | 39 |
Debt discount amortization |  |  | 48 |  |  |  | 61 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | (1,462 | ) |  |  | (1,232 | )
Inventories |  |  | (1,157 | ) |  |  | (259 | )
Prepaid expenses and other assets |  |  | 330 |  |  |  | 423 |
Accounts payable |  |  | 284 |  |  |  | 537 |
Accrued liabilities |  |  | 2,381 |  |  |  | 2,045 |
Net cash (used in) provided by operating activities |  |  | (1,218 | ) |  |  | 5,555 |
Cash flows from investing activities |  |  |  |  |  |  |  |
Purchases of product license rights |  |  | (1,868 | ) |  |  | — |
Purchases of property and equipment |  |  | (14 | ) |  |  | — |
Net cash used in investing activities |  |  | (1,882 | ) |  |  | — |
Cash flows from financing activities |  |  |  |  |  |  |  |
Repayment of long-term debt |  |  | (770 | ) |  |  | (385 | )
Proceeds from employee stock purchase plan and stock option exercises |  |  | 176 |  |  |  | 272 |
Payment of tax withholding related to net share settlement of stock option exercises |  |  | — |  |  |  | (181 | )
Net cash used in financing activities |  |  | (594 | ) |  |  | (294 | )
Change in cash and cash equivalents |  |  | (3,694 | ) |  |  | 5,261 |
Cash and cash equivalents at beginning of period |  |  | 21,388 |  |  |  | 16,305 |
Cash and cash equivalents at end of period |  | $ | 17,694 |  |  | $ | 21,566 |
Supplemental disclosures of cash flow information |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 362 |  |  | $ | 426 |
Cash paid for income taxes |  | $ | — |  |  | $ | — |
Supplemental disclosures of non-cash transactions in investing and financing activities |  |  |  |  |  |  |  |
Right-of-use assets and liabilities obtained due to lease renewal |  | $ | 153 |  |  | $ | — |

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

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 1 — Company Overview

Eton is an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases. The Company currently has five commercial rare disease products: ALKINDI SPRINKLE® for the treatment of pediatric adrenocortical insufficiency; Carglumic Acid for the treatment of hyperammonemia due to N-acetylglutamate synthase (NAGS) deficiency; Betaine Anhydrous for the treatment of homocystinuria; Nitisinone for the treatment of hereditary tyrosinemia type 1 (HT-1); and PKU GOLIKE® medical formula for patients with phenylketonuria (“PKU”). The Company has three additional product candidates in late-stage development: ET-400, ET-600, and ZENEO® hydrocortisone autoinjector.

Note 2 — Liquidity Considerations

The Company believes its existing cash and cash equivalents of $17,694 as of June 30, 2024 in addition to revenues from approved products will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next twelve months from the date of filing of this quarterly report. This estimate is based on the Company’s current assumptions, including assumptions relating to estimated sales and its ability to manage 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, the Company cannot make assurances that it will be able to raise additional capital if needed or under acceptable terms. The sale of additional equity may dilute existing stockholders and newly issued stock could contain senior rights and preferences compared to currently outstanding common shares. The Company’s existing 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 development or sales growth, obtaining regulatory approval for its other product candidates, or is unable to secure such additional financing, it might need to scale back operations.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies

Basis of Presentation

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

Unaudited Interim Financial Information

The accompanying interim condensed financial statements are unaudited and have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company’s financial position as of June 30, 2024, and the results of its operations and its cash flows for the periods ended June 30, 2024 and 2023. The financial data and other information disclosed in these notes related to the three-month and six-month periods ended June 30, 2024 and 2023 are also unaudited. The results for the three-month and six-month periods ended June 30, 2024 are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim periods, or any future year or period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, provisions for uncollectible receivables, chargebacks and sales returns, Medicaid program rebates, valuation of inventories, useful lives of assets and the recoverability of long-lived assets, valuation of deferred tax assets, the accrual of research and development expenses and milestones, and the valuation of stock options, warrants, and restricted stock units (“RSUs”). Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates or assumptions.

Segment Information

The Company operates the business on the basis of a single reportable segment, which is the business of developing and commercializing prescription drug products. The Company’s chief operating decision-maker is the Chief Executive Officer (“CEO”), who evaluates the Company as a single operating segment.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. All cash and cash equivalents are held in U.S. financial institutions or invested in short-term U.S. treasury bills or high-grade money market funds. As of June 30, 2024, the Company’s cash is in a non-interest-bearing account and a government money market fund. From time to time, amounts deposited with its bank exceed federally insured limits. The Company believes the associated credit risk to be minimal.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are recorded net of allowances for credit losses, cash discounts for prompt payment, distribution fees, chargebacks, and returns. The total for these reserves amounted to $185 and $129 as of June 30, 2024 and December 31, 2023, respectively. The Company considers historical collection rates and the current financial status of its customers, as well as information from internal and external sources, macroeconomic and industry-specific factors, current conditions, and reasonable and supportable forecasts when evaluating potential credit losses. Historically, the Company's accounts receivable balances have been highly concentrated with a select number of customers, consisting primarily of specialty pharmacies and large wholesale pharmaceutical distributors. Given the size and creditworthiness of these customers, we have not experienced and do not expect to experience material credit losses.

Inventories

The Company values its inventories at the lower of cost or net realizable value using the first-in, first-out method of valuation. The Company reviews its inventories for potential excess or obsolete issues on an ongoing basis and will record a write-down if an impairment is identified. Inventories at June 30, 2024 and December 31, 2023, consist solely of purchased finished goods. At June 30, 2024 and December 31, 2023, inventories are shown net of reserves for ALKINDI SPRINKLE® of $72 and $76, respectively, due to the risk of expiry before this entire stock of inventories is sold.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed utilizing the straight-line method based on the following estimated useful lives: computer hardware and software is depreciated over three years; equipment, furniture and fixtures is depreciated over five years; leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter.

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

Intangible Assets

The Company capitalizes payments it makes for licensed products when the payment relates to an FDA-approved product, and the cost is recoverable based on expected future cash flows from the product. The cost is amortized on a straight-line basis over the estimated useful life of the product commencing on the approval date in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles — Goodwill and Other. In November 2021, the Company purchased the rights for its Carglumic Acid product for $3,250, and that cost is being amortized over ten years. In September 2022, the Company purchased the rights for its Betaine Anhydrous product for $2,125, and that cost is being amortized over five years. In October 2023, the Company purchased the rights for its Nitisinone product for $650, and that cost is being amortized over five years. In March 2024, the Company purchased the rights for its PKU GOLIKE® product which resulted in a $1,868 intangible asset that is being amortized over ten years. The intangible assets, net on the Company’s balance sheet, reflected $1,772 of accumulated amortization as of June 30, 2024. The Company recorded $267 and $487, respectively, of amortization expense for the three and six-month periods ended June 30, 2024. The table below shows the estimated remaining amortization for these products for each of the five years from 2024 to 2028 and thereafter.

|  | Amortization |
Year |  | Expense |
Remainder of 2024 |  | $ | 534 |
2025 |  |  | 1,067 |
2026 |  |  | 1,067 |
2027 |  |  | 943 |
2028 |  |  | 609 |
Thereafter |  |  | 1,902 |
Total estimated amortization expense |  | $ | 6,122 |

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 six months ended June 30, 2024 or 2023.

Debt Issuance Costs and Debt Discount and Detachable Debt-Related Warrants

Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts related to the relative fair value of warrants issued in conjunction with the debt are also recorded as a reduction to the debt balance and accreted over the expected term of the interest expense using the effective interest method.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Leases

The Company accounts for leases in accordance with ASC Topic 842 – Leases. The Company reviews all relevant facts and circumstances of a contract to determine if it is a lease whereby the terms of the agreement convey the right to control the direct use and receive substantially all the economic benefits of an identified asset for a period of time in exchange for consideration. The associated right-of-use assets and lease liabilities are recognized at lease commencement. The Company measures lease liabilities based on the present value of the lease payments over the lease term discounted using the rate it would pay on a loan with the equivalent payments and term for the lease. The Company does not include the impact for lease term options that would extend or terminate the lease unless it is reasonably certain that it will exercise any such options. The Company accounts for the lease components separately from non-lease components for its operating leases.

The Company measures right-of-use assets based on the corresponding lease liabilities adjusted for (i) any prepayments made to the lessor at or before the commencement date, (ii) initial direct costs it incurs, and (iii) any incentives under the lease. In addition, the Company evaluates the recoverability of its right-of-use assets for possible impairment in accordance with its long-lived assets policy.

Operating leases are reflected on the balance sheets as operating lease right-of-use assets, current accrued liabilities, and long-term operating lease liabilities. The Company did not have any finance leases as of June 30, 2024 or December 31, 2023.

The Company commences recognizing operating lease expense when the lessor makes the underlying asset available for use by the Company and the operating lease expense is recognized on a straight-line basis over the term of the lease. Variable lease payments are expensed as incurred.

The Company does not recognize right-of-use assets or lease liabilities for leases with a term of twelve months or less; such lease costs are recorded in the statements of operations on a straight-line basis over the lease term.

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 high-grade money market funds and short-term U.S. treasury bills from time to time. The Company maintains its cash and cash equivalent balances with one major commercial bank, and the deposits held with the financial institution exceed the amount of insurance provided on such deposits and is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents to the extent recorded on the balance sheets. The Company believes the associated credit risk to be minimal.

The Company is dependent on third-party suppliers for its products and product candidates. In particular, the Company relies, and expects to continue to rely, on a small number of suppliers to manufacture key chemicals, approved products and process its product candidates as part of its development programs. These programs could be adversely affected by a significant interruption in the manufacturing process.

The Company is also subject to credit risk from its accounts receivable related to product sales as it extends credit based on an evaluation of the customer’s financial condition, and collateral is not required. The Company considers historical collection rates and the current financial status of its customers, as well as information from internal and external sources, macroeconomic and industry-specific factors, current conditions, and reasonable and supportable forecasts when evaluating potential credit losses. Historically, the Company's accounts receivable balances have been highly concentrated with a select number of customers, consisting primarily of specialty pharmacies and large wholesale pharmaceutical distributors. Given the size and creditworthiness of these customers, we have not experienced and do not expect to experience material credit losses. Based upon the review of these factors, the Company did not record an allowance for credit losses at June 30, 2024 and 2023. The accounts receivable balance at June 30, 2024 and 2023, and product sales revenue recognized during the six-month periods ended June 30, 2024 and 2023, primarily consist of sales to and amounts due from AnovoRx for sales of the Company’s ALKINDI SPRINKLE® and Carglumic Acid products. AnovoRx sales made up 95.9% of total net revenues recognized in the six-month period ended June 30, 2024 and 96.2% of net accounts receivable as of June 30, 2024, and 63.5% of total net revenues recognized in the six-month period ended June 30, 2023, and 97.4% of net accounts receivable as of December 31, 2023. Given the size and creditworthiness of these customers, we have not experienced and do not expect to experience material credit losses.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

Revenue Recognition for Contracts with Customers

The Company accounts for contracts with its customers in accordance with ASC 606 – Revenue from Contracts with Customers. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration 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 to assess 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 allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Any amounts received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized as revenue within the twelve months following the balance sheet date will be classified as current portion of deferred revenue in the Company’s balance sheets. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet date are classified as long-term deferred revenue, net of current portion.

Milestone Payments – If a commercial contract arrangement includes development and regulatory milestone payments, the Company will evaluate whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur before recognizing the associated revenue. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.

Significant Financing Component – In determining the transaction price, the Company will adjust consideration for the effects of the time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services to the licensees will be more than one year.

The Company sells its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, Nisitinone, and PKU GOLIKE® products to pharmacy distributor customers which provide order fulfilment and inventory storage/distribution services. The Company may sell products in the U.S. to wholesale pharmaceutical distributors, who then sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments represent performance obligations under each purchase order. The Company uses a third-party logistics (“3PL”) vendor to process and fulfill orders and has concluded it is the principal in the sales to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. The Company has no significant obligations to wholesalers to generate pull-through sales.

For its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, Nisitinone, and PKU GOLIKE® 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 estimated and recorded as a reduction of net revenues at the date of sale/shipment. Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sell products at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. Because of the shelf life of the product and the Company’s lengthy return period, there may be a significant period of time between when the product is shipped and when it issues credits on returned product.

The Company estimates the transaction price when it receives each purchase order taking into account the expected reductions of the selling price initially billed to the wholesaler/distributor arising from all of the above factors. The Company has developed estimates for future returns and chargebacks and the impact of other discounts and fees it pays. 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.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

The Company stores its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, Nisitinone, and PKU GOLIKE® inventory at its pharmacy distributor customer locations, and revenue is recorded when stock is pulled and shipped to fulfill specific orders. The Company may recognize revenue and cost of sales from products sold to wholesalers upon delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership and have an enforceable obligation to pay the Company. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, the Company does not believe they have a significant incentive to return the product.

Upon recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net accounts receivable. As of June 30, 2024 and December 31, 2023, estimated state Medicaid liability was $7,142 and $3,627, respectively. 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.

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, freight and handling/storage from the Company’s 3PL logistics service providers, and amortization expense of certain intangible assets. The costs of sales for profit-sharing, royalty fees, purchased finished products, and the associated inbound freight expense are 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. Intangible assets are amortized on a straight-line basis over the estimated useful life of the product. Cost of product 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, stock-based compensation, and other costs to support the Company’s R&D operations. External contracted services include product development efforts such as certain product licensor milestone payments, clinical trial activities, manufacturing and control-related activities, and regulatory costs. R&D expenses are charged to operations as incurred. The Company reviews and accrues R&D expenses based on services performed and relies upon estimates of those costs applicable to the stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

Upfront payments and milestone payments made for the licensing of products that are not yet approved by the FDA are expensed as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.

Income 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 June 30, 2024 and December 31, 2023, the Company has established a 100% valuation reserve against its deferred tax assets.

The Company recorded income tax expense of $54 and zero for the six-month periods ended June 30, 2024 and 2023, respectively. Our effective tax rate was negative 1.8% for the six-month period ended June 30, 2024 and zero for the six-month period ended June 30, 2023.The Company accounts for income taxes under the provisions of ASC 740 - Income Taxes. As of June 30, 2024 and December 31 2023, 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 June 30, 2024 and December 31, 2023, and has not recognized interest and penalties in the statement of operations for the six-month periods ended June 30, 2024 and 2023.

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.

Income (Loss) Per Share

Basic net income (loss) per share of common stock is computed by dividing net income (loss) attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as unvested restricted stock, stock options, RSUs and warrants that are outstanding during the period. Common stock equivalents are excluded from the computation when their inclusion would be anti-dilutive. For the three-month periods ended June 30, 2024 and 2023, common stock equivalents excluded 6,636,723 and 4,887,018, respectively, that were anti-dilutive. For the six-month periods ended June 30, 2024 and 2023, common stock equivalents excluded 6,284,721 and 4,887,018, respectively, that were anti-dilutive. Included in the basic and diluted net income (loss) per share calculation are RSUs awarded to directors that have vested, but the issuance and delivery of the shares of common stock are deferred until the director retires from service as a director.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 3 — Summary of Significant Accounting Policies (continued)

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 option-pricing model (“BSM”). The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods and the contractual life of the options. Expected volatilities are based on the Company's historical volatility subsequent to our IPO, which we believe represents the most accurate basis for estimating expected future volatility under the current conditions. We account for forfeitures as they occur.

Fair Value Measurements

We measure certain of our assets and liabilities at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting requires characterization of the inputs used to measure fair value into a three-level fair value hierarchy as follows:

Level 1 — Inputs based on quoted prices in active markets for identical assets or liabilities. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Observable inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent from the entity.

Level 3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available.

Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values stated below take into account the market for the Company’s financials, assets and liabilities, the associated credit risk and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and debt obligation. The carrying amounts of these financial instruments 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 debt obligation approximates its fair value.

Impact of Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07 Segment Reporting - Improving Reportable Segment Disclosures. The standard requires enhanced disclosures of a public company's significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), and any additional measures of a segment's profit or loss used by the CODM when making resource allocation decisions, including for companies with a single reportable segment. The standard is effective for public companies for annual periods after December 15, 2023 and in interim periods in 2025, with early adoption permitted. The Company is continuing to assess the potential impacts of the amendments, and it does not expect this pronouncement to have a material effect on its financial statements as the Company only has one reportable segment.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes - Improvements to Income Tax Disclosures. The standard requires enhanced income tax disclosures, including the effective tax rate reconciliation and income taxes paid, amongst others. The standard will be effective for public companies for annual periods beginning in 2025, with early adoption permitted. The Company is currently assessing the impact of adopting this guidance on its financial statements.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 4 – Property and Equipment

Property and equipment consist of the following:

|  | June 30, |  |  | December 31, |
|  | 2024 |  |  | 2023 |
Computer hardware and software |  | $ | 187 |  |  | $ | 187 |
Furniture and fixtures |  |  | 125 |  |  |  | 111 |
Equipment |  |  | 52 |  |  |  | 52 |
Leasehold improvements |  |  | 103 |  |  |  | 103 |
Construction in Progress |  |  | — |  |  |  | — |
|  |  | 467 |  |  |  | 453 |
Less: accumulated depreciation |  |  | (422 | ) |  |  | (395 | )
Property and equipment, net |  | $ | 45 |  |  | $ | 58 |

Depreciation expense for the three-month periods ended June 30, 2024 and 2023 was $12 and $10, respectively. Depreciation expense for the six-month periods ended June 30, 2024 and 2023 was $26 and $23, respectively.

Note 5 — Long-Term Debt

SWK Loan

In November 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 borrowed an additional $5,000 upon the FDA approval of a second product developed by the Company. In March 2020, the Company and SWK amended the SWK Credit Agreement, and the Company borrowed an additional $2,000 in August 2020. The term of the SWK Credit Agreement is for five years, and borrowings bear interest at a rate of LIBOR 3-month plus 10.0%, subject to a stated LIBOR floor rate of 2.0%. A 2.0% unused credit limit fee was assessed during the first twelve months after the date of the SWK Credit Agreement and loan fees include a 5.0% exit fee based on the principal amounts drawn which is payable at the end of the term of the SWK Credit Agreement. The Company was required to maintain a minimum cash balance of $3,000, only pay interest on the debt until February 2022 and then pay 5.5% of the loan principal balance commencing on February 15, 2022 and then every three months thereafter until November 13, 2024 at which time the remaining principal balance is due. Borrowings under the SWK Credit Agreement are secured by the Company’s assets. The SWK Credit Agreement contains customary default provisions and covenants which limit additional indebtedness.

In connection with the initial $5,000 borrowed under the SWK Credit Agreement, 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 warrants was $226 and was estimated using BSM with the following assumptions: fair value of the Company’s common stock at issuance of $5.75 per share; seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 1.8%.

In connection with the additional $2,000 borrowed in August 2020, the Company issued warrants for 18,141 shares of its common stock at an exercise price of $6.62 per share. The relative fair value of the 18,141 warrants was $94 and was estimated using BSM with the following assumptions: fair value of the Company’s common stock at issuance of $6.85 per share; seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 0.4%.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 5 — Long-Term Debt (continued)

These warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance. The SWK Warrants are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to change in connection with stock splits, dividends, reclassifications and other conditions.

In April 2022, the Company and SWK further amended the SWK Credit Agreement to allow for a deferral of loan principal payments until May 2023 and reduce the interest rate to LIBOR 3-month plus 8.0%, subject to a stated LIBOR floor rate of 2.0%. In accordance with the change, the Company has classified $4,658 as principal due in the next 12 months in its balance sheet at June 30, 2024. Because LIBOR was phased out as of June 30, 2023, the Company amended the Credit Agreement in August 2023 to refer to the secured overnight financing rate ("Term SOFR"), with an interest rate of Term SOFR plus 8.26%, subject to a stated Term SOFR floor rate of 5.0%.

Interest expense of $460 was recorded during the six months ended June 30, 2024, which included $48 of debt discount amortization. Interest expense of $538 was recorded during the six months ended June 30, 2023, which included $61 of debt discount amortization. As of June 30, 2024, $382 of accrued interest is included in accrued liabilities.

The table below reflects the future payments for the SWK loan principal and interest as of June 30, 2024.

|  | Amount |
Remainder of 2024 |  |  | 5,349 |
Less: amount representing interest |  |  | (659 | )
Loan payable, gross |  |  | 4,690 |
Less: unamortized discount |  |  | (32 | )
Debt, net of unamortized discount |  | $ | 4,658 |

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 6 — Common Stock

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

During the six months ended June 30, 2024, the Company issued 2,500 shares of its common stock resulting from stock option exercises under its 2018 Equity Incentive Plan as amended in December 2020. In June 2024 the Company issued 55,240 shares of its common stock to employees in accordance with its 2018 Employee Stock Purchase Plan (“ESPP”) (see Note 8). During the six months ended June 30, 2023, the Company issued 202,126 shares of its common stock resulting from cash and non-cash stock option exercises under its 2018 Equity Incentive Plan (see Note 8). The Company withheld 50,867 shares for payroll tax obligations totaling $181 for the six months ended June 30, 2023. In June 2023 the Company issued 57,616 shares of its common stock to employees in accordance with its ESPP (see Note 8).

Note 7 — Common Stock Warrants

The Company’s outstanding warrants to purchase shares of its common stock at June 30, 2024 are summarized in the table below.

Description of Warrants |  | No. of Shares |  |  | Exercise Price |
SWK Warrants – Debt – Tranche #1 |  |  | 51,239 |  |  | $ | 5.86 |
SWK Warrants – Debt – Tranche #2 |  |  | 18,141 |  |  | $ | 6.62 |
Total (Avg) |  |  | 69,380 |  |  | $ | 6.05 |

The holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities Act of 1933, as amended (the “Securities Act”) for their shares that are converted to common stock, including demand registration rights and piggyback registration rights. These rights are provided under the terms of a registration rights agreement between the Company and the investors.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 8 — Share-Based Payment Awards

The Company adopted the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which authorized the issuance of up to 5,000,000 shares of the Company’s common stock, and in 2018 it adopted the 2018 Equity Incentive Plan as amended December 2020 (the “2018 Plan”) which replaced the 2017 Plan. The Company has granted restricted stock awards (“RSAs”), stock options and RSUs for its common stock under both plans as detailed in the tables below. There were 248,773 shares available for future issuance under the 2018 Plan as of June 30, 2024.

Share awards that expire, terminate, are surrendered, or canceled without having been fully exercised will be available for future awards under the 2018 Plan. In addition, the 2018 Plan provides that commencing January 1, 2019 and through January 1, 2028, the share reserve will be increased annually by 4% of the total number of shares of common stock outstanding as of the preceding December 31, subject to a reduction at the discretion of the Company’s board of directors. The exercise price for stock options granted is not less than the fair value of common stock as determined by the board of directors as of the date of grant. The Company uses the closing stock price on the date of grant as the exercise price.

To date, all stock options issued have been non-qualified stock options, and the exercise prices were set at the fair value for the shares at the dates of grant. Options typically have a ten-year life.

The Company’s previous Chief Financial Officer had 474,295 employee stock options with an exercise price range of $1.37 to $8.61 which were set to expire three months after his retirement date of May 31, 2022; however, the Company extended the expiration date to April 10, 2023. Of these options, 365,858 options were exercised on a cashless basis in January and March 2023, and the remainder expired in April 2023. No other terms were modified.

For the six-month periods ended June 30, 2024 and 2023, the Company’s total stock-based compensation expense was $1,661 and $1,657, respectively. Of these amounts, $1,459 and $1,534 were recorded in general and administrative (“G&A”) expenses, respectively, and $202 and $123 were recorded in research and development expenses, respectively.

Stock Options

The following table summarizes stock option activity during the six months ended June 30, 2024:

|  |  |  |  |  |  |  |  |  | Weighted |  |  |  |  |
|  |  |  |  |  | Weighted |  |  | Average |  |  |  |  |
|  |  |  |  |  | Average |  |  | Remaining |  |  | Aggregate |
|  |  |  |  |  | Exercise |  |  | Contractual |  |  | Intrinsic |
|  | Shares |  |  | Price |  |  | Term (Yrs) |  |  | Value |
Outstanding as of December 31, 2023 |  |  | 4,839,226 |  |  | $ | 4.57 |  |  |  |  |  |  |  |  |
Issued |  |  | 1,471,118 |  |  | $ | 4.41 |  |  |  |  |  |  |  |  |
Exercised |  |  | (2,500 | ) |  | $ | 2.97 |  |  |  |  |  |  |  |  |
Forfeited/Cancelled |  |  | (25,771 | ) |  | $ | 4.38 |  |  |  |  |  |  |  |  |
Outstanding as of June 30, 2024 |  |  | 6,282,073 |  |  | $ | 4.54 |  |  |  | 7.4 |  |  | $ | 634 |
Exercisable as of June 30, 2024 |  |  | 3,866,990 |  |  | $ | 4.72 |  |  |  | 6.5 |  |  | $ | 604 |
Vested and expected to vest at June 30, 2024 |  |  | 6,282,073 |  |  | $ | 4.54 |  |  |  | 7.4 |  |  | $ | 634 |

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 8 — Share-Based Payment Awards (continued)

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock at June 30, 2024 for those stock options that had strike prices lower than the fair value of the Company’s common stock.

Stock-based compensation related to stock options was $727 and $698 for the three-month periods ended June 30, 2024 and 2023, respectively. Stock based compensation related to stock options was $1,432 and $1,476 for the six-month periods ended June 30, 2024 and 2023, respectively. As of June 30, 2024, there was a total of $6,409 of unrecognized compensation costs related to non-vested stock option awards. The weighted average grant date fair value of stock option awards for the six months ended June 30, 2024 was $2.93 per share. In the six months ended June 30, 2024, there was one stock option exercise which totaled 2,500 shares at a weighted average exercise price of $2.97 per share with an intrinsic value of $2.

Restricted Stock Units (RSUs)

The following table summarizes restricted stock unit activity during the six months ended June 30, 2024:

|  | Number of Units |  |  | Weighted Average Grant-Date Fair Value Per Unit |
Outstanding and unvested as of December 31, 2023 |  |  | 274,204 |  |  | $ | 2.63 |
Granted |  |  | — |  |  | $ | — |
Vested |  |  | — |  |  | $ | — |
Forfeited |  |  | (3,000 | ) |  | $ | — |
Outstanding and unvested as of June 30, 2024 |  |  | 271,204 |  |  | $ | 2.63 |

Stock-based compensation related to RSUs was $117 and $118 for the six-month periods ended June 30, 2024 and 2023, respectively. As of June 30, 2024, there was $483 of unrecognized stock-based compensation expense related to unvested RSUs, which will be recognized over a weighted average period of approximately 2.0 years.

Employee Stock Purchase Plan

The Company’s 2018 Employee Stock Purchase Plan (“ESPP”) provides for an initial reserve of 150,000 shares, and this reserve is automatically increased on January 1 of each year by the lesser of 1% of the outstanding common shares at December 31 of the preceding year or 150,000 shares, subject to reduction at the discretion of the Company’s board of directors. As of June 30, 2024, there were 718,274 shares available for issuance under the ESPP.

The annual offerings consist of two stock purchase periods, with the first purchase period ending in June and the second ending in December. The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per share that is at least the lesser of (1) 85% of the fair market value of a share of common stock on the first date of an offering or (2) 85% of the fair market value of a share of common stock on the date of purchase. After the offering period ends, 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. The terms of the ESPP provide a restart feature if the Company's stock price is lower at the end of a six-month period within the twelve-month offering period than it was at the beginning of the twelve-month offering period.

For the six-month periods ended June 30, 2024 and 2023, there were 55,240 and 57,616 share issuances, respectively, under the ESPP. The weighted average fair value of share awards in the first six months of 2024 and 2023 was $1.35 and $1.14, respectively. Employees contributed $182 and $133 via payroll deductions during the six-month periods ended June 30, 2024 and 2023, respectively. The Company recorded an expense of $112 and $63 related to the ESPP in the six-month periods ended June 30, 2024 and 2023, respectively. As of June 30, 2024 and December 31, 2023, the accompanying condensed balance sheets include $19 and $24, respectively, in accrued liabilities for employee ESPP contributions.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 9 — Related-Party Transactions

Chief Executive Officer

The CEO has a partial interest in a company that the Company had partnered with for its EM-100/Alaway® Preservative Free eye allergy product as described below.

The Company acquired the exclusive rights to sell the EM-100 product in the United States pursuant to a Sales and Marketing Agreement (the “Eyemax Agreement”) dated August 11, 2017, between the Company and Eyemax LLC (“Eyemax”), an entity affiliated with the Company’s CEO. Under the terms of the Eyemax Agreement, the Company would pay Eyemax $250 upon FDA approval, $500 upon the first commercial sale of the product, and a royalty of 10% on the net sales of all products. The Eyemax Agreement was for an initial term of ten years from the date of the Eyemax Agreement, subject to successive two-year renewals unless the Company elected to terminate the Eyemax Agreement.

On February 18, 2019, the Company entered into an Amended and Restated Agreement with Eyemax amending the Sales Agreement (the “Amended Agreement”). Pursuant to the Amended Agreement, Eyemax sold the Company all of its right, title and interest in EM-100, including any such product that incorporates or utilizes Eyemax’s intellectual property rights. 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. From the effective date of the Amended Agreement, the Company has realized a total of $1,840 of the non-royalty and royalty revenue through June 30, 2024. The EM-100 asset and its associated product rights were sold to Bausch Health on February 18, 2019, and future potential royalties of twelve percent on Bausch Health sales of the product, named Alaway® Preservative Free by Bausch, which was approved by the FDA in September 2020, would be split between Eyemax and the Company. There were no amounts due to Eyemax under the terms of the Amended Agreement as of June 30, 2024, and Bausch Health discontinued sales of Alaway® Preservative Free effective March 24, 2023.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 10 — Leases

The Company recognizes a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, including operating leases, and separates lease components from non-lease components related to its office space lease.

In June 2024, the Company renewed its office lease for a two-year period through March 2027 and recorded $219 in ROU assets and $219 in operating lease liabilities in association with the lease extension.

The Company’s operating lease cost as presented as G&A in the condensed statements of operations was $39 for the six months ended June 30, 2024, and $46 for the six months ended June 30, 2023. Cash paid for amounts included in the measurement of operating lease liabilities was $13 for the six months ended June 30, 2024, and $37 for the six months ended June 30, 2023. The ROU asset non-cash lease expense was $36 and $39 for the six-month periods ended June 30, 2024 and 2023, respectively, and is reflected within non-cash lease expense on the Company’s condensed statements of cash flows. As of June 30, 2024, the weighted-average remaining lease term was 2.75 years, and the weighted-average incremental borrowing rate was 8.6%.

The table below presents the lease-related assets and liabilities recorded on the balance sheet as of June 30, 2024 (in thousands).

Assets | Classification |  |  |  |
Operating lease right-of-use assets | Operating lease right-of-use assets, net |  | $ | 210 |
Total leased assets |  |  | $ | 210 |
Liabilities |  |  |  |  |
Operating lease liabilities, current | Accrued liabilities |  | $ | 74 |
Operating lease liabilities, noncurrent | Operating lease liabilities, net of current portion |  | $ | 145 |
Total operating lease liabilities |  |  | $ | 219 |

The Company’s future lease commitments as of June 30, 2024, are as indicated below:

|  | Operating Lease Liabilities |
2024 (remainder of 2024) |  |  | 45 |
2025 |  |  | 89 |
2026 |  |  | 90 |
2027 |  |  | 23 |
Undiscounted lease payments |  |  | 247 |
Less: Imputed interest |  |  | (28 | )
Total operating lease liabilities |  | $ | 219 |

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 11 — Commitments and Contingencies

Legal

The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any pending or threatened litigation matters at this time that would have a material impact on the operations of the Company.

License and product development agreements

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

The three oral solution pediatric neurology product candidates discussed below, Topiramate, Zonisamide, and Lamotrigine were developed by the Company and its various product candidate development partners, and the Company subsequently sold certain rights and interests in these three products to Azurity in 2021, but retained rights to certain royalties. The Company has recognized $27,500 in milestone revenues to date from these three products, and in June 2023 the Company amended its asset purchase agreement with Azurity and sold the remaining royalty interests it received back to Azurity for $5,500. Azurity will assume royalty or profit share obligations owed to development partners as well as additional milestone payments based on sales volume targets.

In March 2020, the Company entered into an Exclusive Licensing and Supply Agreement (the “Alkindi License Agreement”) with Diurnal for marketing ALKINDI SPRINKLE® in the United States. In September 2020, ALKINDI SPRINKLE®’s New Drug Application (NDA) was approved by the FDA as a replacement therapy for pediatric patients with adrenocortical insufficiency.

For the initial licensing milestone fee, the Company paid Diurnal $3,500 in cash and issued 379,474 shares of its common stock to Diurnal which were valued at $1,264 based on the Company’s closing stock price of $3.33 on March 26, 2020. The Company paid Diurnal $1,000 for a 2023 sales milestone in January 2024 that was recorded as licensing cost of sales in December 2023, and will also pay Diurnal $2,500 if the product obtains orphan drug exclusivity status from the FDA.

In June 2021, the Company acquired U.S. and Canadian rights to Crossject’s ZENEO® hydrocortisone needleless autoinjector, which is under development as a rescue treatment for adrenal crisis. The Company paid Crossject $500 upon signing, $500 in March 2022 upon a completion of a successful technical batch and could pay up to $3,500 in additional development milestones and up to $6,000 in commercial milestones, as well as a 10% royalty on net sales.

In October 2021, the Company acquired the U.S. marketing rights to Carglumic Acid Tablets. The product’s Abbreviated New Drug Application (“ANDA”), which is owned by Novitium Pharma, was approved by the FDA on October 12, 2021. The product is an AB-rated, substitutable generic version of Carbaglu®. The Company paid $3,250 upon signing and retains 50% of the product profits with the balance being distributed to the licensor and manufacturer. The Company launched this product in December 2021.

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Eton Pharmaceuticals, Inc.
Notes to Condensed Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

Note 11 — Commitments and Contingencies (continued)

In September 2022, the Company acquired an FDA-approved ANDA for Betaine Anhydrous for oral solution. The ANDA was approved by the FDA in January 2022. The Company paid $2,000 to the seller upon signing and an additional $125 in November 2023, and could pay up to $1,000 in commercial milestones based on future product sales. The Company will retain 65% of the product profits with the balance being distributed to the licensor.

In March 2023, the Company acquired rare disease endocrinology product candidate ET-600 from Tulex Pharmaceuticals. The Company paid $450 to Tulex in July 2023 as a result of successful manufacturing of registration batches. The Company will pay Tulex $200 upon acceptance by the FDA of the NDA for the product, $250 upon first commercial sale of the product, and tiered royalties of 12.5% to 17.0% on net sales.

In October 2023, the Company acquired an FDA-approved ANDA for Nitisinone. The ANDA was approved by the FDA in May 2023. The Company paid $150 to the seller and an additional $500 of cure amounts owed to the manufacturer upon signing. The Company will retain 80% of the product profits with the balance being distributed to the manufacturer.

In March 2024, the Company acquired the rights to PKU GOLIKE® medical formula. The Company paid $2,350 to the seller upon signing, which was allocated as $482 of inventory and $1,868 of an intangible asset (product licensing rights) based on the relative fair value of the purchased assets. The Company could pay up to $2,000 in commercial milestones based on future product sales and will pay the seller a royalty of 30% of net sales, which will include the cost of the product.

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 June 30, 2024 or December 31, 2023.

Note 12 — Subsequent Events

On July 12, 2024 the Company issued 90,402 shares of common stock in connection with the vesting of restricted stock units. The Company has evaluated subsequent events through the filing date of this Form 10-Q and has determined that no subsequent events have occurred that would require recognition in the condensed financial statements or disclosure in the notes thereto.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with (i) our unaudited interim condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations Included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024 (the “2023 10-K”).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan,” “seek” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider other matters set forth in our SEC filings, including the Risk Factors set forth in Part I, Item 1A of our 2023 10-K.

Overview

Eton is an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases. The Company currently has five commercial rare disease products: ALKINDI SPRINKLE® for the treatment of pediatric adrenocortical insufficiency; Carglumic Acid for the treatment of hyperammonemia due to N-acetylglutamate synthase (NAGS) deficiency; Betaine Anhydrous for the treatment of homocystinuria; Nitisinone for the treatment of hereditary tyrosinemia type 1 (HT-1); and PKU GOLIKE® medical formula for patients with phenylketonuria (“PKU”). The Company has three additional product candidates in late-stage development: ET-400, ET-600, and ZENEO® hydrocortisone autoinjector.

Results of Operations (dollars in thousands)

For the three months ended June 30, 2024, we had $9,074 in total revenue that generated a gross profit of $5,626. We had total revenue of $11,997 for the three-month period ended June 30, 2023 that generated a gross profit of $9,682 for the period. The decrease was primarily due to a $5,500 sale of royalty interests to Azurity in June 2023 offset by increased sales volume of the Company's ALKINDI SPRINKLE® and Carglumic Acid products.

For the six months ended June 30, 2024, we had $17,040 in total revenue that generated a gross profit of $10,633. We had total revenue of $17,301 for the six-month period ended June 30, 2023 that generated a gross profit of $13,028 for the period. The decrease was primarily due to a $5,500 sale of royalty interests to Azurity in June 2023 offset by increased sales volume of the Company's ALKINDI SPRINKLE® and Carglumic Acid products.

Research and Development Expenses

For the three months ended June 30, 2024, we incurred $2,970 of research and development (“R&D”) expenses as compared to $1,125 for the same period in 2023. The increase was primarily due to increased expenses associated with ET-400 project development activities.

For the six months ended June 30, 2024, we incurred $3,621 of research and development (“R&D”) expenses as compared to $1,660 for the same period in 2023. The increase was primarily due to increased expenses associated with ET-400 project development activities.

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General and Administrative Expenses

G&A expenses consist primarily of employee compensation expenses, legal and professional fees, product marketing expenses, distribution expenses, business insurance, travel expenses, and general office expenses.

For the three-month periods ended June 30, 2024 and 2023, we incurred $5,591 and $4,674, respectively, of G&A expenses. The increase in G&A expenses was mainly due to increased sales and marketing expenses, legal fees, and consulting expenses.

For the six-month periods ended June 30, 2024 and 2023, we incurred $10,747 and $10,019, respectively, of G&A expenses. The slight increase in G&A expenses was mainly due to increased sales and marketing expenses and legal fees.

Liquidity and Capital Resources

As of June 30, 2024, we had total assets of $31.8 million, cash and cash equivalents of $17.7 million and working capital of $7.2 million. We believe that our existing funding and revenues from our approved products will be sufficient for at least the next twelve months of our operations. However, our projected estimates for our product development spending, administrative expenses, and our working capital requirements could be inaccurate, or we may experience growth more quickly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support our operations.

Cash Flows

The following table sets forth a summary of our cash flows for the six-month periods ended June 30, 2024 and 2023 (dollars in thousands):

|  | Six months ended |  |  | Six months ended |
|  | June 30, 2024 |  |  | June 30, 2023 |
Net cash (used in) provided by operating activities |  | $ | (1,218 | ) |  | $ | 5,555 |
Cash used in investing activities |  |  | (1,882 | ) |  |  | — |
Cash used in financing activities |  |  | (594 | ) |  |  | (294 | )
Change in cash and cash equivalents |  | $ | (3,694 | ) |  | $ | 5,261 |

The decrease in cash (used in) provided by operating activities was primarily due to a $5,500 sale of royalty interests to Azurity in June 2023, a $1,000 milestone payment related to 2023 ALKINDI SPRINKLE® sales in January 2024, and increased inventory purchases for ALKINDI SPRINKLE®, Carglumic Acid, Nitisinone, and PKU GOLIKE® in 2024. The increase in cash used in investing activities was due to a $1,868 payment related to the acquisition of the PKU GOLIKE® product license in March 2024. The increase in cash used in financing activities was primarily due to payments on the Company's long-term debt.

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Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 3 to our financial statements included herein, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We account for contracts with our customers in accordance with Accounting Standards Codification (“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 we determine the contract falls within the scope of ASC 606, we assess 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. We then recognize 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. We assess 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.

We recognize 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 our 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, we 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 our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.

Significant Financing Component – In determining the transaction price, we 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.

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The Company sells its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, Nisitinone, and PKU GOLIKE® products to pharmacy distributor customers which provide order fulfilment and inventory storage/distribution services. The Company may sell products in the U.S. to wholesale pharmaceutical distributors, who then sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments represent performance obligations under each purchase order. The Company uses a third-party logistics (“3PL”) vendor to process and fulfill orders and has concluded it is the principal in the sales to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. The Company has no significant obligations to wholesalers to generate pull-through sales.

For its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, Nisitinone, and PKU GOLIKE® 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 estimated and recorded as a reduction of net revenues at the date of sale/shipment. Selling prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sell products at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government programs. Because of the shelf life of the product and the Company’s lengthy return period, there may be a significant period of time between when the product is shipped and when it issues credits on returned product.

The Company estimates the transaction price when it receives each purchase order taking into account the expected reductions of the selling price initially billed to the wholesaler/distributor arising from all of the above factors. The Company has developed estimates for future returns and chargebacks and the impact of other discounts and fees it pays. When estimating these adjustments to the transaction price, the Company reduces it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.

The Company stores its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, Nisitinone, and PKU GOLIKE® inventory at its pharmacy distributor customer locations, and sales are recorded when stock is pulled and shipped to fulfill specific patient orders. The Company may recognize revenue and cost of sales from products sold to wholesalers upon delivery to the wholesaler location. At that time, the wholesalers take control of the product as they take title, bear the risk of loss of ownership and have an enforceable obligation to pay the Company. They also have the ability to direct sales of product to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, the Company does not believe they have a significant incentive to return the product.

Upon recognition of revenue from product sales, the estimated amounts of credit for product returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid and GPO fees are included in sales reserves, accrued liabilities and net accounts receivable. The Company monitors actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts end up differing from its estimates, it will make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment.

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 BSM. The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods and the contractual life of the options. Expected volatilities are based on the Company's historical volatility subsequent to our IPO, which we believe represents the most accurate basis for estimating expected future volatility under the current conditions. We account for forfeitures as they occur.

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Research and Development Expenses

R&D expenses include both internal R&D activities and external contracted services. Internal R&D activity expenses include salaries, benefits, stock-based compensation, and other costs to support our R&D operations. External contracted services include product development efforts including 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. We review and accrue R&D expenses based on services performed and rely 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 our estimates.

Upfront payments and milestone payments made for the licensing of products that are not yet approved by the FDA are expensed as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.

Off Balance Sheet Transactions

We do not have any off-balance sheet transactions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve capital. We do not utilize hedging contracts or similar instruments. We are exposed to certain market risks relating primarily to interest rate risk on our cash and cash equivalents and risks relating to the financial viability of the institutions which hold our capital and through which we have invested our funds. We manage such risks by investing in short-term, liquid, highly rated instruments. As of June 30, 2024, our cash equivalents only included cash deposits at our bank. From time to time, we do have cash investments in short-term money market or U.S. treasury bills. We do not believe that we have any material exposure to interest rate risk in the current interest rate environment and the short duration of the invested funds we hold. Declines in interest rates would reduce our investment income but would not have a material effect on our financial condition or results of operations. We do not currently have exposure to foreign currency risk.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating these disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective

The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

With respect to the six-month period ended June 30, 2024, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the six-month period ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Certain factors may have a material adverse effect on our business, financial condition, and results of operations, and you should carefully consider them. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our results of operations and financial condition.

You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2023 10-K, which could materially affect our business, financial condition, cash flows or future results. The risk factors described in our 2023 10-K, are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Rule 10b-5(1) Trading Plans. During the three-month period ended June 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits

The exhibits listed on the Exhibit Index are either filed or furnished with this report or incorporated herein by reference.

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EXHIBIT INDEX

Exhibit No. |  | Description
31.1 |  | Certification of President and Chief Executive Officer (Principal Executive Officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of Chief Financial Officer (Principal Financial Officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* |  | Certifications of President and Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 |  | The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2024 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Operations, (iii) the Condensed Statements of Stockholders’ Equity, (iv) the Condensed Statements of Cash Flows and (v) Notes to Condensed Financial Statements.
104 |  | Cover Page Interactive Data File (embedded within the Inline XBRL document)

* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| ETON PHARMACEUTICALS, INC.
August 8, 2024 | By: | /s/ Sean E. Brynjelsen
|  | Sean E. Brynjelsen
|  | President and Chief Executive Officer
|  | (Principal Executive Officer)
| By: | /s/ James R. Gruber
|  | James R. Gruber
|  | Chief Financial Officer
|  | (Principal Financial Officer)

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