PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eton Pharmaceuticals, Inc.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

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

Eton Pharmaceuticals, Inc.

Condensed Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

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

Eton Pharmaceuticals, Inc.

Condensed Statements of OperationsStockholders’ Equity

For the three months ended September 30, 2023 and 2022

(Inin thousands, except per share amounts)

(Unaudited)

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

Eton Pharmaceuticals, Inc.

Condensed StatementStatements of Redeemable Convertible Preferred StockStockholders’ Equity

For the nine months ended September 30, 2023 and Stockholders’ Deficit2022

(in thousands, except share amounts)

(unaudited)(Unaudited)

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

Eton Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

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

Note 1— Company Overview

Eton Pharmaceuticals, Inc. (“Eton” or the “Company”) was incorporated as a Delaware “C” corporation on April 27, 2017 and was initially set up as a wholly-owned subsidiary of Imprimis Pharmaceuticals, Inc. (“Imprimis”).

Eton raised $20,055 in start-up capital through the sale of its Series A redeemable convertible preferred stock (“Series A Preferred”) in June 2017 and a separate management team was then established for Eton with its corporate offices located in Deer Park, Illinois. Eton is a specialtyan innovative pharmaceutical company focused on developing, acquiring, and commercializing prescription drug products utilizing the U.S. Food and Drug Administration’s (the “FDA”) 505(b)(2) regulatory pathway. The Company’s business model is to develop proprietary innovative product candidates that offer commercial and/or functional advantages to currently available alternatives.

address unmet needs in patients suffering from rare diseases.

In November 2018, the Company completed an initial public offering (“IPO”), selling 4,140,000 shares of common stock at an offering price of $6.00 per share, including pursuant to the underwriter’s exercise in full of its option to purchase additional shares. The Company received net proceedscurrently has three commercial rare disease products, ALKINDI SPRINKLE® for the treatment of $22,603, after deducting underwriting discountspediatric adrenocortical insufficiency, Carglumic Acid for the treatment of hyperammonemia due to N-acetylglutamate synthase (NAGS) deficiency, and commissionsBetaine Anhydrous for the treatment of homocystinuria. The Company has three additional product candidates in late-stage development: ZENEO® hydrocortisone autoinjector for the treatment of adrenal crisis, ET-400 for the treatment of adrenocortical insufficiency, and offering-related expenses (see Note 12).

Note 2 — Liquidity ConsiderationsET-600 for the treatment of diabetes insipidus.

As of December 31, 2017 and September 30, 2018, noted in Note 12, effective October 11, 2023, the Company hadacquired an accumulated deficit of $8,639 and $19,806, respectively. In addition,FDA-approved ANDA for the periodNitisinone Capsules from April 27, 2017 (inception) to December 31, 2017 and for the nine months ended September 30, 2018, the Company had net cash used in operating activities of $4,718 and $6,371, respectively.Oakrum Pharma LLC.

Note 2— Liquidity Considerations

To date, the Company has not generated any revenues and does not anticipate generating any revenues unless and until it successfully completes development and obtains regulatory approval for one of its product candidates.As of September 30, 2018, the Company had an accumulated deficit of $19,806 and has incurred negative cash flow from operating activities since its inception. The Company currently believes its existing cash and cash equivalents together with the net cash proceeds receivedof $22,070 as of September 30, 2023 in addition to revenues from the closing of its IPO on November 15, 2018 of $22,603 (see Note 12),approved products will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 24twelve months from the date of issuancefiling of these financial statements.this quarterly report. This estimate is based on the Company’s current assumptions, including assumptions relating to estimated sales and its ability to manage its spending. The Company could use its available capital resources sooner than currently expected. Accordingly, thethe Company could seek to obtain additional capital through equity financings, the saleissuance of debt or other arrangements. However, there can be no assurancethe Company cannot make assurances that the Companyit will be able to raise additional capital if needed or under acceptable terms, if at all.terms. The sale of additional equity may dilute existing stockholders and newly issued shares maystock could contain senior rights and preferences compared to currently outstanding common shares. IssuedThe Company’s existing long-term debt securities may containobligation contains covenants and limitlimits the Company’s ability to pay dividends or make other distributions to stockholders. If the Company is delayedexperiences delays in completing its product development andor sales growth, obtaining regulatory approval for its other product candidates, andor is unable to obtainsecure such additional financing, operations wouldit might need to be scaledscale back or discontinued.discontinue operations.

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 balance sheet as of September 30, 2018, the condensed statements of operations and cash flows for the periods ended September 30, 2018 and 2017, and the statement of redeemable convertible preferred stock and stockholders’ deficit for the nine months ended September 30, 2018 are unaudited. The unaudited interim 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 September 30, 20182023, and the results of its operations and its cash flows for the periods ended September 30, 2018 2023 and 2017.2022. The financial data and other information disclosed in these notes related to the three-month and nine-month periods ended September 30, 20182023 and 20172022 are also unaudited. The results for the three-month and nine-month periods ended September 30, 20182023 are not necessarily indicative of results to be expected for the year ending December 31, 2018,2023, 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 condensed financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed 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 impairment of property and equipment and intangible assets, valuation of deferred tax assets, the accrual of research and development expenses and the valuation of common stock, stock options and warrants, and derivative instruments.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. Cash equivalents consistinstitutions or invested in short-term U.S. treasury bills or high-grade money market funds. As of an interest-bearing checking account.September 30, 2023, 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.

Deferred Offering Costs

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are recorded net of allowances for doubtful accounts, cash discounts for prompt payment, distribution fees, chargebacks, returns, and allowances. The total for these reserves amounted to $136 and $262 as of September 30, 2023 and December 31, 2022, respectively. The Company considers historical collection rates and the current financial status of its customers, as well as macroeconomic and industry-specific factors when evaluating potential credit losses. Historically, the Company's accounts receivable balances have been highly concentrated with a select number of customers, consisting primarily of specialty pharmacies and large wholesale pharmaceutical distributors. Given the size and creditworthiness of these customers, we have not experienced and do not expect to experience material credit losses.

Inventories

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummationvalues its inventories at the lower of cost or net realizable value using the equity financing, these costs are recorded in stockholders’ deficit as a reductionfirst-in, first-out method of proceeds generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations.valuation. The Company recorded deferred offering costs of $0reviews its inventories for potential excess or obsolete issues on an ongoing basis and $397 as of will record a write-down if an impairment is identified. Inventories at September 30, 2023 and December 31, 2017 and 2022, consist solely of purchased finished goods. At September 30, 2018,2023 and December 31, 2022, inventories are shown net of reserves for its ALKINDI SPRINKLE® of $76 and $62, respectively, whichdue to the risk of expiry before this entire stock of inventories is included in other long-term assets on the accompanying condensed balance sheet.

sold.

Note 3— Summary of Significant Accounting Policies (continued)

ClassificationProperty and AccretionEquipment

Property and equipment are stated at cost. Depreciation of Redeemable Convertible Preferred Stockproperty and equipment is computed utilizing the straight-line method based on the following estimated useful lives: computer hardware and software is depreciated over three years; equipment, furniture and fixtures is depreciated over five years; leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. Construction in progress is capitalized but not depreciated until it is placed into service.

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

Intangible Assets

The Company has classifiedcapitalizes payments it makes for licensed products when the Seriespayment 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. A Preferred outside$750 payment related to the approval of stockholders’ equity (deficit) becauseBiorphen had been capitalized in 2019, and that cost was being amortized over five years. As a result of the shares containBiorphen sale to Dr. Reddy’s Laboratories S.A. (“Dr. Reddy’s”) (see Note 11) in June 2022, amortization of that asset was accelerated to record $275 of expense in June 2022, and the remaining $75 of expense in the last six months of the year ended December 31, 2022. A $750 payment related to the approval of Rezipres had been capitalized in Q12022, and that cost was being amortized over five years. As a result of the sale to Dr. Reddy’s, amortization of the Rezipres asset was accelerated to record the remaining $738 in the three-month period ended June 30, 2022. In September 2022, the Company purchased the rights for its Betaine Anhydrous product for $2,000 and that cost is being amortized over five years. The intangible assets, net on the Company’s balance sheet, reflected $1,040 of accumulated amortization as of September 30, 2023. The Company recorded $182 and $544, respectively, of amortization expense for the three and nine months ended September 30, 2023. The table below shows the estimated remaining amortization for these products for each of the five years from 2023 to 2027 and thereafter.

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 nine months ended September 30, 2023 and 2022.

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

Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts 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.

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 redemption featuresthat 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 September 30, 2023 or December 31, 2022.

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

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

The Company is also subject to credit risk from its accounts receivable related to product sales as it extends credit based on an evaluation of the customer’s financial condition, and collateral is not required. Management monitors its exposure to accounts receivable by periodically evaluating the collectability of the account receivable based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer and historical experience. Based upon the review of these factors, the Company did not record an allowance for doubtful accounts at September 30, 2023 and December 31, 2022. The accounts receivable balance at September 30, 2023 and product sales revenue recognized during the nine months ended September 30, 2023, primarily consist of sales to and amounts due from AnovoRx for sales of the Company’s ALKINDI SPRINKLE® and Carglumic Acid products. The accounts receivable balance at September 30, 2022 and product sales revenue recognized during the nine months ended September 30, 2022, consist of sales to and amounts due from AnovoRx for sales of the Company’s ALKINDI SPRINKLE® and Carglumic Acid products as well as sales to and amounts due from AmerisourceBergen Corporation, Cardinal Health Services, and McKesson Corporation for sales of the Company’s Biorphen product. AnovoRx sales made up 73% of total net revenues recognized in the nine months ended September 30, 2023 and 98% of net accounts receivable as of September 30, 2023, and 52% of total net revenues recognized in the nine months ended September 30, 2022, and 80% of net accounts receivable as of December 31, 2022.

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 not solely 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.

Note 3— Summary of Significant Accounting Policies (continued)

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 rare disease products to a pharmacy distributor customer which provides order fulfillment and inventory storage/distribution services. The Company has sold products in the U.S. to wholesale pharmaceutical distributors, who then sold the products to hospitals and other end-user customers. Sales to wholesalers were made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments represented performance obligations under each purchase order. The Company used a third-party logistics (“3PL”) vendor to process and fulfill orders and concluded that the Company is the principal in the sales to wholesalers because it controlled access to the 3PL vendor services rendered and directed the 3PL vendor activities. The Company had no significant obligations to wholesalers to generate pull-through sales.

For its rare disease products, the Company bills at the initial product list price, which is subject to offsets for patient co-pay assistance and potential state Medicaid reimbursements that are recorded as a reduction of net revenues at the date of sale/shipment. Selling prices initially billed to wholesalers were subject to discounts for prompt payment and subsequent chargebacks when the wholesalers sold 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, although rare disease product sales are not subject to returns. When estimating these adjustments to the transaction price, the Company reduces it sufficiently to be able to assert that it is probable that there will be no significant reversal of revenue when the ultimate adjustment amounts are known.

The Company stores its rare disease product inventory at its pharmacy distributor customer location, and records sales when stock is pulled and shipped to fulfill specific patient orders. The Company recognized 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 and take title, bear the risk of loss of ownership and have an enforceable obligation to pay the Company. The carrying valuewholesalers also have the ability to direct sales of products to their customers on terms and at prices they negotiate. Although wholesalers have product return rights, the Series A Preferred is accretedCompany does not believe they have a significant incentive to its redemption value fromreturn the date of issuance through the earliest date of redemption.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 after the sale. If these amounts end up differing from its estimates, it will make adjustments to these allowances, which are applied to increase or reduce product sales revenue and earnings in the period of adjustment.

In addition, the Company anticipates it will receive revenues from product licensing agreements where it has contracted for milestone payments and royalties from products it has developed or acquired.

Research and Development Expenses

Research and development (“R&D”) expenses include both internal R&D activities and external contracted services. Internal R&D activity expenses include salaries, benefits, and stock-based compensation, and other costs to support the Company’s R&D operations. External contracted services include product development efforts includingsuch 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 technologyproducts 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.

EarningsIncome (Loss) Per Share

Basic net lossincome (loss) per share of common sharestock is computed by dividing net lossincome (loss) attributable to common stockholders for the period by the weighted average number of shares of common sharesstock outstanding during the period. Diluted net lossincome (loss) per share is computed by dividing the net lossincome (loss) attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as Series A Preferred, unvested restricted stock, stock options, RSUs and warrants that are outstanding during the period. Common stock equivalents are excluded from the computation wherewhen their inclusion would be anti-dilutive. No such adjustmentsFor the  three-month period ended September 30, 2023, common stock equivalents excluded 5,618,663 shares that were made for 2017 or 2018 asanti-dilutive. For the Company reported anine months ended September 30, 2023, common stock equivalents were 388,832 and excluded 4,821,906 shares that were anti-dilutive. For the three-month and nine-month periods ended September 30, 2022, common stock equivalents of 5,349,891 and 5,118,574, respectively, are excluded from the calculation of diluted net loss forper share because the periods ended September 30, 2017effect is anti-dilutive. Included in the basic and 2018 as includingdiluted net income (loss) per share calculation are RSUs awarded to employees or directors that have vested, but the effectsissuance and delivery of the shares of common stock equivalents inare deferred until the diluted EPS calculation would have been antidilutive (See Note 9).director retires from service as a director.

Warrant Liability

The Company estimates the fair value of certain warrants at each reporting period using Level 3 inputs. The estimates in valuation models are based, in part, on subjective assumptions, including but not limited to stock price volatility, the expected life of the warrants, the risk-free interest rate and the exercise price of the warrants, and could differ materially in the future. Changes in the fair value of the warrant liability during the period are recorded as a component of other income (expense). The Company will continue to adjust the fair value of the warrant liability at the end of each reporting period for changes in fair value until the earlier of the exercise or expiration of the applicable warrants, or when the number of shares issuable upon exercise of these warrants is fixed which occurred with the Company’s IPO in November 2018.Stock-Based Compensation

Note 3 — Summary of Significant Accounting Policies (continued)

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) — ASC 718, Compensation — Stock Compensation. The guidance under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant for employees and directors and record expense over the related service periods, which are generally the vesting period of the equity awards. Awards for consultants are accounted for under ASC 505-50 — Equity Based Payments to Non-Employees. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes-Merton option-pricing model (“BSM”).

The Company estimates the fair value of stock-based option awards to its employees and directors using the BSM.Black-Scholes-Merton option-pricing model (“BSM”). The BSM requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures, and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-couponzero-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 arevolatility is based on the Company's own volatility, along with a limited weighting of comparable companies’ historical volatility,volatilities, which management believes represents the most accurate basis for estimating expected future volatility under the current conditions. The Company accounts for forfeitures as they occur. The Company uses the closing common stock price on the date of grant for the fair value of the common stock.

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-levelthree-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 takestake 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.

Note 3 — Summary of Significant Accounting Policies (continued)

The carrying amounts ofCompany’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, and long-term debt obligation. The carrying amounts of these financial instruments, except for the long-term debt obligation, approximate their fair values due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying value of the long-term debt obligation approximates its fair value.

The fair values of the Company’s warrant liability at inception and for subsequent mark-to-market fair value measurements are based on management’s valuation model and expectations with respect to the method and timing of settlement. The Company has determined that the warrant liability fair values are classified as Level 3 measurements within the fair value hierarchy.

Impact of NewRecent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 (Topic 842) – Leases, which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, with terms more than 12 months to be recognized as assets and liabilities on the balance sheet. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating ASU 2016-02, the Company expects the adoption of ASU 2016-02 will not have a material effect on the Company’s financial condition from the recognition of the lease rights and obligations as assets and liabilities. The Company is currently evaluating ASU 2016-02 to determine the effect on the Company’s results of operations and cash flows.

In June 2018, 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifiesreplaces the accountingincurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses, requires consideration of a broader range of reasonable and supportable information for nonemployee share-based payment transactions.credit loss estimates on certain types of financial instruments, including trade receivables, and new disclosures. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU, 2018-07 will beas subsequently amended, is effective for financial statements issuedthe Company for fiscal years beginning after December 15, 2018,2022, as the Company was a smaller reporting company as of November 15, 2019, the determination date. We adopted ASU 2016-13 on January 1, 2023. Based on the composition of the Company’s accounts receivable, including current market conditions and interim periods within those fiscal years with early adoption permitted (but no sooner thanhistorical credit loss activity, the adoption of Topic 606). The Company is currently evaluating ASU 2018-07 to determine the effect on the Company’s financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532,Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of operations is required to be filed. This final rule became effective on November 5, 2018. On September 25, 2018, the SEC released guidance advising that it will this standard did not object to a registrant adopting the requirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule. The Company does not expect the adoption of SEC Release No. 33-10532 to have a material impact on the Company’s consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of September 30, 2023, using its financial position, resultsexpected credit loss evaluation process described above, resulted in no provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of operationsthe standard.

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 anticipates adopting SEC Release No. 33-10532received 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 its Form 10-Q filingAugust 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 firsttwelve 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 March 2020, SWK provided a waiver for the quarter ending March 31, 2019.

Note 4 — Fair Value of Financial AssetsCompany to obtain loans with the Small Business Association. In February 2021, the Company notified SWK that it would not require additional borrowing capacity under the SWK Credit Agreement and Liabilitiesterminated the additional borrowing capacity with SWK.

The following table presents information aboutIn 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 financial assets and liabilities measured at fair value on a recurring basis and indicates the levelcommon stock with an exercise price of the fair value hierarchy utilized to determine such fair values (in thousands):

During the periods ended December 31, 2017 and September 30, 2018, there were no transfers between Level 1, Level 2 and Level 3.

Valuation of Warrant Liability

$5.86 per share. The warrant liability in the table above is composed of therelative fair value of a warrant to purchase shares of common stock that were issued to the Company’s placement agent in connectionthese warrants was $226 and was estimated using BSM with the Series A Preferred offering (see Note 5). Thefollowing assumptions: fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used the BSM, which incorporates assumptions and estimates, to value the warrant. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares ofCompany’s common stock the remainingat issuance of $5.75 per share; seven-year contractual term of the warrant,term; 95% volatility; 0% dividend rate; and a risk-free interest rate expected dividend yield and expected volatility of 1.8%.

In connection with the price of additional $2,000 borrowed in August 2020, the underlying common stock. The Company determined the fair value per share of the underlying common stock by taking into consideration the most recent sales of its preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant. The Company historically has been a private company and lacks company-specific historical and implied volatility informationissued warrants for 18,141 shares of its common stock. Therefore, the Company estimates its expected stock volatility based on the historical volatilityat an exercise price of publicly traded peer companies for a term equal to the remaining contractual term$6.62 per share. The relative fair value of the warrant. The18,141 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 is determined by referenceof 0.4%.

Note 5— Long-Term Debt (continued)

These warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the warrant.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 estimatedand SWK further amended the SWK Credit Agreement to allow for a 0% expected dividend yield based ondeferral of loan principal payments until May 2023 and reduce the fact thatinterest 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 never paid or declared dividends and does not intend to do soclassified $1,540 as principal due in the foreseeable future.next 12 months, and the remainder classified as long-term debt in its balance sheet at September 30, 2023. 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%.

Note 4 — Fair ValueInterest expense of Financial Assets and Liabilities (continued)$805 was recorded during the nine months ended September 30, 2023, which included $90 of debt discount amortization. Interest expense of $699 was recorded during the nine months ended September 30, 2022, which included $96 of debt discount amortization. As of September 30, 2023, $307 of accrued interest is included in accrued liabilities.

The following table provides a roll forwardbelow reflects the future payments for the SWK loan principal and interest as of the aggregate fair values of the Company’s warrant liability, for which fair value is determined using Level 3 inputsSeptember 30, 2023.

Note 5 6— Redeemable Convertible Preferred Common Stock — Series A

The Company has 10,000,00050,000,000 authorized shares of $0.001 par value preferredcommon stock as perunder its Amended and Restated Certificate of Incorporation. In June 2017,

During the nine months ended September 30, 2023, the Company issued 6,685,082 Series A Preferred at a price298,528 shares of $3.00 per shareits common stock resulting from cash and allnon-cash stock option exercises under its 2018 Equity Incentive Plan as amended December 2020 (see Note 8) and vesting of restricted stock units. The Company withheld 50,867 shares remained outstanding as of December 31, 2017 and for payroll tax obligations totaling $181 for the nine months ended September 30, 2018.2023. In June 2023, the Company issued 57,616 shares of its common stock to employees in accordance with its Employee Stock Purchase Plan (“ESPP”). During the nine months ended September 30, 2022, a holder of the Company’s common stock warrants exercised 600,000 warrants on a cashless basis and the Company issued 598,448 shares of its common stock in connection with the warrant exercise. The gross proceeds were $20,055 fromintrinsic value of the Series A Preferredwarrant exercise was $2,268. In June 2022, the Company issued 47,585 shares of its common stock offering. to employees in accordance with its ESPP. In July 2022, the Company issues 25,000 shares of its common stock to an employee for a stock option exercise under its 2018 Equity Incentive Plan as amended December 2020.

Note 7— Common Stock Warrants

The Series A Preferred stockholdersCompany’s outstanding warrants to purchase shares of its common stock at September 30, 2023 are summarized in the table below.

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”), of 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.

As of December 31, 2017, the liquidation value of the mezzanine Series A Preferred was $20,698, which consisted of the issuance amount of $20,055 plus accrued dividends of $643. As of September 30, 2018, the liquidation value of the mezzanine Series A Preferred was $21,598, which consisted of the issuance amount of $20,055 plus accrued dividends of $1,543.

The Series A Preferred automatically converted to common shares upon completion of the IPO in November 2018. The conversion share calculation was based on the $3.00 initial issue price for the Series A Preferred plus any accrued but unpaid dividends and automatically converted into shares of the Company’s common stock using a stated divisor conversion price equal to 50% of the IPO price to the public which was $6.00 per share. In accordance with relevant accounting literature, since the terms of the conversion option did not permit the Company to compute the additional number of shares that it would need to issue upon conversion of the Series A Preferred when the contingent event occurred, the Company recorded the beneficial conversion amount as a deemed dividend at the date of the IPO in November 2018.

As a result of the Series A Preferred having a possible cash redemption feature in the event that an IPO or alternate financing was not available by December 31, 2018, the Series A Preferred is classified as temporary equity and not included as part of Company’s stockholders’ deficit. In accordance with that classification, the $2,534 of issuance costs associated with the Series A Preferred offering are being ratably accreted as a deemed dividend using the effective interest method over its expected term.

Note 5 — Redeemable Convertible Preferred Stock — Series A (continued)

The Series A Preferred was automatically converted to the Company’s common shares upon completion of the IPO in November 2018 (see Note 12).

The following is a reconciliation of the carrying value of the Series A Preferred (in thousands):

Note 6 — Common Stock

The Company has 50,000,000 authorized shares of $0.001 par value common stock as per its Amended and Restated Certificate of Incorporation. In May 2017, the Company issued 3,500,000 shares of its common stock to Imprimis, 1,500,000 shares of restricted stock to certain executives and staff of Imprimis and 1,000,000 shares of restricted stock to the CEO of the Company. On January 1, 2018, the Company issued 54,745 restricted shares of its common stock to each of its four issued to outside directors (218,980 total shares) as part of their compensation for board service to the Company in 2018. The restricted shares issued to the Imprimis executives and staff vest over a 12-month period, the restricted shares issued to the CEO vest over a 24-month period and the restricted shares issued to the outside directors vest 25% at each quarter-end in 2018 and are 100% vested as of December 31, 2018. The Company accounted for the restricted stock awards (“RSAs”) in accordance with ASC 718 or ASC 505-50 and for the period April 27, 2017 (inception) through December 31, 2017 and for the periods ended September 30, 2017 and 2018, the Company recorded $1,403, $875 and $1,274, respectively, in stock-based compensation expense for these RSAs (see Note 8).

Note 7 — Common Stock Warrants

In May 2017, the Company issued a warrant to purchase 600,000 shares of its common stock to consultants for business strategy and intellectual property advisory services. The warrant vested at issuance in May 2017 and has a $0.01 exercise price per warrant share and expires five yearsJune 26, 2022, 467,242 warrants from the date of issuance. The Company used the BSM to value the warrant and the fair value at the date of issuance was $121 based on an expected term of five years, volatility of 85%, a risk-free interest rate of 1.8% and a 0% rate on expected dividends. The $121 amount for the consulting warrants was expensed as a component of the Company’s general and administrative expenses in May 2017.

In conjunction2017 preferred stock offering with the closing of the Series A Preferred offering in June 2017 (See Note 5), the Company issued a warrant to purchase 649,409 shares of its common stock to the placement agent at an exercise price of $3.00 per share, provided, however, upon the conversion of the Series A Preferred, the warrant shall adjustwere set to entitle the holder to purchase shares of common stock equal to 10.0% of the shares of common stock issuable upon conversion of the Series A Preferred (excluding 191,000 shares of Series A Preferred that were purchased by insiders) and the exercise price shall adjustexpire. Prior to the conversion price of the Series A Preferred. This warrant vested at issuance in June 2017. The Company used the BSM to value the warrant and the fair value at the date of issuance was $479. The number of common shares issuable upon the exercise of this warrant was not fixed as it could vary by a factor of 1.000 to 1.333 common shares per warrant share in accordance with the IPO price, andexpiration, the Company consideredentered into an agreement with warrant holders, whereby it modified the warrant to be a derivative instrument. The $479 amount was recorded as a component of the issuance costs for the Series A Preferred in June 2017. As of December 31, 2017, the fair value of the warrant was $520 and the $41 increase in value during 2017 was recorded as a component of other income and expense.

Note 7 — Common Stock Warrant (continued)

As of September 30, 2018, the fair valueterms of the warrants was $1,577to extend the expiration date until December 26, 2022 in exchange for the Company retaining the option of a cashless exercise provision. No other terms were modified. Due to this modification, the Company incurred a modification expense of $244 that is included in general and the $1,057 increase in value during 2018 was recorded as a component of other income and expense. The fair value assumptions included an expected term of five years, expected volatility of 85%, a risk-free interest rate of 2.9% and estimate of the conversion rate. These warrants are classified as warrant liabilityadministrative (“G&A”) expense on the Company’s balance sheets. In accordance withCondensed Statements of Operations for the Company’s IPO nine months ended September 30, 2022.

Note 8— Share-Based Payment Awards

The weighted average exercise price of the outstanding warrants for the consultant and placement agent as of both December 31, 2017 and September 30, 2018 was $1.56 per share.

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

Note 8 — Share-Based Payment Awards

The Company’s board of directors and stockholders approvedadopted the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan in May 2017 (the “Plan”“2017 Plan”), which authorizesauthorized the issuance of up to 5,000,000 shares of the Company’s common stock.stock, and in 2018 it adopted the 2018 Equity Incentive Plan as amended December 2020 (the “2018 Plan”) which succeeded the 2017 Plan. The Company has granted RSAs,restricted stock awards (“RSAs”), stock options and restricted stock units (“RSUs”)RSUs for its common stock under the2017 Plan and 2018 Plan as detailed in the tables below. There were 976,020693,597 shares available for future issuance under the 2018Plan as of September 30, 2018.2023.

SharesShare awards that are expired, terminated, surrendered, or canceled without having been fully exercised will be available for future awards under the 2018Plan. 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 notno less than the fair value of common sharesstock as determined by the board of directors as of the date of grant. The Company’s board of directors valuesCompany uses the Company’s commonclosing stock taking into consideration its most recently available valuation of common stock performed by third parties as well as additional factors which may have changed sinceprice on the date of grant as the most recent contemporaneous valuation through the date of grant.

On January 1, 2018, the Company issued 54,745 restricted shares of its common stock to each of its four outside directors (218,980 total shares). The restricted shares issued to the outside directors vest 25% at each quarter-end in 2018 and will be 100% vested at December 31, 2018.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-yearten-year life, except for options to purchase 50,000 shares of the Company’s common stock granted to product consultants in July 2017 that expired, unexercised, in July 2022.

The Company’s previous CFO had 474,295 employee stock options with an exercise price range of $1.37 to $8.61 which were set to expire within five years ifthree months after his retirement date of May 31, 2022; however, the Company is not ableextended the expiration date to file certain product submissionsApril 10, 2023. Of these options, 365,858 options were exercised in January and March 2023, and the remainder expired in April 2023. No other terms were modified. Due to the FDA prior to the five-year expiration date. Furthermore, these option awards to the Company’s product consultants do not vest unless certain product submissions are made to the FDA, and accordingly,this modification, the Company has not recorded anyincurred a modification expense of approximately $72 that is included in general and administration expense on the Condensed Statements of Operations for these contingently vesting option awards to its product consultants.the nine-month period ended September 30, 2023.