| Summary of Significant Accounting Policies | 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 September 30, 2022 and the results of its operations and its cash flows for the periods ended September 30, 2022 and 2021. The
financial data and other information disclosed in these notes related to the three-month and nine-month periods ended September 30, 2022
and 2021 are also unaudited. The results for the three-month and nine-month periods ended September 30, 2022 are not necessarily indicative
of results to be expected for the year ending December 31, 2022, 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 and sales returns, valuation of inventories, useful
lives of assets, the impairment of intangible assets, the accrual of research and development expenses and the valuation of common stock,
stock options and warrants, and restricted stock units. 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 September 30, 2022, the Company’s cash is in a non-interest bearing account as well as 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 doubtful
accounts, cash discounts for prompt payment, distribution fees, chargebacks and returns and allowances. The total for these reserves
amounted to $ 448 96 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 September 30, 2022 and December 31, 2021 consist solely of purchased finished goods. At September 30, 2022
and December 31, 2021 inventories are shown net of a reserve for its Biorphen product of $ 0 1,414 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. 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 five years 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 ten
years 750 five
years 275 75 750 five
years 738 2,000 five
years 1,777 135 1,398 Schedule of Intangible Assets Amortization Expense
Year Amortization
Expense
Remainder of 2022 $ 219
2023 725
2024 725
2025 725
2026 725
Thereafter 1,854
Total estimated amortization
expense $ 4,973 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 has been recognized since the Company’s inception in 2017. 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 and are also recorded as a reduction to the debt balance and accreted over
the expected term of the debt to interest expense using the effective interest method. 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 which the entity
expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines
are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At
contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised
within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable
at a customer’s discretion are generally considered options. The Company assesses whether these options provide a material right
to the customer and, if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract
modification for accounting purposes. The
Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or
as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output
or input method. Any amounts received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized
as revenue within the twelve months following the balance sheet date will be classified as current portion of deferred revenue in the
Company’s balance sheets. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet
date are classified as long-term deferred revenue, net of current portion. Milestone
Payments Royalties
– Significant
Financing Component – The
Company sells its Alkindi Sprinkle and Carglumic Acid product to one pharmacy distributor customer which provides 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. 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) For
its Alkindi Sprinkle and Carglumic Acid products, the Company bills at the initial product list price which are subject to offsets for
patient co-pay assistance and potential state Medicaid reimbursements which are recorded as a reduction of net revenues at the date of
sale/shipment. 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, although Alkindi Sprinkle and Carglumic Acid 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 Alkindi Sprinkle and Carglumic Acid inventory at its pharmacy distributor customer location, and sales are recorded
when stock is pulled and shipped to fulfill specific patient orders. The Company recognizes 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. 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. Cost
of Sales Cost
of 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 costs from the Company’s 3PL logistics
service providers, and amortization expense of certain intangible assets. The cost of sales for profit-sharing and royalty fees and costs
for purchased finished products and the associated inbound freight expense is recorded when the associated product sale revenue is recognized
in accordance with the terms of shipment to customers while outbound freight and handling/storage fees charged by the 3PL service provider
are expensed as they are incurred. Cost of sales also reflects any write-downs or reserve adjustments for the Company’s inventories. 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) Research
and Development Expenses Research
and development (“R&D”) expenses include both internal R&D activities and external contracted services. Internal
R&D activity expenses include salaries, benefits and stock-based compensation and other costs to support the Company’s R&D
operations. External contracted services include product development efforts such as certain product licensor milestone payments, clinical
trial activities, manufacturing and control-related activities and regulatory costs. R&D expenses are charged to operations as incurred.
The Company reviews and accrues R&D expenses based on services performed and relies upon estimates of those costs applicable to the
stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any
reporting period. Actual results could differ from the Company’s estimates. Upfront
payments and milestone payments made for the licensing of products that are not yet approved by the FDA are expensed as
R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for
use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed. Income
(Loss) Per Share Basic
net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders for the period by
the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by
dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common and
common equivalent shares, such as unvested restricted stock, stock options and warrants that are outstanding during the period.
Common stock equivalents are excluded from the computation when their inclusion would be anti-dilutive. For the three-month and
nine-month periods ended September 30, 2022, common stock equivalents of 5,349,891 5,118,574 4,339,508 4,279,400 Stock-Based
Compensation The
Company accounts for stock-based compensation under the provisions of ASC — 718 Compensation — Stock Compensation. The guidance
under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant and record expense
over the related service periods, which are generally the vesting period of the equity awards. The Company estimates the fair value of
stock-based option awards using the Black-Scholes-Merton option-pricing model (“BSM”). The BSM requires the input of subjective
assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures and the fair value of the underlying
common stock on the date of grant, among other inputs. The risk-free interest rate was determined from the implied yields for zero-coupon
U.S. government issues with a remaining term approximating the expected life of the options or warrants. Dividends on common stock are
assumed to be zero for the BSM valuation of the stock options. The expected term of stock options granted is based on vesting periods
and the contractual life of the options. Expected volatilities are based on comparable companies’ historical volatility along with
a limited weighting included for the Company’s own volatility, which management believes represents the most accurate basis for
estimating expected future volatility under the current conditions. The Company accounts for forfeitures as they occur. The Company uses
the closing common stock price on the date of grant for the fair value of the common stock. 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) 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 Level
2 Level
3 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 included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities,
and long-term debt obligation. The carrying amounts of these financial instruments, except for the long-term debt obligation, approximate
their fair values due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company,
the carrying value of the long-term debt obligation approximates its fair value. Impact
of New Accounting Pronouncements There
were no new accounting pronouncements issued by the FASB during the period that would apply to the Company would have a material impact
on its financial position or results of operations. Eton
Pharmaceuticals, Inc. Notes
to Condensed Financial Statements ( in
thousands, except share and per share amounts) (Unaudited) |
