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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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
(State or other jurisdiction
of incorporation or organization)
21925 W. Field Parkway, Suite 235
Deer Park, IL
(Address of principal executive offices)
37-1858472
(I.R.S. Employer
Identification No.)
60010-7278
(Zip Code)
Registrant’s telephone number, including area code: (847) 787-7361
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading Symbol
ETON
Name of each exchange on which registered
The Nasdaq Global Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 period 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
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of all common stock (based upon the closing price on the Nasdaq Global Market) of the registrant held by non-
affiliates as of June 30, 2023 was approximately $84.7 million.
As of March 5, 2024, the registrant had 25,688,062 shares of common stock, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2024 Annual Meeting of Stockholders, which the registrant intends to file pursuant to
Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2023, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
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PART I
PART II
Reserved
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
PART IV
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Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K and the information incorporated herein by reference contain forward-looking statements that involve a
number of risks and uncertainties, many of which are beyond our control. Although our forward-looking statements reflect the good faith judgment of our
management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking statements are inherently
subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking
statements as a result of various factors, including those set forth below under the caption “Risk Factors.”
Forward-looking statements in this Annual Report and in our other reports with the Securities and Exchange Commission (the “SEC”), for
example, may include statements regarding:
● our ability to submit our product candidates through the 505(b)(2) regulatory pathway for approval by the U.S. Food and Drug Administration (the
“FDA”);
● our ability to obtain FDA approval for our product candidates;
● our ability to comply with all U.S. and foreign regulations concerning the development, manufacture and sale of our product candidates;
● our ability to maintain, protect and enhance our intellectual property;
● costs associated with initiating and defending intellectual property infringement and other claims;
● future acquisitions of or investments in complementary companies or technologies; and
● our ability to comply with evolving legal standards and regulations, particularly concerning requirements for being a public company.
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In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,”
“expects,” “hopes,” “intends,” “may,” “plan,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” or the negative of those terms, and
similar expressions that convey uncertainty of future events or outcomes. In addition, statements that “we believe” and similar statements reflect our beliefs
and opinions on the relevant subject. These statements include, but are not limited to, statements under the captions “Business,” “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other sections in this Annual Report on Form 10-K.
We discuss many of the risks associated with the forward-looking statements in this Annual Report on Form 10-K in greater detail under the heading “Risk
Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statements we may make. You should be aware that the
occurrence of any of the events discussed under the caption “Risk Factors” and elsewhere in this report could substantially harm our business, results of
operations and financial condition and that if any of these events occurs, the trading price of our common stock could decline and you could lose all or a
part of the value of your shares of our common stock.
The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear
in this Annual Report on Form 10-K. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this
Annual Report on Form 10-K. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. Except as required by law, we assume no obligation to update our forward-looking statements
publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new
information, future events or otherwise.
This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the
markets for our product candidates, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is
based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or
circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this
industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third
parties, industry, medical and general publications, government data and similar sources. As used in this Annual Report on Form 10-K, unless the context
indicates or otherwise requires, “Eton,” “our company,” “we,” “us,” and “our” refer to Eton Pharmaceuticals, Inc., a Delaware corporation.
You should read the following together with the more detailed information regarding our company, our common stock and our financial statements
and notes to those statements appearing elsewhere in this report or incorporated by reference. The SEC allows us to “incorporate by reference”
information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this report.
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Item 1. Business
About Eton
PART I
Eton is an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases. The Company currently
has four commercial rare disease products, ALKINDI SPRINKLE® for the treatment of adrenocortical insufficiency; Carglumic Acid for the treatment of
hyperammonemia due to N-acetylglutamate synthase (“NAGS”) deficiency; Betaine Anhydrous for the treatment of homocystinuria; and Nitisinone for the
treatment of hereditary tyrosinemia type 1 (HT-1). The Company has three additional product candidates in late-stage development: ET-400, ET-600, and
ZENEO® hydrocortisone autoinjector.
ALKINDI SPRINKLE® (hydrocortisone granules) – This product was approved by the FDA in September 2020 as a replacement therapy for
Adrenocortical Insufficiency (“AI”) in children under 17 years of age. The product is the first and only FDA-approved granule hydrocortisone
formulation designed to help provide accurate dosing for newborns and children with adrenal insufficiency. We acquired U.S. marketing rights to
the product in March 2020 and launched ALKINDI SPRINKLE® in December 2020 with a sales force targeting pediatric endocrinologists. We
believe there are approximately 10,000 children currently suffering from AI in the United States. ALKINDI SPRINKLE® is protected by three
issued patents that extend to 2034.
Carglumic Acid tablets – Our Carglumic Acid product is an FDA-approved generic version of Carbaglu®. Our product is approved for the
treatment of acute and chronic hyperammonemia due to NAGS deficiency. We acquired marketing rights to the product in October 2021 and
launched the product in December 2021. We promote the product with our internal sales force.
Betaine Anhydrous for Oral Solution – Our Betaine Anhydrous product is an FDA-approved generic version of Cystadane® for the treatment of
homocystinuria, a rare inherited condition that is estimated to impact fewer than 2,000 patients in the United States. We acquired the product in
September 2022 and launched the product in May 2023.
Nitisinone – Our Nitisinone product is an FDA-approved generic version of Orfadin® for the treatment of tyrosinemia type 1, an ultra-rare
inherited condition that is estimated to impact fewer than 500 patients in the United States. We acquired the product in October 2023 and launched
the product in February 2024.
ET-400 – Eton expects to submit a new drug application for the product during 2024, which could allow for an approval and launch of the product
in 2025.
ET-600 – Eton expects to submit a new drug application for the diabetes insipidus product during 2025, which could allow for an approval and
launch of the product in early 2026.
ZENEO® Hydrocortisone Autoinjector – Our ZENEO® hydrocortisone autoinjector product candidate is a proprietary needle-free autoinjector
under development for the treatment of adrenal crisis. We expect to submit a New Drug Application (“NDA”) for the product in 2025, which
could allow for FDA approval in 2026.
Product
Carglumic Acid Tablets
ALKINDI SPRINKLE®
Betaine Anhydrous
Nitisinone
ET-400
ET-600
Eton Pharmaceuticals
Products Summary
Eton Category
Metabolic
Endocrinology
Metabolic
Metabolic
Indication
NAGS deficiency
Adrenal Insufficiency
Homocystinuria
Tyrosinemia Type 1
Pending
Pending
Endocrinology
Diabetes Insipidus
ZENEO® Hydrocortisone
Endocrinology
Adrenal Crisis
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FDA Status
Commercial
Commercial
Commercial
Commercial
Submission Expected in
2024
Submission Expected in
2025
Submission Expected in
2025
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Goals and Strengths
Our goal is to become a leading profitable pharmaceutical company focused on developing and commercializing treatments for rare diseases. We
believe we are unique in the pharmaceutical industry in our ability to identify, acquire, and advance products through the development and regulatory
process. Our biggest competitive strengths are:
● Business development experience – our ability to identify and execute transactions on under-appreciated development assets. Our team has
completed over 150 business development transactions throughout their careers and their industry connections and track record provide the
company with proprietary deal flow. We typically avoid participating in broker led transactions of auction processes.
● Regulatory expertise – our knowledge and experience in gaining FDA approval, and particularly our knowledge within the 505(b)(2) regulatory
pathway, provides drug sponsors with the opportunity to leverage existing data or literature to drastically expedite drug development timelines and
reduce investment.
●
Established commercial operations – our sales and marketing teams have developed strong relationships with healthcare professionals and patient
advocacy groups in multiple therapeutic areas. These relationships allow us to commercialize new products quickly and effectively.
Sales and Marketing
We currently commercialize four orphan products under our own label with our internal infrastructure and sales force. We market and sell our
ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone in the United States consistent with applicable laws. These products are
distributed to patients via specialty pharmacies, which support customer service and reimbursement activities.
Research and Development
We currently have nine employees that support our product research and development (“R&D”) priorities and strategy. In addition, we utilize
external sources for various product development activities, including the resources of our product development partners for certain product candidates and
through the use of contract laboratory services on a fee for service model. Our R&D priorities include:
● developing, manufacturing and delivering a pipeline of innovative products to patients living with rare diseases;
● advancing our capabilities that can position us for long-term R&D leadership; and
●
pursuing multiple development pathways through acquisitions, joint ventures, partnerships, and product licensing with creativity, flexibility and
urgency to deliver innovative products to patients as quickly as possible.
Manufacturing and Suppliers
We rely on third-party contract manufacturing organizations (“CMOs”) to manufacture our products. The majority of our finished product
manufacturing partners are based in the United States or Europe. We seek to work with CMOs that have a long history of quality and FDA compliance. All
products are manufactured in compliance with current Good Manufacturing Processes (“GMP”), and our internal quality system requires us to enter quality
agreements with and audit all of our manufacturers prior to commercializing the product. Our choice to rely on external manufacturers significantly reduces
the amount of capital invested in our business and allows us the flexibility to pursue a broad range of opportunities beyond the specific capabilities of a
single facility.
Intellectual Property
Our success depends in part on our ability to obtain patents, to protect trade secrets, to operate without infringing upon the proprietary rights of
others and to prevent others from infringing on our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods,
filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our
business. We also rely on our trade secrets, know-how and continuing technological innovation to develop and maintain our proprietary position. We
vigorously defend our intellectual property to preserve our rights and gain the benefit of our technological investments. Our business is not dependent,
however, upon any single patent, trademark, or contract.
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ALKINDI SPRINKLE® is protected by three issued patents that extend to 2034. ET-400 is protected by an issued patent that extends to 2043, and
there are additional patent applications related to this product and ET-600 under review with the U.S. Patent and Trademark Office (“USPTO”). In June
2021, we acquired U.S. marketing rights from Crossject to the ZENEO® hydrocortisone autoinjector. We intend to seek patent protection on our internally
developed products as circumstances warrant.
Government Regulation
The FDA and comparable regulatory agencies in federal, state and local jurisdictions impose substantial requirements upon the development,
manufacture, and marketing of pharmaceutical products. These agencies regulate the research, testing, manufacture, quality, control, storage, distribution,
marketing and sale of our pharmaceutical products. Additionally, in the United States, we must follow rules and regulations established by the FDA
requiring the presentation of data indicating that our products are safe and efficacious and are manufactured in accordance with GMP regulations. If we do
not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture
or market our products, and we may be criminally prosecuted. We, and our manufacturers and contract research organizations (“CROs”), may also be
subject to regulations under other foreign, federal, state and local laws, including, but not limited to, the U.S. Occupational Safety and Health Act, the
Resource Conservation and Recovery Act, the Clean Air Act and import, export and customs regulations as well as the laws and regulations of other
countries. The U.S. government has increased its enforcement activity regarding marketing practices domestically and internationally. As a result,
pharmaceutical companies must ensure their compliance with the Foreign Corrupt Practices Act and federal healthcare fraud and abuse laws, including the
False Claims Act.
FDA Market Approval Process
The steps required to be taken before a new drug may be marketed in the United States generally include:
● completion of pre-clinical laboratory and animal testing under current good laboratory practices;
● completion of required chemistry, manufacturing and controls testing;
● submission to the FDA of an Investigational New Drug (“IND”) application, which must be evaluated and found acceptable by the FDA
before human clinical trials may commence;
● performance of adequate and well-controlled human clinical trials to establish the safety, pharmacokinetics and efficacy of the proposed drug
for its intended use;
● approval by an independent institutional review board (“IRB”) or ethics committee before each human clinical trial may be initiated;
● submission and approval of an NDA by the FDA; and
● compliance with any post-approval requirements, including agreement with FDA of the language on the package insert.
The testing and approval process require substantial time, effort, and financial resources, and we cannot be certain that any approval will be
granted on a timely basis, if at all. Preclinical development of a drug candidate can take several years to complete, with no guarantee that an IND based on
those studies will become effective to even permit clinical testing to begin. Even though several of our pharmaceutical product candidates utilize active
drug ingredients that are commercially marketed in the United States in other dosage forms, we need to establish safety and effectiveness of those active
ingredients in the formulation and dosage forms that we are developing.
Clinical studies are conducted under protocols detailing, among other things, the objectives of the study, what types of patients may enter the
study, schedules of tests and procedures, drugs, dosages, and length of study, as well as the parameters to be used in monitoring safety, and the efficacy
criteria to be evaluated. A protocol for each clinical study and any subsequent protocol amendments must be submitted to the FDA as part of the IND
process.
Clinical trials are usually conducted in three phases. Phase 1 clinical trials are conducted in small groups of healthy volunteers to assess safety of
various dosing regimens and pharmacokinetics. After a safe dose has been established, in Phase 2 clinical trials the drug is administered to a limited patient
population with the target disease or condition to identify possible adverse events and safety risks, to conduct a preliminary evaluation of the efficacy of the
product candidate in treating the targeted disease or condition. Phase 3 clinical trials are usually multi-center, double-blind controlled trials in larger
numbers of subjects to assess as fully as possible both the safety and effectiveness of the drug, establish the overall risk-benefit of the product candidate,
and provide adequate information for the labeling of the product.
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Clinical trials must be conducted in accordance with the FDA’s current Good Clinical Practices (“GCP”) requirements. The FDA may order the
temporary or permanent discontinuation of a clinical study at any time or impose other sanctions if it believes that the clinical study is not being conducted
in accordance with FDA requirements or that the participants are being exposed to an unacceptable health risk. An IRB generally must approve the clinical
trial design and patient informed consent at study sites that the IRB oversees and may halt a study, either temporarily or permanently, for failure to comply
with the IRB’s requirements, or may impose other conditions. Additionally, some clinical studies are overseen by an independent group of qualified experts
organized by the clinical study sponsor, known as a data safety monitoring board or committee. This group recommends whether or not a trial may move
forward at designated checkpoints based on access to certain data from the study. The clinical study sponsor may also suspend or terminate a clinical trial
based on evolving business objectives and/or competitive climate.
As a product candidate moves through the clinical testing phases, manufacturing processes are further defined, refined, controlled, and validated.
The level of control and validation required by the FDA increases as clinical studies progress. We and the third-party manufacturers on which we rely for
the manufacture of our product candidates and their respective components (including the active pharmaceutical ingredient (“API”)) are subject to
requirements that drugs be manufactured, packaged, and labeled in conformity with GMP. To comply with GMP requirements, manufacturers must
continue to spend time, money, and effort to meet requirements relating to personnel, facilities, equipment, production and process, labeling and packaging,
quality control, recordkeeping, and other requirements.
After completion of all required testing in accordance with all applicable regulatory requirements, detailed information on the product candidate is
submitted to the FDA in the form of an NDA, requesting approval to market the product for one or more indications, together with payment of a user fee,
unless waived. An NDA includes all relevant data available from pertinent nonclinical and clinical studies, including negative or ambiguous results as well
as positive findings, together with detailed information on the chemistry, manufacture, controls, and proposed labeling, among other things. To support
marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the product candidate for its
intended use to the satisfaction of the FDA.
If an NDA submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the Prescription Drug User Fee Act
(“PDUFA”) the FDA’s goal is to complete its initial review and respond to the applicant within ten months of submission, unless the application relates to
an unmet medical need, or is for a serious or life-threatening indication, in which case the goal may be within six months of NDA submission. However,
the review process and the target response date under PDUFA may be extended if the FDA requests or the NDA sponsor otherwise provides additional
information or clarification regarding information already provided in the NDA. During its review of an NDA, the FDA may refer the application to an
advisory committee for review, evaluation, and recommendation as to whether the application should be approved. The FDA is not bound by the
recommendation of the advisory committee, but it typically follows such recommendations. Data from clinical studies are not always conclusive and the
FDA and/or any advisory committee it appoints may interpret data differently than the applicant.
After the FDA evaluates the NDA and inspects manufacturing facilities where the drug product and/or its API will be produced, it will either
approve commercial marketing of the drug product with prescribing information for specific indications or issue a Complete Response Letter (“CRL”)
indicating that the application is not ready for approval and stating the conditions that must be met in order to secure approval of the NDA. If the CRL
requires additional data and the applicant subsequently submits that data, the FDA nevertheless may ultimately decide that the NDA does not satisfy its
criteria for approval. The FDA could also approve the NDA with a Risk Evaluation and Mitigation Strategies (“REMS”) plan to mitigate risks, which could
include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries, and
other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling, development of adequate
controls and specifications, or a commitment to conduct post-marketing testing. Such post-marketing testing may include Phase 4 clinical trials and
surveillance to further assess and monitor the product’s safety and efficacy after approval.
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If the FDA approves one of our product candidates, we will be required to comply with post-approval regulatory requirements, including record-
keeping requirements and reporting of adverse reactions and production problems, and updated safety and efficacy information. Also, quality control and
manufacturing procedures must continue to conform to GMP after approval, and the FDA periodically inspects manufacturing facilities to assess
compliance with GMP, which imposes extensive procedural, substantive and record-keeping requirements. If we seek to make certain changes to an
approved product, such as certain manufacturing changes, we will need FDA review and approval before the change can be implemented. For example, if
we change the manufacturer of a product or our API, the FDA may require stability or other data from the new manufacturer. Such data will take time and
are costly to generate, and the delay associated with generating these data may cause interruptions in our ability to meet commercial demand, if any. While
physicians may use products for indications that have not been approved by the FDA, we may not label or promote the product for an indication that has
not been approved. Securing FDA approval for new indications is similar to the process for approval of the original indication and requires, among other
things, submitting data from adequate and well-controlled studies that demonstrate the product’s safety and efficacy in the new indication. Even if such
studies are conducted, the FDA may not approve any change in a timely fashion, or at all.
The FDA may also require post-marketing testing or Phase 4 testing, as well as risk minimization action plans and surveillance to monitor the
effects of an approved product or place conditions on an approval that could otherwise restrict the distribution or use of the product.
Section 505(b)(2) New Drug Applications
We intend to submit applications for certain product candidates via the 505(b)(2) regulatory pathway. As an alternate path for FDA approval of
new indications or new formulations of previously approved products, a company may submit a Section 505(b)(2) NDA, instead of a “stand-alone” or
“full” NDA. Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (“FDCA”) was enacted as part of the Drug Price Competition and Patent Term
Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the submission of an NDA where at least some
of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of
reference. Some examples of products that may be allowed to follow a 505(b)(2) path to approval are drugs that have a new dosage form, strength, route of
administration, formulation, or indication.
The Hatch-Waxman Amendments permit applicants to rely upon certain published nonclinical or clinical studies conducted for an approved
product or the FDA’s conclusions from prior review of such studies. The FDA may require companies to perform additional studies or measurements to
support any changes from the approved product. The FDA may then approve the new product for all or some of the labeled indications for which the
reference product has been approved, as well as for any new indication supported by the Section 505(b)(2) application. While references to nonclinical and
clinical data not generated by the applicant or for which the applicant does not have a right of reference are allowed, all development, process, stability,
qualification, and validation data related to the manufacturing and quality of the new product must be included in an NDA submitted under Section 505(b)
(2).
To the extent that the Section 505(b)(2) applicant is relying on the FDA’s conclusions regarding studies conducted for an already approved
product, the applicant must provide the patent number and certify to the FDA in its opinion and to the best of its knowledge, one of the following
circumstances: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire
on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The Section
505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed
in the Orange Book for the reference product has expired. If the Orange Book certifications outlined above are not accomplished, the Section 505(b)(2)
applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay and patent litigation
before its products may be commercialized.
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Section 505(j) Abbreviated New Drug Applications
The 505(j) pathway is used for product candidates that are therapeutically equivalent to an approved product. The underlying premise of the 505(j)
pathway is that a product candidate classified as therapeutically equivalent can be substituted for the approved product with the full expectation that the
substituted product will produce the same clinical effect and safety profile as the approved product when administered under the same conditions. A
product candidate utilizing the 505(j) pathway requires an abbreviated new drug application, (“ANDA”), which relies on the FDA’s finding that the
previously approved drug candidate is safe and effective. An ANDA generally must contain information to show that the product candidate is the same as
the approved product with respect to API, conditions of use, route of administration, dosage form, strength, and labeling, with certain permissible
differences, and is the bioequivalent of the approved drug. The 505(j) pathway typically requires no clinical testing other than a bioequivalence trial. While
the 505(j) pathway is typically shorter and less expensive than the 505(b)(2) pathway, the 505(b)(2) pathway allows greater flexibility as to the
characteristics of the product candidate.
Other U.S. Healthcare Laws and Compliance Requirements
Products distributed in the United States are also subject to additional healthcare regulation and enforcement by the federal government and the
states in which we conduct our business. Applicable federal and state healthcare laws and regulations include the following:
● The U.S. Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving, or
providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase,
order, lease, or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as
Medicare and Medicaid;
● The federal civil and criminal false claims laws, including the U.S. False Claims Act, can be enforced by individuals, on behalf of the
government, through civil whistleblower or qui tam actions, and the civil monetary penalties law, prohibits individuals or entities from,
among other things, knowingly presenting, or causing to be presented, to the federal government claims for payment that are false or
fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government;
● The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which prohibits, among other things, executing a scheme to
defraud any healthcare benefit program, including private third-party payors, and knowingly and willfully falsifying, concealing or covering
up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items, or services;
●
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their implementing regulations,
imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of
individually identifiable health information; and
● Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and
claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, state laws that
require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance
guidance promulgated by the federal government; state and local laws that require drug manufacturers to report information related to
payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; state laws that require the
reporting of information related to drug pricing; state and local laws requiring the registration of pharmaceutical sales and medical
representatives; and state and foreign laws, such as the General Data Protection Regulation (EU) 2016/679, governing the privacy and
security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted
by HIPAA, thus complicating compliance efforts.
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Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of
our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the federal or
state laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including significant criminal, civil, and
administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, integrity oversight
and reporting obligations to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations.
Reimbursement
Sales of our products in the United States may depend, in part, on the extent to which the costs of the products will be covered and reimbursed by
third-party payors, such as government health programs, commercial insurance and managed health care organizations. These third-party payors are
increasingly challenging the prices charged for medical products and services. Additionally, the containment of health care costs has become a priority of
federal and state governments, and the prices of drugs have been a focus in this effort. The United States government, state legislatures and foreign
governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and
requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in
jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payors do not consider our products to
be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level
of payment may not be sufficient to allow us to sell our products on a profitable basis.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, (the “MMA”), imposed new requirements for the distribution and
pricing of prescription drugs for Medicare beneficiaries and included a major expansion of the prescription drug benefit under Medicare Part D. Under Part
D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs.
Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike
Medicare Parts A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs,
and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug
formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or
class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government
payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated
prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the
MMA applies only to drug benefits for Medicare beneficiaries, private third-party payors often follow Medicare coverage policy and payment limitations in
setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-
governmental payors.
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Decreases in third-party reimbursement for our products or a decision by a third-party payor to not cover our products could reduce physician
usage of the products and have a material adverse effect on our sales, results of operations and financial condition.
Healthcare Reform
In the United States and some foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and
regulatory changes to the health-care system that could prevent or delay marketing approval pharmaceutical products, restrict or regulate post-approval
activities and affect our ability to profitably sell our product candidates. Among policy makers and payors in the United States and elsewhere, there is
significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding
access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative
initiatives.
In March 2010, then President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act (collectively, the “Health Care Reform Law”), which, among other things, imposed reporting requirements on manufacturers
related to drug samples and financial relationships with physicians and teaching hospitals, increased the minimum Medicaid rebates owed by manufacturers
under the Medicaid Drug Rebate Program, extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual
fees on manufacturers of certain branded prescription drugs, and established a Medicare Part D coverage gap discount program.
Some of the provisions of the Health Care Reform Law have yet to be implemented, and there have been judicial and Congressional challenges to
certain aspects of the Health Care Reform Law. In addition, Congress has considered legislation that would repeal or repeal and replace all or part of the
Health Care Reform Law. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under
the Health Care Reform Law have been signed into law and became effective in January 2019. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) included
a provision which repealed the tax-based shared responsibility payment imposed by the Health Care Reform Law on certain individuals who fail to
maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” The Bipartisan Budget Act of 2018,
among other things, amended the Health Care Reform Law to increase from 50 percent to 70 percent the point-of-sale discount that is owed by
pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the
“donut hole”.
In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted,
including:
● In August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select
Committee on Deficit Reduction to recommend to Congress proposals for deficit reduction of at least $1.2 trillion for the years 2013 through 2021.
The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction, which triggered the legislation’s automatic reduction to
several government programs. This includes aggregate reductions to Medicare payments to providers of, up to 2% per fiscal year, and, due to
subsequent legislative amendments, will remain in effect through 2030 unless Congress takes additional action. These reductions went into effect in
April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional action is taken by
Congress.
● On April 13, 2017, CMS published a final rule that gives states greater flexibility in setting benchmarks for insurers in the individual and small
group marketplaces, which may have the effect of relaxing the essential health benefits required under the Health Care Reform Law for plans sold
through such marketplaces.
● On May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to
access certain investigational new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval.
Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the
FDA expanded access program. There is no obligation for a pharmaceutical manufacturer to make its drug products available to eligible patients as a
result of the Right to Try Act.
● On May 23, 2019, CMS published a final rule to allow Medicare Advantage Plans the option of using step therapy for Part B drugs beginning
January 1, 2020.
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Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of
prescription drugs and biologics. Such scrutiny has resulted in several recent U.S. Congressional Inquiries and proposed and enacted federal and state
legislation designed to, among other things, bring more transparency to product pricing, reduce the cost of prescription drugs under Medicare, review the
relationship between pricing and manufacturer and patient programs, and reform government program reimbursement methodologies for products. In July
2021, President Biden signed an Executive Order affirming the administration’s policy to (i) support legislative reforms that would lower the prices of
prescription drug and biologics, including by allowing Medicare to negotiate drug prices, by imposing inflation caps, and, by supporting the development
and market entry of lower-cost generic drugs and biosimilars; and (ii) support the enactment of a public health insurance option. Among other things, the
Executive Order also directs the U.S. Department of Health & Human Services (“HHS”) to provide a report on actions to combat excessive pricing of
prescription drugs, enhance the domestic drug supply chain, reduce the price that the Federal government pays for drugs, and address price gouging in the
industry; and directs the FDA to work with states and Indian Tribes that propose to develop section 804 Importation Programs in accordance with the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and the FDA’s implementing regulations. The FDA released such
implementing regulations on September 24, 2020, which went into effect on November 30, 2020, providing guidance for states to build and submit
importation plans for drugs from Canada. On September 25, 2020, CMS stated drugs imported by states under this rule will not be eligible for federal
rebates under Section 1927 of the Social Security Act and manufacturers would not report these drugs for “best price” or Average Manufacturer Price
purposes. Since these drugs are not considered covered outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost
for these drugs. If implemented, importation of drugs from Canada may materially and adversely affect the price we receive for any of our product
candidates. Additionally, on November 30, 2020, HHS published a regulation removing safe harbor protection for price reductions from pharmaceutical
manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule
also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between
pharmacy benefit managers and manufacturers. Pursuant to court order, the removal and addition of the aforementioned safe harbors were delayed and
recent legislation imposed a moratorium on implementation of the rule until January 1, 2032. Although a number of these and other proposed measures
may require authorization through additional legislation to become effective, and the Biden administration may reverse or otherwise change these
measures, both the Biden administration and Congress have indicated that they will continue to seek new legislative measures to control drug costs.
In August 2022, President Biden signed the Inflation Reduction Act (“IRA”) which provides for (i) the government to set or negotiate prices for
select high-cost Medicare Part D (beginning in 2026) and Medicare Part B drugs (beginning in 2028) that are more than nine years (for small-molecule
drugs) or 13 years (for biological products) from their FDA approval, (ii) manufacturers to pay a rebate for Medicare Part B and Part D drugs when prices
increase faster than inflation beginning in 2022 for Medicare Part D and 2023 for Medicare Part B drugs, and (iii) Medicare Part D redesign which replaces
the current coverage gap provisions and establishes a $2,000 cap for out-of-pocket limits costs for Medicare beneficiaries beginning in 2025, with
manufacturers being responsible for 10% of costs up to the $2,000 cap and 20% after that cap is reached. Implementation of the IRA is expected to be
carried out through upcoming actions by regulatory authorities, the outcome of which is uncertain.
In August 2023, the Biden Administration published the first ten medicines subject to the Medicare Drug Price Negotiation Program. In addition,
there will be a new Medicare manufacturer discount program agreement expected to be signed in March 2024 that will change our discounting obligations
for all medicines in Medicare, with few exceptions, beginning in 2025. The Medicare Drug Price Negotiation Program is currently subject to legal
challenges and therefore, the outcome of the Program remains uncertain. We continue to evaluate the impact of the IRA on our business, operations and
financial condition and results as the full effect of the IRA on our business and the pharmaceutical industry remains uncertain.
At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and
transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We expect that states will
continue to seek cost cutting, which may focus on managed care capitation payments, supplemental rebates, and/or formulary management.
We expect that the healthcare reform measures that have been adopted and may be adopted in the future, may result in more rigorous coverage
criteria and in additional downward pressure on the price that we receive for any approved product and could seriously harm our future revenues. Any
reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private third-party payors.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal, and state levels directed at broadening
the availability of healthcare and containing or lowering the cost of healthcare. The implementation of cost containment measures or other healthcare
reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product. Such reforms could have an adverse effect
on anticipated revenue from product candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our
overall financial condition and ability to develop product candidates.
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Employees
We currently have 30 full-time employees, 9 of whom are engaged in research and development activities, 16 are engaged in sales and marketing
operations and 5 of whom are engaged in general corporate and strategy roles. We periodically utilize outside consultants on an as-needed basis, including
medical consultants.
Corporate and Other Information
We were incorporated under the laws of the state of Delaware in April 2017. Our principal executive offices are located at 21925 W. Field
Parkway, Suite 235, Deer Park, Illinois, 60010, and our telephone number is (847) 787-7361. Our corporate website address is www.etonpharma.com, to
which we regularly post copies of our press releases as well as links to reports we have filed with the SEC, which are available free of charge as soon as
reasonably practicable after being electronically filed with or furnished to the SEC. Interested persons can subscribe on our website to email alerts that are
sent automatically when we issue press releases, file reports with the SEC or post certain other information to our website. Information contained on or
accessible through our website is not a part of this Annual Report on Form 10-K or our other filings with the SEC.
We own two U.S. federal trademark applications and unregistered trademarks, including our company name. All other trademarks or trade names
referred to in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names in this Annual Report
are referred to without the symbols ® and ™, but such references should not be construed as any indication that their respective owners will not assert, to
the fullest extent under applicable law, their rights thereto.
Risk Factors Summary
You should carefully consider the risks set forth in the section of this Annual Report of Form 10-K entitled “Risk Factors” beginning on page
14 of this Annual Report, including, but not limited to, the following:
● We may have significant research, regulatory and development expenses as we advance our product candidates.
● We may need to grow the size of our organization, and we may experience difficulties in managing this growth.
● If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our
product candidates.
● We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.
● We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any
cybersecurity incidents, could harm our ability to operate our business effectively.
● Sales of counterfeits of any of our product candidates, as well as unauthorized sales of any of our product candidates, may have adverse effects on
our revenues, business and results of operations and damage our brand and reputation.
● We have entered into several arrangements with related parties for the development and marketing of certain product candidates and these
arrangements present potential conflicts of interest.
● We face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.
● Our competitors may obtain FDA or other regulatory approval for comparable products more rapidly than we may obtain approval for ours, and the
risk of our competitors doing so may lead us to develop drug candidates without disclosing certain information with regard to such candidates.
● If we are not able to obtain regulatory approvals for our product candidates, we will not be able to commercialize our product candidate and our
ability to generate revenue will be limited.
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● If the FDA concludes that our product candidates do not satisfy the requirements for the 505(b)(2) regulatory approval pathway, or if the
requirements for approval of any of our product candidates under Section 505(b)(2) are not as we expect, the approval pathway for our product
candidates will likely take significantly longer, cost significantly more and encounter significantly greater complications and risks than anticipated,
and in any case may not be successful.
● An NDA submitted under Section 505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that would delay or
prevent the review or approval of our product candidate.
● Even if we receive regulatory approval for any of our product candidates, we may not be able to successfully commercialize the product, and the
revenue that we generate from its sales, if any, may be limited.
● We are subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product
candidates could be subject to labeling and other restrictions and withdrawal from the market, and we may be subject to penalties if we fail to
comply with regulatory requirements or if we experience unanticipated problems with our product candidates.
● Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products.
● Current and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates
and affect the prices we may obtain.
● If we market any of our products or product candidates in a manner that violates health care fraud and abuse laws, or if we violate government price
reporting laws, we may be subject to civil or criminal penalties.
● We may not be able to establish agreements with third parties with whom we wish to collaborate and, if we are able to establish them, we may not
be able to establish them on commercially reasonable terms, which could result in alterations or delays of our development and commercialization
plans.
● We expect to rely on third parties to conduct clinical trials for our product candidates. If these third parties do not successfully carry out their
contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our product candidates
and our business would be substantially harmed.
● We enter into various contracts in the normal course of our business, some or all of which may require us to indemnify the other party to the
contract. In the event we have to perform under these indemnification provisions, it could have an adverse effect on our business, financial condition
and results of operations.
● Any termination or suspension of, or delays in the commencement or completion of, any necessary studies of any of our product candidates for any
indications could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.
● Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results.
● Third-party coverage and reimbursement and health care cost containment initiatives and treatment guidelines may constrain our future revenues.
● We are subject to extensive laws and regulations related to data privacy, and our failure to comply with these laws and regulations could harm our
business.
● We will depend on rights to certain pharmaceutical compounds that have been acquired by us. We do not have complete control over these
pharmaceutical compounds and any loss of our rights to them could prevent us from selling our products.
● It is difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.
● Changes in either U.S. or foreign patent law or interpretation of such laws could diminish the value of patents in general, thereby impairing our
ability to protect our products.
● Our product candidates may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development
and commercialization efforts.
● Others may claim an ownership interest in our intellectual property, which could expose us to litigation and have an adverse effect on our prospects.
● We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or
disclosed alleged confidential information or trade secrets of their former employers.
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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. Accordingly, in evaluating our business, we
encourage you to consider the following discussion of risk factors, in its entirety, in addition to other information contained in this Annual Report on Form
10-K and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our
results of operations and financial condition.
Risks Relating to Our Business
We may need to grow the size of our organization, and we could experience difficulties in managing this growth.
As our development and commercialization plans and strategies develop, we may need to expand the size of our employee and
consultant/contractor base. Future growth would impose significant added responsibilities on members of management, including the need to identify,
recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount of its attention
away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future financial performance and our
ability to commercialize our product candidates and any other future product candidates and our ability to compete effectively will depend, in part, on our
ability to effectively manage our future growth.
We focus on rare diseases, which may create additional risks and challenges, including that the target patient populations of our products and product
candidates may be small.
Because we focus on developing drugs as treatments for rare diseases, we may seek orphan drug, breakthrough therapy or fast track designations
for our product candidates. Often, regulatory authorities have broad discretion in determining whether or not to grant such designations. We cannot
guarantee that our product candidates will receive orphan drug status from the FDA or equivalent designations from other regulatory authorities. Even with
an orphan drug designation for our current and potential future product candidates, we may not be the first to obtain marketing approval for any particular
orphan indication due to the uncertainties associated with developing pharmaceutical products. Further, even if we obtain orphan drug exclusivity for an
existing or future product candidate, that exclusivity may not effectively protect the product from competition.
We also cannot guarantee that we will receive breakthrough therapy, fast track, or equivalent designations, which provide certain potential benefits
such as more frequent meetings with the applicable regulatory authorities to discuss development plans, intensive guidance on efficient drug development
programs, and potential eligibility for rolling review or priority review. Even if we are successful in obtaining any such designations for our product
candidates, such designations may not lead to faster development or regulatory review or approval and do not increase the likelihood that our product
candidates will receive marketing approval. We may not be able to obtain or maintain these designations for our product candidates that receive them, and
our competitors may obtain these designations for their product candidates, which could impact our ability to develop and commercialize our products and
product candidates or compete with such competitors, which may adversely impact our business, financial condition or results of operations.
Given the small number of patients who have the diseases that we are targeting, it is critical to our ability to grow and become profitable that we
continue to successfully identify patients with these rare diseases. Our projections of both the number of people who have these diseases, as well as the
subset of people with these diseases who have the potential to benefit from treatment with our products and product candidates, are based on our beliefs and
estimates. These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient foundations, or market
research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients
may turn out to be lower than expected. Additionally, the potentially addressable patient population for each of our products and product candidates may be
limited or may not be amenable to treatment with our products and product candidates, and new patients may become increasingly difficult to identify or
access. Further, even if we obtain significant market share for our products and product candidates, because the potential target populations are small, we
may struggle to remain profitable or generate sufficient revenue growth to sustain our business.
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If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product
candidates.
We face a potential risk of product liability as a result of the commercialization of our approved products and clinical testing of our new product
candidates and will face an even greater risk if we commercialize our current product candidates or any other future product. For example, we may be sued
if our approved products or any product we develop, including any of our product candidates, or any materials that we use in our products allegedly causes
injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of
warranties. In the United States, claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against
product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense
would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
● decreased demand for our current products or any of our product candidates or any future products that we may develop;
● injury to our reputation;
● withdrawal of clinical trial participants;
● costs to defend the related litigation;
● a diversion of management’s time and our resources;
● substantial monetary awards to trial participants or patients;
● product recalls, withdrawals or labeling, marketing or promotional restrictions;
● the inability to commercialize some or all of our product candidates; and
● a decline in the value of our stock.
We carry product liability insurance we consider adequate for our current level of expected product sales, clinical testing and product
development. Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability
claims could prevent or inhibit the commercialization of our approved products or additional products we develop. Although we will endeavor to obtain
and maintain such insurance in coverage amounts which we deem adequate, any claim that may be brought against us could result in a court judgment or
settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance
policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts
awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be
able to obtain, sufficient capital to pay such amounts.
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We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.
We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will
complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit
of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter
numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent
us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the
expected synergies to justify the transaction.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any
cybersecurity incidents, could harm our ability to operate our business effectively.
Significant disruptions of IT systems or breaches of information security could adversely affect our business. Despite the implementation of
security measures, our internal computer systems and those of third parties with which we contract are vulnerable to damage from cyber attacks, computer
viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. We rely on technology developed, supplied,
and/or maintained by third parties that may make us vulnerable to “supply chain” style cyber-attacks. System failures, accidents or security breaches could
cause interruptions in our operations, and result in a material disruption of our product development and clinical activities and business operations, in
addition to possibly requiring substantial expenditures of resources to remedy. Cybersecurity attacks in particular are evolving and include, but are not
limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems,
misappropriation of our confidential or otherwise protected information and corruption of data. The loss, theft or sabotage of product development or
clinical trial data could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent
that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or
proprietary information, we could incur liability and our development programs and the development of our product candidates could be delayed. Any
technology service interruption or breach of our systems could adversely affect our business operations and/or result in the loss of personal data,
confidential information or intellectual property. Such incidents require disclosure to government authorities and/or regulators and any incident could result
in financial, legal, business and reputational harm to us. We maintain cyber liability insurance; however, this insurance may not be sufficient to cover the
financial, legal, business or reputational losses that may result from an interruption or breach of our systems.
Artificial intelligence-based software is increasingly being used in the biopharmaceutical and healthcare industries. As with many developing
technologies, artificial intelligence-based software presents risks and challenges. For example, algorithms may be flawed, data sets may be insufficient, of
poor quality, or contain biased information; and inappropriate or controversial data practices by data scientists, engineers, and end-users could impair
results. If the analyses that artificial intelligence-based applications assist in producing are deficient or inaccurate, we could be subjected to competitive
harm, potential legal liability and brand or reputational harm. Furthermore, use of artificial intelligence-based software may lead to the release of
confidential information which may impact our ability to realize the benefits of our intellectual property.
Sales of counterfeits of any of our product candidates, as well as unauthorized sales of any of our product candidates, may have adverse effects on our
revenues, business and results of operations and damage our brand and reputation.
Our current approved products or our new product candidates may become subject to competition from counterfeit pharmaceutical products,
which are pharmaceutical products sold under the same or very similar brand names and/or having a similar appearance to genuine products, but which are
sold without proper licenses or approvals. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having
different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product.
Obtaining regulatory approval for our product candidates is a complex and lengthy process. If during the period while the regulatory approval is pending,
illegal sales of counterfeit products begin, consumers may buy such counterfeit products, which could have an adverse impact on our revenues, business
and results of operations. In addition, if illegal sales of counterfeits result in adverse side effects to consumers, we may be associated with any negative
publicity resulting from such incidents. Although pharmaceutical regulation, control and enforcement systems throughout the world have been increasingly
active in policing counterfeit pharmaceuticals, we may not be able to prevent third parties from manufacturing, selling or purporting to sell counterfeit
products competing with our current products or our new product candidates. Such sales may also be occurring without our knowledge. The existence and
any increase in production or sales of counterfeit products or unauthorized sales could negatively impact our revenues, brand reputation, business and
results of operations.
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Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization
We depend entirely on the success of current approved products and our new product candidates. If we are unable to generate revenues from our
approved products and new product candidates, our ability to create stockholder value will be limited.
We may not be successful in obtaining acceptance from the FDA or comparable foreign regulatory authorities to start our clinical trials. If we do
not obtain such acceptance, the time in which we expect to commence clinical programs for any product candidate will be extended and such extension will
increase our expenses and increase our need for additional capital. Moreover, there is no guarantee that our clinical trials will be successful or that we will
continue clinical development in support of additional product approvals from the FDA or comparable foreign regulatory authorities for any indication. We
note that most product candidates never reach the clinical development stage and even those that do commence clinical development have only a small
chance of successfully completing clinical development and gaining regulatory approval. Therefore, our business substantially depends entirely on the
successful development, regulatory approval and commercialization of our product candidates, which may never occur.
We face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have
existing competitors and potential new competitors in a number of jurisdictions, many of which have or will have substantially greater name recognition,
commercial infrastructures and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly discover
and develop novel compounds that could make any of our product candidates obsolete or uneconomical. In addition, mergers and acquisitions in the
biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors, potentially
reducing or eliminating our commercial opportunity. Furthermore, such potential competitors may enter the market before us, and their products may be
designed to circumvent our pending patent applications and any patents we may receive. They may also challenge, narrow or invalidate any granted patents
or our patent applications, and such patents and patent applications may fail to provide adequate protection for our product candidates. Any new product
that competes with an approved product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be
commercially successful. Other competitive factors, including generic competition, could force us to lower prices or could result in reduced sales. In
addition, new products developed by others could emerge as competitors to our product candidates. If we are not able to compete effectively against our
current and future competitors, our business will not grow and our financial condition and operations will suffer.
We face substantial competition, which may result in others discovering, developing and commercializing products before or more successfully than
our product candidates.
The development and commercialization of new drugs is highly competitive. We face competition (from major pharmaceutical companies,
specialty pharmaceutical companies and biotechnology companies worldwide) with respect to our current product candidates and will face competition
with respect to any product candidates that we may seek to develop or commercialize in the future. We compete directly with companies that focus on
505(b)(2) and generic drugs, and companies dedicating their resources to novel forms of therapies for these indications. Many of these competitors are
attempting to develop products for our target indications. We face the risk that our competitors will develop a competing product using the same 505(b)(2)
pathway that we intend to pursue. Our business model is to focus on product candidates that we consider to have a shorter timeline to, and lower cost of,
regulatory approval. These attributes can also be taken advantage of by our competitors to develop and obtain marketing approval of a competing product.
In addition, following FDA approval of our product candidates for which we have no patent protection, our competitors may seek to develop a competing
product pursuant to the 505(j) pathway, which is an abbreviated pathway used for the regulatory approval of generic product candidates. As a result of the
foregoing, we may find that the market opportunity for our product candidates for which we have no patent protection is relatively small due to the fact that
barriers to entry are low and generic competition may follow within relatively short time periods after our product is approved. With the proliferation of
new drugs and therapies in these areas, we expect to face increasingly intense competition as new technologies become available. Any product candidates
that we successfully develop and commercialize will compete with existing products and new products that may become available in the future.
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There are products already approved for all of the indications we are targeting. Many of these approved products are well established therapies and
are widely accepted by physicians, patients and third-party payors. This may make it difficult for us to achieve our business strategy of replacing existing
products with our product candidates. In addition, where we are able to offer benefits over existing products offered by our competitors, those competitors
may reformulate their drugs in a manner that mimics the benefits offered by our product candidates. As noted below, many of our product candidates are
not eligible for patent protection or the market and data exclusivity provisions under the FDCA. Consequently, our commercial operations face significant
direct competition and our competitors may develop products that are similar to ours and perhaps safer, more effective, more convenient or less costly than
any that we are developing or that would render our product candidates obsolete or non-competitive. Our inability to successfully compete could negatively
impact our business, results of operations and stock price.
Our competitors may obtain FDA or other regulatory approval for comparable products more rapidly than we may obtain approval for ours, and the
risk of our competitors doing so may lead us to develop drug candidates without disclosing certain information with regard to such candidates.
The FDCA provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA or 505(b)(2) NDA if
new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to
the approval of the application, (e.g., for new indications, dosages, strengths or dosage forms of an existing drug). Many of our competitors have
significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. As a result, many of our
competitors have the ability to bring a product candidate to market more rapidly than we can and depending on the nature of their product candidate they
could substantially delay the introduction of our product candidate into the market if their product qualifies for the market and data exclusivity provisions
under the FDCA. In order to preserve any competitive advantage, we will, at times, make the decision to pursue a product candidate for which we will not
disclose the API, dosage or reference drug until such time as we believe that any competitive advantage would not be materially compromised by public
disclosure of such information, which in some cases may be as late as our receipt of marketing approval from the FDA. Our business currently depends on
our ability to bring our product candidates to market in a manner that preserves our perceived competitive advantage, and any loss of that competitive
advantage could negatively impact our business, results of operations and stock price.
If we are not able to obtain any required regulatory approvals for our product candidates, we will not be able to commercialize our product candidate
and our ability to generate revenue will be limited.
We may be required to successfully complete clinical trials for our product candidates before we can apply for marketing approval. Even if we
complete any such clinical trials, it does not assure marketing approval. Any such clinical trials may be unsuccessful, which would materially harm our
business. Even if such initial clinical trials are successful, we may be required to conduct additional clinical trials to establish our product candidates’ safety
and efficacy before an NDA or foreign equivalents can be submitted to the FDA or comparable foreign regulatory authorities for marketing approval of our
product candidates.
Our success depends on the receipt of regulatory approval and the issuance of such regulatory approvals is uncertain and subject to a number of
risks, including the following:
● the results of any required toxicology studies may not support the submission of an IND for our product candidates;
● the FDA or comparable foreign regulatory authorities or Institutional Review Boards (“IRB”), may disagree with the design or
implementation of our clinical trials;
● we may not be able to provide acceptable evidence of our product candidates’ safety and efficacy;
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● the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA or
other regulatory agencies for marketing approval;
● the dosing of our product candidates in any required clinical trial may not be at an optimal level;
● the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA or
other regulatory agencies for marketing approval;
● the dosing of our product candidates in any required clinical trial may not be at an optimal level;
● patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to our product candidates;
● the data collected from clinical trials may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory
approval in the United States or elsewhere;
● the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; and
● the approval policies or regulations of the FDA may significantly change in a manner rendering our clinical data insufficient for approval.
Failure to obtain regulatory approval for our product candidates for the foregoing, or any other reasons, will prevent us from commercializing our
product candidates, and our ability to generate sufficient revenue will be materially impaired. We cannot guarantee that regulators will agree with our
assessment of the results of the clinical trials we intend to conduct in the future or that such trials will be successful. The FDA and other regulators have
substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require
additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could
delay, limit or prevent regulatory approval of our product candidates.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based
upon, among other things, the type, complexity and novelty of the product candidates involved, the jurisdiction in which regulatory approval is sought and
the substantial discretion of the regulatory authorities. Changes in regulatory approval policies during the development period, changes in or the enactment
of additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an
application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all
jurisdictions in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval in a
different jurisdiction. Failure to obtain regulatory marketing approval for our product candidates will prevent us from commercializing the product
candidate, and our ability to generate sufficient revenue will be materially impaired.
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If the FDA does not conclude that our product candidates satisfy the requirements for the 505(b)(2) regulatory approval pathway, or if the
requirements for approval of any of our product candidates under Section 505(b)(2) are not as we expect, the approval pathway for our product
candidates will likely take significantly longer, cost significantly more and encounter significantly greater complications and risks than anticipated, and
in any case may not be successful.
We intend to seek FDA approval through the 505(b)(2) regulatory pathway for the majority of our product candidates. The Drug Price
Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the FDCA. Section 505(b)(2)
permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the
applicant. If the FDA does not allow us to pursue the 505(b)(2) regulatory pathway for our product candidates as anticipated, we may need to conduct
additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time and
financial resources required to obtain FDA approval for our product candidates would likely substantially increase. Moreover, the inability to pursue the
505(b)(2) regulatory pathway could result in new competitive products reaching the market faster than our product candidates, which could materially
adversely impact our competitive position and prospects. Even if we are allowed to pursue the 505(b)(2) regulatory pathway for a product candidate, we
cannot assure you that we will receive the requisite or timely approvals for commercialization of such product candidate. For example, we had under
development a patented injectable pentoxifylline therapeutic candidate, which we believed would satisfy the requirements of the 505(b)(2) regulatory
pathway. However, based on a pre-IND meeting with the FDA in March 2018 to discuss the clinical and regulatory pathway for the product, we have
decided to suspend all further development activities for this candidate indefinitely due to extraordinarily high costs of the clinical trials that would be
required by the FDA.
Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years some pharmaceutical
companies and others have objected to the FDA’s interpretation of Section 505(b)(2) to allow reliance on the FDA’s prior findings of safety and
effectiveness. If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this could delay
or even prevent the FDA from approving any Section 505(b)(2) application that we submit. In addition, we expect that our competitors will file citizens’
petitions with the FDA in an attempt to persuade the FDA that our product candidate, or the clinical studies that support their approval, contain
deficiencies. Such actions by our competitors could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2).
Moreover, the FDA recently adopted an interpretation of the three-year exclusivity provisions whereby a 505(b)(2) application can be blocked by
exclusivity even if does not rely on the previously approved drug that has exclusivity (or any safety or effectiveness information regarding that drug).
Under the FDA’s new interpretation, approval may be blocked by exclusivity awarded to a previously-approved drug product that shares certain innovative
features with our product, even if our 505(b)(2) application does not identify the previously-approved drug product as a listed drug or rely upon any of its
safety or efficacy data. Any failure to obtain regulatory approval of our product candidates would significantly limit our ability to generate sufficient
revenues, and any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenues.
An NDA submitted under Section 505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that would delay or prevent
the review or approval of our product candidate.
The 505(b)(2) application would enable us to reference published literature or the FDA’s previous findings of safety and effectiveness for the
branded reference drug. For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman
Act apply. In accordance with Hatch-Waxman Act, in seeking approval for a drug through such an NDA, applicants are required to list with the FDA each
patent whose claims cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the
FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in
turn, be cited by potential generic competitors in support of approval of an ANDA. An ANDA provides for marketing of a drug product that has the same
active ingredients in the same strengths and dosage form as the listed drug and has been shown to be bioequivalent to the listed drug. Other than the
requirement for bioequivalence testing, ANDA applicants are not required to conduct or submit results of pre-clinical or clinical tests to prove the safety or
effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug and can often be
substituted by pharmacists under prescriptions written for the original listed drug.
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The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book.
Specifically, the applicant must certify that either: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed
patent has not expired, but will expire on a particular date and approval is sought after patent expiration or (iv) the listed patent is invalid or will not be
infringed by the new product. The ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA label does not
contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant does not
challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.
A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid or
unenforceable, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also
send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent
holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. Under the Hatch-Waxman Act, the holder
of patents that the 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the Paragraph IV certification. Filing of a
patent infringement lawsuit against the filer of the 505(b)(2) applicant within 45 days of the patent owner’s receipt of notice triggers a one-time, automatic,
30-month stay of the FDA’s ability to approve the 505(b)(2) NDA, unless patent litigation is resolved in favor of the Paragraph IV filer or the patent expires
before that time. Accordingly, we may invest a significant amount of time and expense in the development of one or more product candidates only to be
subject to significant delay and patent litigation before such product candidates may be commercialized, if at all.
In addition, a 505(b)(2) application will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new
chemical entity listed in the Orange Book for the referenced product has expired. The FDA may also require us to perform one or more additional clinical
studies or measurements to support the change from the branded reference drug, which could be time-consuming and could substantially delay our
achievement of regulatory approvals for such product candidates. The FDA may also reject our future 505(b)(2) submissions and require us to file such
submissions under Section 505(b)(1) of the FDCA, which would require us to provide extensive data to establish safety and effectiveness of the drug for
the proposed use and could cause delay and be considerably more expensive and time-consuming. These factors, among others, may limit our ability to
successfully commercialize our product candidates.
Companies that produce branded reference drugs routinely bring litigation against ANDA or 505(b)(2) applicants that seek regulatory approval to
manufacture and market generic and reformulated forms of their branded products. These companies often allege patent infringement or other violations of
intellectual property rights as the basis for filing suit against an ANDA or 505(b)(2) applicant. Likewise, patent holders may bring patent infringement suits
against companies that are currently marketing and selling their approved generic or reformulated products. Litigation to enforce or defend intellectual
property rights is often complex and often involves significant expense and can delay or prevent introduction or sale of our product candidates. If patents
are held to be valid and infringed by our product candidates in a particular jurisdiction, we would, unless we could obtain a license from the patent holder,
be required to cease selling in that jurisdiction and may need to relinquish or destroy existing stock in that jurisdiction. There may also be situations where
we use our business judgment and decide to market and sell our approved products, notwithstanding the fact that allegations of patent infringement(s) have
not been finally resolved by the courts, which is known as an “at-risk launch.” The risk involved in doing so can be substantial because the remedies
available to the owner of a patent for infringement may include, among other things, damages measured by the profits lost by the patent owner and not
necessarily by the profits earned by the infringer. In the case of a willful infringement, the definition of which is subjective, such damages may be increased
up to three times. Moreover, because of the discount pricing typically involved with bioequivalent and, to a lesser extent, 505(b)(2) products, patented
branded products generally realize a substantially higher profit margin than bioequivalent and, to a lesser extent, 505(b)(2) products, resulting in
disproportionate damages compared to any profits earned by the infringer. An adverse decision in patent litigation could have a material adverse effect on
our business, financial position and results of operations and could cause the market value of our common stock to decline.
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Even if we receive regulatory approval for our additional product candidates, we may not be able to successfully commercialize these products, and the
revenue that we generate from those sales, if any, may be limited.
If approved for marketing, the commercial success of our product candidates will depend upon each product’s acceptance by the medical
community, including physicians, patients and health-care payors. The degree of market acceptance for any of our product candidates will depend on a
number of factors, including:
● demonstration of clinical safety and efficacy;
● relative convenience, dosing burden and ease of administration;
● the willingness of physicians to prescribe our product candidates, and the target patient population to try new therapies;
● efficacy of our product candidates compared to competing products;
● the introduction of any new products that may in the future become available targeting indications for which our product candidates may be
approved;
● new procedures or therapies that may reduce the incidences of any of the indications in which our product candidates may show utility;
● pricing and cost-effectiveness;
● the inclusion or omission of our product candidates in applicable therapeutic and vaccine guidelines;
● the effectiveness of our own or any future collaborators’ sales and marketing strategies;
● limitations or warnings contained in approved labeling from regulatory authorities;
● our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement from government health care programs,
including Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals from
government bodies regulating the pricing and usage of therapeutics; and
● the willingness of patients to pay out-of-pocket in the absence of third-party coverage or adequate reimbursement or government pricing
approvals.
If any of our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors, and patients,
we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-
party payors on the benefits of our product candidates may require significant resources and may never be successful.
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In addition, even if we obtain regulatory approvals for our product candidates, the timing or scope of any approvals may prohibit or reduce our
ability to commercialize our product candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and
give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be
limited or subject to restrictions or post-approval commitments that render our product candidates not commercially viable. For example, regulatory
authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge
for any of our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve any of our
product candidates with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication.
Further, the FDA or comparable foreign regulatory authorities may place conditions on approvals or require risk management plans or a REMS, to assure
the safe use of the drug. If the FDA concludes a REMS is needed, the FDA will not approve the NDA without an approved REMS, if required. A REMS
could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries
and other risk minimization tools. The FDA may also require a REMS for an approved product when new safety information emerges. Any of these
limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our product candidates. Moreover,
product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product. Any
of the foregoing scenarios could materially harm the commercial success of our product candidates.
We are subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product
candidates could be subject to labeling and other restrictions and withdrawal from the market, and we may be subject to penalties if we fail to comply
with regulatory requirements or if we experience unanticipated problems with our product candidates.
The FDA or foreign equivalent may still impose significant restrictions on our products indicated uses or the conditions of approval, or impose
ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to
monitor safety and efficacy. Our product candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling,
packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market
information. These requirements include registration with the FDA, as well as continued compliance with current GCP regulations for any clinical trials
that we conduct post-approval. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by
the FDA and other regulatory authorities for compliance with GMP requirements relating to quality control, quality assurance and corresponding
maintenance of records and documents.
The FDA has the authority to require a REMS as part of an NDA or after approval, which may impose further requirements or restrictions on the
distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training,
limiting treatment to patients who meet certain safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry.
With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in
addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the
distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must
obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through
our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and
similar state laws, which impact, among other things, our proposed sales, marketing and scientific/educational grant programs. If we participate in the U.S.
Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be
subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and
state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.
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In addition, if any of our product candidates are approved for a particular indication, our product labeling, advertising and promotion would be
subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about
prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved
labeling. However, companies may share truthful and not misleading information that is otherwise consistent with the product’s approved FDA labeling. If
we receive marketing approval for our product candidates, physicians may nevertheless legally prescribe our products to their patients in a manner that is
inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and government
fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to
have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against
companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that
companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.
If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or
frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable regulatory
requirements, we may be subject to the following administrative or judicial sanctions:
● restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product
recalls;
● issuance of warning letters or untitled letters;
● clinical holds;
● injunctions or the imposition of civil or criminal penalties or monetary fines;
● suspension or withdrawal of regulatory approval;
● suspension of any ongoing clinical trials;
● refusal to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license
approvals;
● suspension or imposition of restrictions on operations, including costly new manufacturing requirements; or
● product seizure or detention or refusal to permit the import or export of product.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue.
Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.
Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and
costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in
international markets and/or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential
of our product candidates will be harmed.
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Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products.
Various jurisdictions may seek to adopt significant additional product labeling or warning requirements or limitations on the availability of our
products relating to the content or perceived adverse health consequences of our products. Federal laws may preempt some or all of these attempts by state
or localities to impose additional labeling or warning requirements. If these types of requirements become applicable to our products under current or future
environmental or health laws or regulations, they may inhibit sales of our products. Moreover, if we fail to meet compliance deadlines for any such new
requirements, our products may be deemed misbranded or mislabeled and could be subject to enforcement action, or we could be exposed to private
lawsuits alleging misleading labels or product promotion.
Current and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates
and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes
regarding the health care system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and
affect our ability to profitably sell our product candidates. Legislative and regulatory proposals have been made to expand post-approval requirements and
restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the
FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if
any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as
well as subject us to more stringent product labeling and post-marketing testing and other requirements. For additional information on legislative and
regulatory changes, see the Item 1. Business—Healthcare Reform section.
In the United States, the Medicare Modernization Act (“MMA”) changed the way Medicare covers and pays for pharmaceutical products. The
legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices
for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that
will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be
additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and
price that we receive for our product candidates and could seriously harm our business. While the MMA applies only to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in
reimbursement that results from the MMA may result in a similar reduction in payments from private payors.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively
referred to as the Health Care Reform Law, was enacted, which substantially changes the way health care is financed by both governmental and private
insurers, and significantly impacts the U.S. pharmaceutical industry. The Health Care Reform Law, among other things, imposed reporting requirements on
manufacturers related to drug samples and financial relationships with physicians and teaching hospitals, increased the minimum Medicaid rebates owed by
manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations,
established annual fees on manufacturers of certain branded prescription drugs, and established a Medicare Part D coverage gap discount program.
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Some of the provisions of the Health Care Reform Law have yet to be implemented, and there have been judicial and Congressional challenges to
certain aspects of the Health Care Reform Law, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Health Care
Reform Law. Since January 2017, former President Trump had signed two executive orders and other directives designed to delay, circumvent or loosen
certain requirements mandated by the Health Care Reform Law. Concurrently, Congress has considered legislation that would repeal or repeal and replace
all or part of the Health Care Reform Law. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of
certain taxes under the Health Care Reform Law have been signed into law. The Tax Act included a provision which repealed, effective January 1, 2019,
the tax-based shared responsibility payment imposed by the Health Care Reform Law on certain individuals who fail to maintain qualifying health
coverage for all or part of a year that is commonly referred to as the “individual mandate.” On January 22, 2018, former President Trump signed a
continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Health Care Reform Law-mandated fees, including
the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based
on market share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, among other things, amended the
Health Care Reform Law, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers
who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. On December
14, 2018, a Texas U.S. District Court Judge ruled that the Health Care Reform Law is unconstitutional in its entirety because the “individual mandate” was
repealed by Congress as part of the Tax Act. In June 2021, the U.S. Supreme Court overturned the 2018 Texas U.S. District Court decision. It is unclear
how subsequent appeals, and other efforts to repeal and replace the Health Care Reform will impact our business. We cannot predict the impact on our
business of changes to current laws and regulations. However, any changes that lower reimbursements for products for which we may obtain regulatory
approval, or that impose administrative and financial burdens on us, could adversely affect our business.
In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. These
changes include, among others, aggregate reductions of Medicare payments to providers of up to 2% per fiscal year. We expect that additional state and
federal health care reform measures will be adopted in the future, which may alter or completely replace the existing health care financing structure. Any of
these reform measures could limit the amounts that federal and state governments will pay for health care products and services, which could result in
reduced demand for any such product candidate that we may have developed or additional pricing pressures on our business.
Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of
prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation
designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs,
and reform government program reimbursement methodologies for products. For example, the Trump administration released a “Blueprint” to lower drug
prices and reduce out-of-pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power
of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out-of-pocket costs of drug
products paid by consumers. On January 31, 2019, the U.S. Department of Health and Human Services, Office of Inspector General, proposed
modifications to the federal Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among
other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit
managers working with these organizations. While some of these and other proposed measures may require additional authorization to become effective,
Congress and government administration officials have each indicated that they will continue to seek new legislative and/or administrative measures to
control drug costs.
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The policies of the FDA or similar regulatory authorities may change, and additional government regulations may be enacted that could prevent,
limit or delay regulatory approval of our product candidates. For example, in December 2016, the 21st Century Cures Act was signed into law. The
21st Century Cures Act, among other things, is intended to modernize the regulation of drugs and biologics and spur innovation, but it has not yet been
fully implemented and its ultimate implementation is unclear. Furthermore, the Trump administration has taken several executive actions, including the
issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine
regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing
applications. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course,
our business may be negatively impacted. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or
policies, or if we are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval that may have been obtained and
we may not achieve or sustain profitability, which would adversely affect our business.
If we market our existing approved products or any of our new product candidates in a manner that violates health care fraud and abuse laws, or if we
violate government price reporting laws, we may be subject to civil or criminal penalties.
The FDA enforces laws and regulations, which require that the promotion of pharmaceutical products be consistent with the approved prescribing
information. While physicians may prescribe an approved product for a so-called “off label” use, it is unlawful for a pharmaceutical company to promote
its products in a manner that is inconsistent with its approved label and any company which engages in such conduct can be subject to significant liability.
Similarly, industry codes in the EU and other foreign jurisdictions prohibit companies from engaging in off-label promotion and regulatory agencies in
various countries enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are consistent with our label,
regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute other civil or criminal enforcement
proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal health care fraud and abuse
laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include, among others, the U.S.
Anti-Kickback Statute, U.S. False Claims Act and similar state laws. Because of the breadth of these laws and the narrowness of their exceptions and safe
harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws.
The U.S. Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to
induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under
Medicare, Medicaid or other federally financed health care programs. This statute has been interpreted broadly to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers, purchasers, formulary managers, and others on the other hand. Although there are several
statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution, the exceptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not
qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does
not make the conduct per se illegal under the Federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case
basis based on a cumulative review of all of its facts and circumstances. Our practices may not, in all cases, meet all of the criteria for safe harbor
protection from anti-kickback liability. Moreover, recent health care reform legislation has strengthened these laws. For example, the Health Care Reform
Law, among other things, amended the intent requirement of the U.S. Anti-Kickback Statute and other criminal health care fraud statutes; a person or entity
no longer needs to have actual knowledge of the statutes or specific intent to violate them in order to have committed a violation. In addition, the Health
Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the U.S. Anti-Kickback
Statute constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act. Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement
to get a false claim paid.
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Over the past few years, several pharmaceutical and other health care companies have been prosecuted under these laws for a variety of alleged
promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to
prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in
off-label promotion that caused claims to be submitted to Medicare or Medicaid for non-covered, off-label uses; and submitting inflated best price
information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the U.S. Anti-
Kickback Statute and the U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Sanctions under these federal and state laws may include significant administrative, criminal, and civil monetary
penalties, exclusion of a manufacturer’s products from reimbursement under government programs, fines and imprisonment. Due to the breadth of these
federal and state anti-kickback laws, and the potential for additional legal or regulatory change in this area, it is possible that our future business activities,
including our sales and marketing practices and/or our future relationships with physicians and the medical community might be challenged under anti-
kickback laws, which could harm us.
We are completely dependent on third parties to manufacture our approved products and new product candidates, and our commercialization of our
product candidates could be halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or
comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our product candidates or fail to do so at acceptable quality
levels or prices.
We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the API in our product candidates for use in
our clinical trials or for commercial product, if any. In addition, we do not have the capability to encapsulate any of our product candidates as a finished
drug product for commercial distribution. As a result, we will be obligated to rely on contract manufacturers, if and when any of our product candidates are
approved for commercialization. While we have entered into certain agreements with contract manufacturers for clinical and commercial supply, there can
be no assurance we will be able to maintain those relationships or engage additional contract manufacturers for clinical or commercial supply of any of our
product candidates on favorable terms to us, or at all.
The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA or comparable foreign
regulatory authorities pursuant to inspections that will be conducted after we submit an NDA to the FDA or their equivalents to other relevant regulatory
authorities. We will not control the manufacturing process of, and will be completely dependent on, our contract manufacturing partners for compliance
with GMPs for manufacture of both active drug substances and finished drug products. These GMP regulations cover all aspects of the manufacturing,
testing, quality control and record keeping relating to our product candidates. If our contract manufacturers do not successfully manufacture material that
conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure or maintain regulatory approval
for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our
product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly
impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.
Our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies
for compliance with GMPs and similar regulatory requirements. We will not have control over our contract manufacturers’ compliance with these
regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on
us, including fines, injunctions, civil penalties, failure to grant approval to market any of our product candidates, delays, suspensions or withdrawals of
approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. In addition, we will not have
control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our
contract manufacturers to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for or
market any of our product candidates.
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If, for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, and we may
not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we cannot be certain that any such third
parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product
experiences any significant difficulties in its respective manufacturing processes for our API or finished products or should cease doing business with us,
we could experience significant interruptions in the supply of any of our product candidates or may not be able to create a supply of our product candidates
at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of any of our product candidates might be negatively affected.
Our inability to coordinate the efforts of our third-party manufacturing partners, or the lack of capacity available at our third-party manufacturing partners,
could impair our ability to supply any of our product candidates at required levels. Because of the significant regulatory requirements that we would need
to satisfy in order to qualify a new bulk or finished product manufacturer, if we face these or other difficulties with our current manufacturing partners, we
could experience significant interruptions in the supply of any of our product candidates if we decided to transfer the manufacture of any of our product
candidates to one or more alternative manufacturers in an effort to deal with the difficulties.
Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally, we
rely on third parties to supply the raw materials needed to manufacture our potential products. Any reliance on suppliers may involve several risks,
including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any
unanticipated disruption to a contract manufacturer caused by problems at suppliers could delay shipment of any of our approved products or product
candidates in development, increase our cost of goods sold and result in lost sales.
We cannot guarantee that our future manufacturing and supply partners will be able to reduce the costs of commercial-scale manufacturing of any
of our product candidates over time. If the commercial-scale manufacturing costs of any of our product candidates are higher than expected, these costs
may significantly impact our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order
to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by
such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We
also cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize
output, we may not be able to reduce our costs over time.
We may not be able to establish agreements with third parties with whom we wish to collaborate and, if we are able to establish them, we may not be
able to establish them on commercially reasonable terms, which could result in alterations or delays of our development and commercialization plans.
We face significant competition in seeking appropriate third parties to assist us in our business operations. Whether we reach a definitive
agreement will depend, among other things, upon our assessment of the third parties’ resources and expertise, the terms and conditions of the proposed
agreement, and the proposed parties’ evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of
approval by the FDA or similar regulatory authorities outside the United States, the potential market for the product candidate, the costs and complexities
of manufacturing and delivering the product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our
ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market
conditions generally. Potential third parties may also consider alternative product candidates or technologies for similar indications that may be available to
collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any arrangements
that we may establish may also not be favorable to us.
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Agreements with third parties are complex and time-consuming to negotiate and document. In addition, there have been a significant number of
recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future third parties to assist us in
our business operations. We may not be able to negotiate agreements on a timely basis, on acceptable terms or at all. If we are unable to do so, we may
have to curtail the development of the product candidate, reduce or delay its development program, delay its potential commercialization or reduce the
scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If
we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may
not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidate or bring
it to market and generate product revenue.
In addition, any future agreements that we enter into may not be successful. The success of our arrangements will depend heavily on the efforts
and activities of our third-party collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will
apply to these collaborations. Disagreements between parties to an agreement regarding clinical development and commercialization matters can lead to
delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the agreement. These
disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology
companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us
financially and could harm our business reputation.
We may need to rely on third parties to conduct clinical trials for our future product candidates. If these third parties do not successfully carry out their
contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our product candidates
and our business would be substantially harmed.
We have entered into agreements with third-party CROs to conduct and manage our clinical programs including contracting with clinical sites to
perform our clinical studies. We plan to rely heavily on these parties for execution of clinical studies for our product candidates and will control only
certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable
protocol, legal, regulatory and scientific standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and
our CROs will be required to comply with GCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities
for any products in clinical development. The FDA and its foreign equivalents enforce these GCP regulations through periodic inspections of trial sponsors,
principal investigators and trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be
deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our
marketing applications. We cannot assure you that, upon inspection, the FDA or other regulatory authorities will determine that any of our clinical trials
comply with GCPs. In addition, our clinical trials must be conducted with products produced under GMP regulations and will require a large number of test
subjects. Our failure or the failure of our CROs or clinical sites to comply with these regulations may require us to repeat clinical trials, which would delay
the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
Although we intend to design the clinical trials for our product candidates in consultation with CROs, we expect that the CROs will manage all of
the clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs would be outside of our
direct control. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements with us or in compliance with regulatory
requirements. If the CROs or clinical sites do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with
regulatory requirements, the development and commercialization of any of our product candidates for the subject indication may be delayed or our
development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs and clinical sites will devote
to our program or any of our product candidates. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the
duration of, or increase the size of our clinical trials, which could significantly delay commercialization and require significantly greater expenditures.
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If any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements with alternative
CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced
or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or
for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully
commercialize our product candidates. As a result, our financial results and the commercial prospects for any of our product candidates would be harmed,
our costs could increase and our ability to generate revenue could be delayed.
We enter into various contracts in the normal course of our business, some or all of which may require us to indemnify the other party to the contract.
In the event we have to perform under these indemnification provisions, it could have an adverse effect on our business, financial condition and results
of operations.
In the normal course of business, we periodically may enter into commercial, service, collaboration, licensing, consulting and other agreements
that contain indemnification provisions. With respect to our commercial agreements, vendors typically ask for indemnification from any third-party product
liability claims that could result from the production, use or consumption of the product, as well as for alleged infringements of any patent or other
intellectual property right by a third party. Should our obligation under an indemnification provision exceed applicable insurance coverage or if we were
denied insurance coverage, our business, financial condition and results of operations could be adversely affected. Similarly, if we are relying on a third
party to indemnify us and the party is denied insurance coverage, or the indemnification obligation exceeds the applicable insurance coverage and does not
have other assets available to indemnify us, our business, financial condition and results of operations could be adversely affected.
Any termination or suspension of, or delays in the commencement or completion of, any necessary studies of any of our product candidates for any
indications could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.
The commencement and completion of clinical studies can be delayed for a number of reasons, including delays related to:
● the FDA or a comparable foreign regulatory authority failing to grant permission to proceed and placing the clinical study on hold;
● subjects for clinical testing failing to enroll or remain in our trials at the rate we expect;
● a facility manufacturing any of our product candidates being ordered by the FDA or other government or regulatory authorities to temporarily
or permanently shut down due to violations of GMP requirements or other applicable requirements, or cross-contaminations of product
candidates in the manufacturing process;
● any changes to our manufacturing process that may be necessary or desired;
● subjects choosing an alternative treatment for the indications for which we are developing our product candidates, or participating in
competing clinical studies;
● subjects experiencing severe or unexpected drug-related adverse effects;
● reports from clinical testing on similar technologies and products raising safety and/or efficacy concerns;
● third-party clinical investigators losing their license or permits necessary to perform our clinical trials, not performing our clinical trials on our
anticipated schedule or employing methods consistent with the clinical trial protocol, GMP requirements, or other third parties not performing
data collection and analysis in a timely or accurate manner;
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● inspections of clinical study sites by the FDA, comparable foreign regulatory authorities, or IRBs finding regulatory violations that require us
to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire study,
or that prohibit us from using some or all of the data in support of our marketing applications;
● third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for
violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any
of the data produced by such contractors in support of our marketing applications;
● one or more IRBs refusing to approve, suspending or terminating the study at an investigational site, precluding enrollment of additional
subjects, or withdrawing its approval of the trial; reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the
terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
● deviations of the clinical sites from trial protocols or dropping out of a trial;
● adding new clinical trial sites;
● the inability of the CRO to execute any clinical trials for any reason; and
● government or regulatory delays or “clinical holds” requiring suspension or termination of a trial.
Product development costs for any of our product candidates will increase if we have delays in testing or approval or if we need to perform more
or larger clinical studies than planned. Additionally, changes in regulatory requirements and policies may occur and we may need to amend study protocols
to reflect these changes. Amendments may require us to resubmit our study protocols to the FDA, comparable foreign regulatory authorities, and IRBs for
reexamination, which may impact the costs, timing or successful completion of that study. If we experience delays in completion of, or if we, the FDA or
other regulatory authorities, the IRB, or other reviewing entities, or any of our clinical study sites suspend or terminate any of our clinical studies of any of
our product candidates, its commercial prospects may be materially harmed and our ability to generate sufficient product revenues will be delayed. Any
delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to generate
sufficient revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that
cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical studies may also ultimately lead to the denial of
regulatory approval of our product candidates. In addition, if one or more clinical studies are delayed, our competitors may be able to bring products to
market before we do, and the commercial viability of any of our product candidates could be significantly reduced.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results.
Clinical testing of drug product candidates is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can
occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the results of later-
stage clinical trials. We cannot assure you that the FDA or comparable foreign regulatory authorities will view the results as we do or that any future trials
of any of our product candidates will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired safety and
efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry
have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier
trials. Any future clinical trial results for our product candidates may not be successful.
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In addition, a number of factors could contribute to a lack of favorable safety and efficacy results for any of our product candidates. For example,
such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and
surgical technique, and due to varying patient characteristics including demographic factors and health status.
We may need to conduct clinical trials for our new product candidates and we may be delayed in commercializing or fail to find success in these
trials. Further, the results of any clinical trial may not be predictive of future trial results. Positive results in preclinical testing and early clinical trials do not
ensure that later clinical trials will be successful. A number of pharmaceutical companies have suffered significant setbacks in clinical trials, including in
Phase 3, after promising results in preclinical testing and early clinical trials. These setbacks have included negative safety and efficacy observations in
later clinical trials, including previously unreported adverse events.
Phase 3 clinical trials often produce unsatisfactory results even though prior clinical trials were successful. Moreover, the results of clinical trials
may be unsatisfactory to the FDA or foreign regulatory authorities even if we believe those clinical trials to be successful. The FDA or applicable foreign
regulatory agencies may suspend one or all of our clinical trials or require that we conduct additional clinical, nonclinical, manufacturing, validation or
drug product quality studies and submit that data before considering or reconsidering any NDA or similar foreign regulatory application we may submit.
Depending on the extent of these additional studies, approval of any applications that we submit may be significantly delayed or may require us to expend
more resources than we have available. It is also possible that additional studies we conduct may not be considered sufficient by the FDA or applicable
foreign regulatory agencies to provide regulatory approval.
If any of these outcomes occur, we may not receive approval for our product candidate.
We are subject to extensive laws and regulations related to data privacy, and our failure to comply with these laws and regulations could harm our
business.
We are subject to data privacy and security laws and regulations by both the federal government and the states in which we conduct our business.
HIPAA and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, govern our processing of personal
data, including the collection, access, use, analysis, modification, storage, transfer, security breach notification, destruction and disposal of personal data.
There are foreign and state law versions of these laws and regulations to which we are currently and/or may in the future, be subject. For example, the
collection and use of personal health data in the European Union is governed by the GDPR. The GDPR, which is wide-ranging in scope, imposes several
requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and
confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of personal data. The
GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, provides an enforcement authority and
imposes large monetary penalties for noncompliance. The GDPR requirements apply not only to third-party transactions, but also to transfers of
information within our company, including employee information.
In the United States, there are numerous privacy laws that may be applicable to our activities, and a range of enforcement agencies at both the
state and federal levels that can review companies for privacy and data security concerns based on general consumer protection laws. New laws also are
being considered or have been implemented at both the state and federal levels. For example, the California Consumer Privacy Act of 2018 (effective on
January 1, 2020), as amended by the California Privacy Rights and Enforcement Act of 2020 (effective on January 1, 2023) (“CCPA”), requires companies
that process information of California residents (“consumers,” as defined under the CCPA) to make specific disclosures about their data collection, use and
disclosure practices, provides consumers with individual data privacy rights, including enabling consumers to limit the use of their sensitive personal
information, imposes new operational requirements for covered businesses, imposes data retention limitations, provides a private right of action for data
breaches, creates a statutory damages framework and creates a new state agency, the California Privacy Protection Agency, that is vested with the authority
to implement and enforce the CCPA. Although there are limited exemptions for clinical trial data under the CCPA, the CCPA and other similar laws could
impact our business activities in the future depending on our revenue growth, how much consumer data we process, and how such laws are interpreted.
Additionally, four additional states have enacted privacy laws, which could increase our potential liability and adversely affect our business in the future. In
particular, the Virginia Consumer Data Protection Act (“VCDPA”) became effective on January 1, 2023; the Colorado Privacy Act (“CPA”) and the
Connecticut Data Privacy Act (“CTDPA”) will become effective on July 1, 2023; and the Utah Consumer Privacy Act (“UCPA”) will become effective on
December 31, 2023. While these regulations incorporate many similar concepts to the CCPA, there are also several key differences in their scope,
application, and enforcement that will, among other things, impact how regulated businesses collect and process personal sensitive data, conduct data
protection assessments, transfer personal data to affiliates, and respond to consumer rights requests. Other states are considering similar legislation and a
broad range of legislative measures also have been introduced at the federal level. Such proposed legislation, if enacted, may add additional complexity,
variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the
availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies. The existence of
comprehensive privacy laws in different states in the country makes our compliance obligations more complex and costly and may increase the likelihood
that we may be subject to enforcement actions or otherwise incur liability for noncompliance.
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Further, regulations promulgated pursuant to HIPAA imposes privacy, security and breach notification obligations on certain healthcare providers,
health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates that perform certain services that involve
creating, receiving, maintaining or transmitting individually identifiable health information for or on behalf of such covered entities, and their covered
subcontractors. HIPAA establishes privacy and security standards that limit the use and disclosure of individually identifiable health information and
protected health information, or PHI, and requires the implementation of administrative, physical, and technological safeguards to protect the privacy of
PHI and ensure the confidentiality, integrity, and availability of electronic PHI. Most healthcare providers, including research institutions from which we
obtain patient health information, are subject to privacy and security regulations promulgated under HIPAA. We do not believe that we are currently acting
as a covered entity or business associate under HIPAA and thus are not directly subject to its requirements or penalties. However, any person may be
prosecuted under HIPAA’s criminal provisions either directly or under aiding-and-abetting or conspiracy principles. Consequently, depending on the facts
and circumstances, we could face substantial criminal penalties if we knowingly receive individually identifiable health information from a HIPAA-covered
healthcare provider or research institution that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health information.
The global legislative and regulatory landscape for privacy and data protection continues to evolve, and implementation standards and
enforcement practices are likely to remain uncertain for the foreseeable future. This evolution may create uncertainty in our business, result in liability or
impose additional costs on us. The cost of compliance with these laws, regulations and standards is high and is likely to continue to increase in the future.
It is possible that privacy laws may be interpreted and applied in a manner that is inconsistent with our practices. Any failure or perceived failure
by us to comply with federal, state, or foreign laws or self-regulatory standards could result in negative publicity, diversion of management time and effort
and proceedings against us by governmental entities or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising.
As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we
conduct business.
In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with evolving
laws and regulations at the federal and state level may be costly and require ongoing modifications to our policies, procedures and systems. Further, any
failure by our third-party collaborators, service providers, contractors or consultants to comply with applicable law, regulations or contractual obligations
related to data privacy or security could result in proceedings against us by governmental entities or others.
We may also publish privacy policies and other documentation regarding our collection, processing, use and disclosure of personal information
and/or other confidential information. Although we endeavor to comply with applicable regulations, our published policies and other documentation, we
may at times fail to do so or may be perceived to have failed to do so. Despite our efforts, we may not be successful in achieving compliance if our
employees or vendors fail to comply with our published policies and documentation. Such failures can subject us to potential international, local, state and
federal action if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Claims that we have violated individuals’ privacy rights
or failed to comply with data protection laws or applicable privacy notices, even if we are not found liable, could be expensive and time-consuming to
defend and could result in adverse publicity that could harm our business. We also face a threat of consumer class actions related to these laws and the
overall protection of personal information. Even if we are not determined to have violated these laws, government investigations into these issues typically
require the expenditure of significant resources and generate negative publicity, which could harm our reputation and our business, financial condition,
results of operations or prospects.
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Risks Relating to Our Intellectual Property Rights
We will depend on rights to certain pharmaceutical compounds that have been acquired by us. We do not have complete control over these
pharmaceutical compounds and any loss of our rights to them could prevent us from selling our products.
We are dependent on the assignment and licensing from third parties for certain of our pharmaceutical compounds and potential product
candidates. Our rights to use the pharmaceutical compounds we were assigned are subject to the negotiation of, continuation of and compliance with the
terms of those assignments and licenses. Moreover, under these agreements, any related patents may remain under the control of the assignor or licensor.
Our rights to develop and commercialize the product candidates are subject to the validity of the intellectual property rights. Enforcement of any assigned
or licensed patents or defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of the assignor or licensor.
Legal action could be initiated against the original owners of the intellectual property that we acquired and an adverse outcome in such legal action could
harm our business because it might prevent such companies or institutions from continuing to assign intellectual property that we may need to operate our
business.
In addition, our rights to practice the inventions claimed in any patents and patent applications are subject to our assignors and licensors abiding
by the terms of those agreements and not terminating them. These agreements may be terminated by the assignor or licensor if we are in material breach of
certain terms or conditions of the agreement or in certain other circumstances. Our rights under these agreements are subject to our continued compliance
with the terms of the agreements, including the payment of royalties and other payment due under the agreements. Termination of these agreements could
prevent us from marketing some or all of our products. Because of the complexity of our products and the patents, determining the scope of the assignment
or license and related royalty obligations can be difficult and can lead to disputes between us and the assignor or licensor. An unfavorable resolution of
such a dispute could lead to an increase in the royalties payable pursuant to the agreement. If the assignor or licensor believed we were not paying the
royalties due under the agreement or were otherwise not in compliance with the terms of the agreement, the assignor or licensor might attempt to revoke the
agreement. If such an attempt were successful, we might be barred from producing and selling some or all of our products.
It may be difficult and costly to protect our intellectual property rights, and we cannot ensure the protection of these rights.
Our commercial success depends, in part, on obtaining and maintaining patent protection for our technologies, products and processes,
successfully defending these patents against third-party challenges and successfully enforcing these patents against third-party competitors. Proprietary
rights relating to our current and potential products will be protected from unauthorized use by third parties only to the extent that they are covered by valid
and enforceable patents or are effectively maintained as trade secrets. Patents owned by or licensed to us may not afford protection against competitors, and
our pending patent applications now or hereafter filed by or licensed to us may not result in patents being issued.
Our patents or patent applications, or those licensed to us, if issued, may be challenged, invalidated or circumvented, and the rights granted
thereunder may not provide proprietary protection or competitive advantages to us against competitors with similar technology. Furthermore, our
competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for
development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent
may expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent, which could adversely
affect our ability to protect future product development and, consequently, our operating results and financial position.
If we cannot maintain the confidentiality of our proprietary technology and other confidential information, our ability to receive patent protection
and our ability to protect valuable information owned by us may be imperiled. Litigation may be necessary to assert claims of infringement, to enforce
patents issued to us, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietary rights of others. In addition,
interference, derivation, post-grant oppositions, and similar proceedings may be necessary to determine rights to inventions in our patents and patent
applications. Litigation or similar proceedings could result in substantial costs to and diversion of effort by us and could have a material adverse effect on
our business, financial condition and results of operations. These efforts by us may not be successful.
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Additionally, if we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering any product
candidate, the defendant could counterclaim that the patent covering any other product candidate is invalid and/or unenforceable. In patent litigation in the
United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged
failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions
include allegations that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement,
during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of
litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings.
Such proceedings could result in revocation or amendment of our patents or our licensors’ patents in such a way that they no longer cover product
candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for
example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant
were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on any product
candidate. Such a loss of patent protection would have a material adverse impact on our business.
We also rely on our know-how, trade secrets, and continuing technological innovation to develop and maintain our proprietary position. However,
know-how and trade secrets are difficult to protect. While we require and continue to intend to require employees, academic collaborators, consultants and
other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary or licensed
information. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use
intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively
expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those offered in the United States.
Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or
importing products made using our inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we do not have, or where we do not pursue and obtain, patent protection to develop
their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as
that in the United States. These products may compete with our product and our patents or other intellectual property rights may not be effective or
sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual
property rights may not be effective or sufficient to prevent third parties from so competing.
Further, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many
companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems
of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those
relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other
intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third
parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In
these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an
expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we
will not have the benefit of patent protection in such countries.
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Moreover, proceedings to enforce our patent rights, or those of our licensors or partners, in foreign jurisdictions could result in substantial costs
and divert our efforts and attention from other aspects of our business, could put our in-licensed patents, or any patents that we may own in the future, at
risk of being invalidated or interpreted narrowly, could put our owned or in-licensed patent applications at risk of not issuing and could provoke third
parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be
commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop or license.
If we fail to obtain or maintain patent protection or trade secret protection for our product candidates or our technologies, third parties could use
our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and attain
profitability.
We may also rely on the trademarks we may develop to distinguish our products from the products of our competitors. We cannot guarantee that
any trademark applications filed by us or our business partners will be approved. Third parties may also oppose such trademark applications, or otherwise
challenge our use of the trademarks. In the event that the trademarks we use are successfully challenged, we could be forced to rebrand our products, which
could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot provide
assurance that competitors will not infringe the trademarks we use, or that we will have adequate resources to enforce these trademarks.
Changes in either U.S. patent law or interpretation of such laws could diminish the value of patents in general, thereby impairing our ability to protect
our products.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and
enforcing patents in the biotechnology industry involve both technological and legal complexity, and it therefore is costly, time-consuming and inherently
uncertain. In addition, on September 16, 2011, the Leahy-Smith America Invents Act (“AIA”), was signed into law. The AIA includes a number of
significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.
An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding
which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that
files a patent application in the U.S. PTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had
made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent
application.
Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing
opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16,
2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in the USPTO proceedings compared to the evidentiary standard in
U.S. federal court, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though
the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the
USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district
court action.
Depending on decisions by the U.S. Congress, the federal courts, the USPTO, or similar authorities in foreign jurisdictions, the laws and
regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing in-licensed
patents and patents that we might obtain in the future.
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Our product candidates may infringe the intellectual property rights of others, which could increase our costs and delay or prevent our development
and commercialization efforts.
Our success depends in part on avoiding infringement of the proprietary technologies of others. The pharmaceutical industry has been
characterized by frequent litigation regarding patent and other intellectual property rights. Identification of third-party patent rights that may be relevant to
our proprietary technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the
difficulty in assessing the meaning of patent claims. Additionally, because patent applications are maintained in secrecy until the application is published,
we cannot be certain that we were the first to make inventions or file for protection of inventions set forth in our patents or patent applications. There may
also be issued patents and patent applications claiming subject matter that we may be required to license in order to research, develop or commercialize any
of our product candidates, and we do not know if such patents and patent applications would be available to license on commercially reasonable terms, or
at all. Any claims of patent infringement asserted by third parties would be time-consuming and may:
● result in costly litigation;
● divert the time and attention of our technical personnel and management;
● prevent us from commercializing a product until the asserted patent expires or is held finally invalid or not infringed in a court of law;
● require us to cease or modify our use of the technology and/or develop non-infringing technology; or
● require us to enter into royalty or licensing agreements.
Third parties may hold proprietary rights that could prevent any of our product candidates from being marketed. Any patent-related legal action
against us claiming damages and seeking to enjoin commercial activities relating to any of our product candidates or our processes could subject us to
potential liability for damages and require us to obtain a license to continue to manufacture or market any of our product candidates or any future product
candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made
available on commercially acceptable terms, if at all. In addition, we cannot be sure that we could redesign our product candidates or any future product
candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure
to obtain necessary licenses, could prevent us from developing and commercializing any of our product candidates or a future product candidate, which
could harm our business, financial condition and operating results.
We expect that there are other companies, including major pharmaceutical companies, working in the areas competitive to our proposed product
candidates which either has resulted, or may result, in the filing of patent applications that may be deemed related to our activities. If we were to challenge
the validity of these or any issued U.S. patent in court, we would need to overcome a statutory presumption of validity that attaches to every issued U.S.
patent. This means that, in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. If we were to
challenge the validity of these or any issued U.S. patent in an administrative trial before the Patent Trial and Appeal Board in the USPTO, we would have
to prove that the claims are unpatentable by a preponderance of the evidence. There is no assurance that a jury and/or court would find in our favor on
questions of infringement, validity or enforceability.
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Others may claim an ownership interest in our intellectual property, which could expose us to litigation and have an adverse effect on our prospects.
A third party may claim an ownership interest in one or more of our or our licensors’ patents or other proprietary or intellectual property rights. A
third party could bring legal actions against us and seek monetary damages and/or enjoin clinical testing, manufacturing and marketing of the affected
product or products. We cannot guarantee that a third party will not assert a claim or an interest in any of such patents or intellectual property. If we become
involved in any litigation, it could consume a substantial portion of our resources, and cause a significant diversion of effort by our technical and
management personnel. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license to
continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents.
We cannot, however, assure you that any such license will be available on acceptable terms, if at all. Ultimately, we could be prevented from
commercializing a product candidate, or be forced to cease some aspect of our business operations as a result of claims of patent infringement or violation
of other intellectual property rights. Further, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in
advance, including the demeanor and credibility of witnesses and the identity of any adverse party. This is especially true in intellectual property cases that
may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or
disclosed alleged confidential information or trade secrets of their former employers.
As is commonplace in our industry, we will employ individuals who were previously employed at other pharmaceutical companies, including our
competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future to claims that our employees or
prospective employees are subject to a continuing obligation to their former employers (such as non-competition or non-solicitation obligations) or claims
that our employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers.
Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial
costs and be a distraction to management.
Risks Related to Owning Our Common Stock
An active, liquid and orderly trading market for our shares may not continue to be developed or sustained.
Our common stock is listed on the Nasdaq Global Market. However, trading volume has been limited and a more active public market for our
common stock may not develop or be sustained over time. The market price of our common stock could be subject to significant fluctuations. The price of
our stock may change in response to variations in our operating results and also may change in response to other factors, including factors specific to
companies in our industry many of which are beyond our control. Our shares may be less liquid than the shares of other public companies and there may be
imbalances between supply and demand for our shares. As a result, our share price may experience significant volatility and may not necessarily reflect the
value of our expected performance. Moreover, sales of our common stock in the public market, or the perception that such sales could occur, could
negatively impact the price of our common stock. As a result, you may not be able to sell your shares of our common stock in short time periods, or
possibly at all, and the price per share of our common stock may fluctuate significantly.
Future capital raises may dilute our existing stockholders’ ownership, could depress the market price for our common stock and have other adverse
effects on our operations.
We have an effective Form S-3 registration statement (“Shelf Registration”) on file with the SEC which allows us to sell any combination of
common stock, preferred stock, debt securities, warrants to purchase any of these securities, subscription rights to purchase any of these securities, and/or
units consisting of one or more of the foregoing in one or more offerings up to a total dollar amount of $100 million (including the $22.5 million raised in
our October 2020 offering of common stock). The issuance of additional shares of our common stock pursuant to the Shelf Registration, or issuances of
securities convertible into or exercisable for our common stock or other equity-linked securities, including preferred stock, warrants, debt securities or
units, would dilute the ownership interest of our common shareholders and could depress the market price of our common stock and impair our ability to
raise capital through the sale of additional equity securities. If we raise additional funds by issuing debt securities, these debt securities would have rights
senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions on our operations, including liens on
our assets. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies
or candidate products, or to grant licenses on terms that are not favorable to us.
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The trading price of the shares of our common stock may continue to be volatile, and purchasers of our common stock could incur substantial losses.
The trading price of our common stock has fluctuated significantly in the past and is likely to be volatile. The stock market in general, and early
stage public companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The stock market in general has been, and the market price of our shares in particular will likely be, subject to
fluctuation, whether due to, or irrespective of, our operating results and financial condition. The market price of our shares on the Nasdaq Global Market
may fluctuate as a result of a number of factors, some of which are beyond our control, including, but not limited to:
● actual or anticipated variations in our and our competitors’ results of operations and financial condition;
● market acceptance of our products;
● the mix of products that we sell and related services that we provide;
● changes in earnings estimates or recommendations by securities analysts, if our shares are covered by analysts;
● not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley
Act”);
● changes in earnings estimates or recommendations by securities analysts, if our shares are covered by analysts;
● development of technological innovations or new competitive products by others;
● announcements of technological innovations or new products by us;
● publication of the results of preclinical or clinical trials for our other product candidates;
● failure by us to achieve a publicly announced milestone;
● delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products;
● developments concerning intellectual property rights, including our involvement in litigation brought by or against us;
● regulatory developments and the decisions of regulatory authorities as to the approval or rejection of new or modified products;
● changes in the structure of healthcare payment systems;
● changes in the amounts that we spend to develop, acquire or license new products, technologies or businesses;
● changes in our expenditures to promote our products;
● our sale or proposed sale, or the sale by our significant stockholders, of our shares or other securities in the future;
● changes in key personnel;
● success or failure of our research and development projects or those of our competitors;
● the trading volume of our shares; and
● general economic and market conditions and other factors, including factors unrelated to our operating performance.
These factors and any corresponding price fluctuations may materially and adversely affect the market price of our shares and result in substantial
losses being incurred by our investors. In the past, following periods of market volatility, public company stockholders have often instituted securities class
action litigation. If we were involved in securities litigation, it could impose a substantial cost upon us and divert the resources and attention of our
management from our business.
We are a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will
make our common stock less attractive to investors.
We are a “smaller reporting company” pursuant to the Securities Exchange Act of 1934. As a smaller reporting company, we are permitted and
plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not smaller reporting companies.
These exemptions include, but are not limited to, presenting only two years of audited financial statements in our registration statement and annual reports
on Form 10-K, selected financial data in such registration statements and annual reports, and reduced disclosure obligations on executive compensation. As
a result of our reduced disclosure requirements, the information we provide stockholders will be different than the information that is available with respect
to other public companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors
find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or
prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the
trading price of our common shares.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure
controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their
implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the
Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm when required, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retrospective changes to our consolidated
financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in
our reported financial information, which could have a negative effect on the trading price of our common shares. There is also a risk that neither we nor
our independent registered public accounting firm (when applicable in the future) will be able to conclude within the prescribed timeframe that internal
controls over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of
confidence in the reliability of our financial statements.
We have not paid dividends in the past and have no immediate plans to pay dividends, so any returns will be limited to the value of our stock.
We plan to reinvest all of our earnings, to the extent we have earnings, to cover operating costs and otherwise become and remain competitive. We
do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate
sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect to
receive cash dividends on our common stock, and any return to stockholders will therefore be limited to the appreciation of their stock.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our shares, the
price of our shares could decline.
The trading market for our shares will rely in part on the research and reports that equity research analysts publish about us and our business, if at
all. We do not have control over these analysts, and we do not have commitments from them to write research reports about us. The price of our shares
could decline if no research reports are published about us or our business, or if one or more equity research analysts downgrades our shares or if those
analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under the Tax Act, federal NOLs incurred in taxable years ending after December 31, 2017, may be carried forward indefinitely, but the
deductibility of federal NOLs generated in tax years beginning before December 31, 2017, is limited. We filed in GA, IL, MN, TN, and FL for 2022. Only
GA and FL conform to the Tax Act. IL and TN do not conform (their NOL will expire if not used and there is no limit deduction on their NOL). MN does
conform with the 80% of taxable income limitation section of the Tax Act for the years 2018 through 2022 and has a 70% limitation for 2023, but not the
indefinite carryforward section. MN NOL will expire if not used. 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, or NOLs, and other
pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We are performing a study to determine if we have
triggered any “ownership change” limitations. We may also experience ownership changes in the future as a result of subsequent shifts in our stock
ownership some of which may be outside of our control. As a result, if we earn net taxable income, our ability to use our pre-ownership change NOL
carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In
addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently
increase state taxes owed.
Assuming a market for our common stock continues to develop, sales of a substantial number of shares of our common stock in the public market by
our existing stockholders could cause our stock price to fall.
Sales of a substantial number of shares of our common stock by our existing stockholders in the public market or the perception that these sales
might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity
securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.
As of March 5, 2024, we had 25,688,062 shares of common stock outstanding, all of which, other than shares held by our directors and certain
officers, are eligible for sale in the public market, subject in some cases to compliance with the requirements of Rule 144, including volume limitations and
manner of sale requirements.
Certain holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended
(the “Securities Act”). Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the
Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
We may be at an increased risk of securities class action litigation.
Historically, securities class action litigation has often been brought against a company following a decline in the market price of its securities.
This risk is especially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent
years. If we were to be sued, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
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Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and applicable provisions of Delaware law
may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which
stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.
The provisions in our amended and restated certificate of incorporation and amended and restated bylaws:
● authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights
and preferences determined by our board of directors that may be senior to our common stock;
● establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of
persons for election to our board of directors;
● establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;
● require the approval of our board of directors or the holders of at least seventy-five percent (75%) of our outstanding shares of capital stock to
amend our bylaws and certain provisions of our certificate of incorporation;
● limit who may call stockholder meetings;
● do not provide for cumulative voting rights; and
● provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
In addition, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with a person who
beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction lasts for a period of three years
following the share acquisition. These provisions may have the effect of entrenching our management team and may deprive our stockholders of the
opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce
the price of our common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for
certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers or stockholders.
Provisions in our amended and restated certificate of incorporation provide that the Court of Chancery of the State of Delaware will, to the fullest
extent permitted by law, be the sole and exclusive forum for:
● any derivative action or proceeding brought on our behalf;
● any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers or other employees;
● any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of Delaware law
or our charter documents; or
● any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine, but
excluding actions to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive
jurisdiction.
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In addition, unless we consent in writing to the selection of an alternative forum, the Federal district courts of the United States shall be the
exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, a court may determine that this
provision is unenforceable.
Ownership portions held by our executives and directors, as well as by our former parent company, Harrow Health, Inc., may limit our stockholders’
ability to influence corporate matters.
Our directors and executive officers beneficially own approximately 14.9% of our common stock. Additionally, Harrow Health, Inc. (“Harrow”),
our former parent company, holds approximately 7.7% of our outstanding common stock as of March 5, 2024. Accordingly, these parties, together, can
significantly influence, though not independently determine, the outcome of matters required to be submitted to our stockholders for approval, including
decisions relating to the election of our board of directors and the outcome of any proposed merger or consolidation of our company. These interests may
not be consistent with those of our other stockholders. In addition, the significant interest held by these parties, and particularly by Harrow, may discourage
third parties from seeking to acquire control of us, which may adversely affect the market price of our shares.
As stockholders in our company, you will be deemed to have notice of and have consented to the provisions of our amended and restated
certificate of incorporation related to choice of forum, but will not be deemed to have waived our compliance with the federal securities laws and the rules
and regulations thereunder. The choice of forum provisions in our amended and restated certificate of incorporation may limit our stockholders’ ability to
obtain a favorable judicial forum for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits with respect to
such claims. Alternatively, if a court were to find the choice of forum provision contained in our restated charter to be inapplicable or unenforceable in an
action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and
financial condition.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
Managing cybersecurity risk is critical to supporting our vision, enabling our strategy, and safely operating our business. We recognize the
importance of assessing, identifying, and managing material risks associated with cybersecurity threats. Our process for identifying and assessing material
risks from cybersecurity threats operates alongside our broader overall risk assessment process which covers all Company risks. As part of this process,
appropriate personnel collaborate with third-party subject matter experts to gather insights for identifying and assessing material risks associated
with cybersecurity threats, their severity, and potential mitigations. Further, we provide periodic training for all personnel regarding cybersecurity threats,
with such training appropriate to the roles, responsibilities and access of the relevant Company personnel. Our policies require all workers to report any real
or suspected cybersecurity event.
We have a cybersecurity risk assessment process that involves the activities listed below, among others:
● Compare our processes to benchmark standards, such as those set by the National Institute of Standards and
Technology (“NIST”).
● Closely monitor emerging data protection laws and implement changes to our processes as needed.
● Conduct annual cybersecurity management and incident training for employees involved in our systems that contain
sensitive data.
● Run tabletop exercises to simulate a response to a cybersecurity incident and use the findings to improve our processes and technologies as
needed.
● Carry cybersecurity risk insurance that provides protection against potential losses arising from a cybersecurity
incident.
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As part of the above process, we engage third-party services to provide 24-hour, 365-day monitoring, escalation, and response to cyber events. In
addition to consulting on best practices, we leverage a third-party expert security firm for independent evaluations of our security controls through
penetration testing. These evaluations test both the design and the operational effectives of security controls.
Our process also addresses material risks from cybersecurity threats associated with our use of third-party service providers, including those in our
supply chain, our product development partners, or those who have access to sensitive data or our systems. Third-party risks are included within our
broader overall risk assessment process, and cybersecurity considerations are considered during the selection and oversight of our third-party service
providers.
Governance
Our board of directors, in coordination with the Audit Committee, oversees our risk management program, including the management of risks
associated with cybersecurity threats. Our board of directors and Audit Committee receive periodic updates on developments in our cybersecurity risk
management practices, evolving standards, third-party vulnerability assessments, and information security issues. On an annual basis, our board of directors
and the Audit Committee discuss our approach to overseeing cybersecurity threats with senior management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”).
Senior management works collaboratively across the organization to implement a program designed to protect our information systems from
cybersecurity threats and to respond to any cybersecurity incidents in accordance with our incident response and recovery plans. A cross-functional team
addresses cybersecurity threats and responds to cybersecurity incidents through communications within the team and with third-party experts to stay
informed about and monitor the prevention, detection, mitigation, and remediation of cybersecurity threats and incidents and report such incidents to the
board of directors and the Audit Committee when appropriate.
As of the date of this Form 10-K, we are not aware of cybersecurity incidents that have materially affected or are reasonably likely to materially
affect the Company, including our business, strategy, results of operations, or financial condition at this time. For further discussion of the risks associated
with cybersecurity incidents, see Part I, Item 1A of this Form 10-K under the risk factor entitled "We rely significantly on information technology and any
failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business
effectively."
Item 2. Properties
We conduct all of our administrative activities for Eton Pharmaceuticals, Inc. at our 5,507 square foot leased office space located at 21925 W.
Field Parkway, Suite 235, Deer Park, Illinois 60010. The lease for this facility expires in March 2025.
We consider our current facilities suitable and adequate to meet our current needs.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
Our common stock is listed on the Nasdaq Global Market under the symbol “ETON.” The closing price of our common stock on the Nasdaq
Global Market on December 29, 2023, the last trading date in 2023, was $4.38 per share.
Record Holders
As of March 5, 2024, we had six holders of record of our common stock. The actual number of stockholders is greater than this number of record
holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of
holders of record also does not include stockholders whose shares may be held in trust by other entities. The closing price per share of our common stock
on March 5, 2024 was $4.38.
Dividends
We have never declared or paid a cash dividend on our common stock. We currently intend to retain any future earnings and do not expect to pay
any dividends in the foreseeable future. Any future determinations to pay cash dividends will be made at the discretion of our board of directors, subject to
applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual
restrictions, general business conditions, and any other factors that our board of directors may deem relevant.
Purchases of Equity Securities
None.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with our financial statements and the related notes thereto included in “Item 8.
Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that
involve risks and uncertainties. For a complete discussion of forward-looking statements, see the section above entitled “Forward Looking Statements.”
Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those
set forth under the caption “Item 1A. Risk Factors.”
Overview
We are an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases. Since the formation of
our company in 2017, we have used our expertise in business development, regulatory, and product development to assemble a diversified portfolio of rare
disease products.
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Results of Operations
To date, we have realized revenues from the sale of our neurology products portfolio in 2021, a licensing arrangement on our EM-100 product that
was sold to Bausch Health, and the launch of our Biorphen®, ALKINDI SPRINKLE®, and Carglumic Acid products in December 2019, December 2020,
and December 2021, respectively. We also realized revenue from the sale of our hospital products portfolio to Dr. Reddy’s Laboratories S.A. (“Dr.
Reddy's”) in 2022, the launch of our Betaine Anhydrous and product in May 2023, the sale of our neurology product royalty streams to Azurity in June
2023, and the launch of our Nitisinone product in February 2024. We anticipate successfully growing sales of our commercialized products and
commercializing additional product candidates in 2024 and beyond.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Net revenues of $31.6 million in 2023 included $5.5 million of licensing revenue from the sale of our neurology product royalty streams to
Azurity in June 2023. Net revenue of $21.3 million in 2022 included $10.0 million of licensing revenue, consisting of $5.0 million from Azurity on the
launch of Zonisamide and $5.0 million from the hospital products sale to Dr. Reddy’s. Net product revenue of $26.1 million in 2023 increased by
$14.9 million from $11.3 million in 2022 primarily as a result of growth in ALKINDI SPRINKLE® and Carglumic Acid.
Our 2023 gross profit of $21.1 million was up from $14.3 million in 2022 primarily as a result of growth in ALKINDI SPRINKLE® and
Carglumic Acid, as well as the sale of our neurology product royalty streams to Azurity.
For the years ended December 31, 2023 and 2022, we incurred $3.3 million and $4.0 million of R&D expenses, respectively, and $18.9 million
and $18.6 million of general and administrative (“G&A”) expenses, respectively. The $0.7 million decrease in R&D was driven by hospital products
development in 2022 that were sold and therefore did not recur in 2023. The $0.3 million increase in G&A expenses was primarily due to personnel
additions to support our growing business. We incurred a net loss of $0.9 million and $9.0 million for the years ended December 31, 2023 and 2022,
respectively.
General and Administrative Expenses
G&A expenses consist primarily of employee compensation expenses, selling and adverting/promotional expenses, legal and professional fees,
business insurance and FDA fees associated with approved products. We anticipate that our G&A expenses will increase to support our business growth,
particularly with respect to sales and marketing activities and additional personnel.
Research and Development Expenses
We currently have nine employees that support our overall product development function. The majority of our spend in R&D is to third parties we
contract with to develop and test our products and development of partner milestone payments.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Net revenues of $21.3 million in 2022 included $10.0 million of licensing revenue, consisting of $5.0 million from Azurity on the launch of
Zonisamide and $5.0 million from the sale of our hospital products to Dr. Reddy’s. Net revenues of $21.8 million in 2021 included $19.0 million of
licensing revenue, including $17.0 million from our neurology products sold to Azurity.
Our 2022 gross profit of $14.3 million was down from $19.0 million in 2021, primarily as a result of decreased licensing revenue.
For the years ended December 31, 2022 and 2021, we incurred $4.0 million and $6.2 million of R&D expenses, respectively, and $18.6 million
and $14.3 million of G&A expenses, respectively. The $2.2 million decrease in R&D was driven by milestone payments on a number of our products in
development in 2021 that did not recur in 2022. The $4.3 million increase in G&A expenses was primarily due to personnel additions and increased sales
and marketing initiatives to support our growing business. We incurred a net loss of $9.0 million and $2.0 million for the years ended December 31, 2022
and 2021, respectively.
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General and Administrative Expenses
G&A expenses consisted primarily of employee compensation expenses, selling and adverting/promotional expenses, legal and professional fees,
business insurance and FDA fees. We anticipate that our G&A expenses will increase to support our business growth.
Research and Development Expenses
We had eight employees that supported our overall product development function. The majority of our spend in R&D was to third parties we
contracted with to develop and test our products in addition to development partner milestone payments. We closed our internal R&D facility in May 2021.
Liquidity and Capital Resources
As of December 31, 2023, we had total assets of $31.7 million, cash and cash equivalents of $21.4 million and working capital of $10.6 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 years ended December 31, 2023, 2022 and 2021 (in thousands):
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash flows (used in) provided by financing activities
Net change in cash and cash equivalents
Year ended
December 31, 2023
$
Year ended
December 31,
2022
Year ended
December 31,
2021
4,821 $
(2,788)
(134)
1,899 $
(4,721)
(2,559)
391
(6,889)
6,815 $
(775)
(957)
5,083 $
$
The increase in cash provided by operating activities is primarily a result of increased revenue. Investing activities in 2023 consist of licensing
fees for Nitisinone, while investing activities in 2022 and 2021 consist primarily of licensing fees for Betaine and Carglumic Acid, respectively. The
increase in cash used in financing activities is primarily the result of scheduled payments on our outstanding loan to SWK Holdings. See Note 5 — Debt
for additional notes to Financial Statement.
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.
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Revenue Recognition for Contracts with Customers
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.
The Company sells its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone 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.
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For its ALKINDI SPRINKLE®, Carglumic Acid, Betaine Anhydrous, and Nitisinone 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®, Carglumic Acid, Betaine Anhydrous, and Nitisinone 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®, Carglumic Acid, Betaine Anhydrous, and Nitisinone inventory at its pharmacy distributor
customer locations, 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.
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. Compensation expense is recognized over the period during which
services are rendered by 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 our common stock and updated assumption inputs in the Black-Scholes
option-pricing model (“BSM”).
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 and
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 technology for products that are not yet approved by the FDA are expensed
as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D
activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
Item 7A. 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 December 31, 2023, 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 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.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm (PCAOB ID: 170)
ETON PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Eton Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Eton Pharmaceuticals, Inc. (the “Company”) as of December 31, 2023 and 2022, the related
statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
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Product Sales Deductions
Critical Audit Matter Description
As described in Note 3 to the financial statements under the caption “Revenue Recognition for Contracts with Customers,” revenues from product sales are
recognized net of reductions for estimated returns, chargebacks, distribution fees, prompt payment discounts, state Medicaid and GPO fees (collectively,
“sales deductions”), which are established at the time of sale.
Auditing the estimation of sales deductions was challenging because of the limited sales history of the Company’s products and the subjectivity of certain
assumptions required to estimate those amounts. The product sales deductions are estimated based on current contractual and statutory requirements,
market events and trends, and internal and external historical data. Specifically, management estimates potential chargebacks, which relate to price
reductions below the estimated sales price that the wholesalers provide to certain customers, based on historical industry data for competing products and
adjusted for actual historical experience. In addition, management estimates its provision for product returns based on prior experience with similar product
launches and considers other factors such as levels of inventory in the distribution channel, forecasted buying patterns, product dating and expiration
period.
How the Critical Audit Matter Was Addressed in the Audit
To test management’s estimated product sales deductions, we obtained management’s calculations for the respective estimates and performed the following
procedures, among others. We tested management’s estimation process for determining of product sales discounts accruals by developing an independent
expectation of the estimated accrual rate, including a comparison of rates used in management’s forecast to rates in the underlying contracts and performing
a retrospective review of assumptions to actual activity. In addition, we assessed subsequent events to determine whether there was any new information
that would require adjustment to the initial accruals, evaluated trends in actual sales and discount accrual balances, and compared cash receipts to product
sales. We also examined terms and conditions for a sample of contracts with the Company’s customers, tested a sample of credits issued and payments
made throughout the year and agreed rates to underlying contract terms.
/s/ KMJ Corbin & Company LLP
We have served as the Company’s auditor since 2018.
Irvine, California
March 14, 2024
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Eton Pharmaceuticals, Inc.
BALANCE SHEETS
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Operating lease right-of-use assets, net
Other long-term assets, net
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Current portion of long-term debt, net of discount
Accrued liabilities
Total current liabilities
Long-term debt, net of discount and including accrued fees
Operating lease liabilities, net of current portion
December 31,
2023
December 31,
2022
$
$
$
21,388 $
3,411
911
1,129
26,839
58
4,739
92
12
31,740 $
1,848 $
5,380
9,013
16,241
—
22
16,305
1,852
557
1,290
20,004
72
4,754
188
12
25,030
1,766
1,033
3,662
6,461
5,384
107
Total liabilities
16,263
11,952
Commitments and contingencies (Note 14)
Stockholders’ equity
Common stock, $0.001 par value; 50,000,000 shares authorized; 25,688,062 and 25,353,119 shares issued
and outstanding at December 31, 2023 and 2022, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
26
119,521
(104,070)
15,477
25
116,187
(103,134)
13,078
Total liabilities and stockholders’ equity
$
31,740 $
25,030
The accompanying notes are an integral part of these financial statements.
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Revenues:
Licensing revenue
Product sales and royalties, net
Total net revenues
Cost of Sales:
Licensing revenue
Product sales and royalties
Total cost of sales
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest and other income (expense), net
Gain on PPP loan forgiveness
Gain on equipment sale
Loss before income tax expense
Income tax expense
Net loss
Net loss per share, basic and diluted
Eton Pharmaceuticals, Inc.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
December 31,
2023
For the years ended
December 31,
2022
December 31,
2021
5,500 $
26,142
31,642
1,000
9,581
10,581
10,000 $
11,251
21,251
1,640
5,293
6,933
19,000
2,832
21,832
1,500
1,327
2,827
21,061
14,318
19,005
3,322
18,931
22,253
3,996
18,582
22,578
(1,192)
(8,260)
503
—
—
(689)
247
(936) $
(0.04) $
(761)
—
—
(9,021)
—
(9,021) $
(0.36) $
6,235
14,265
20,500
(1,495)
(1,006)
365
181
(1,955)
—
(1,955)
(0.08)
25,207
$
$
$
Weighted average number of common shares outstanding, basic and diluted
25,645
25,146
The accompanying notes are an integral part of these financial statements.
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Eton Pharmaceuticals, Inc.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Balances at December 31, 2020
24,312,808 $
24 $
107,797 $
(92,158) $
15,663
Common Stock
Shares
Amount
Additional Paid-
in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
—
—
3,381
Stock-based compensation
Stock option exercises
Employee stock purchase plan
Common stock issued related to restricted stock units
Stock warrant exercises
Net loss
144,233
49,155
25,000
94,808
—
Balances at December 31, 2021
24,626,004
Stock-based compensation
Stock option exercises
Employee stock purchase plan
Stock warrant exercises
Net loss
—
25,000
69,884
632,231
—
Balances at December 31, 2022
25,353,119
Stock-based compensation
Employee stock purchase plan
—
86,782
Stock option exercises and vesting of restricted stock units
299,028
Shares withheld related to net share settlement of stock option
exercises
Net loss
(50,867)
—
1
—
—
—
—
25
—
—
—
—
—
25
—
—
1
—
—
—
—
—
—
—
3,381
339
202
—
—
(1,955)
(1,955)
338
202
—
—
—
111,718
(94,113) $
17,630
4,218
35
171
45
—
—
—
—
—
4,218
35
171
45
(9,021)
(9,021)
116,187
(103,134) $
13,078
3,137
229
148
—
—
—
(180)
—
—
(936)
3,137
229
149
(180)
(936)
Balances at December 31, 2023
25,688,062 $
26 $
119,521 $
(104,070) $
15,477
The accompanying notes are an integral part of these financial statements.
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Eton Pharmaceuticals, Inc.
STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Stock-based compensation
Depreciation and amortization
Debt discount amortization
Gain on forgiveness of PPP loan
Gain on sale of equipment
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Net cash provided by (used in) operating activities
Cash used in investing activities
Proceeds from sale of equipment
Purchases of property and equipment
Purchase of product licensing rights
Net cash used in investing activities
Cash flows from financing activities
Debt paydown
Net proceeds from employee stock purchase plan and stock option and stock
warrant exercises
Net cash (used in) provided by financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid for interest
Cash paid for income taxes
Supplemental disclosures of non-cash investing and financing activities:
Adjustment of operating lease right-of-use assets and liabilities due to tenant
allowance
Right-of-use assets obtained in exchange for lease liabilities
$
$
$
$
$
December 31,
2023
For the years ended
December 31,
2022
December 31,
2021
$
(936) $
(9,021) $
(1,955)
3,137
901
117
—
—
(1,559)
(354)
161
53
5,295
6,815
—
—
(775)
(775)
(1,155)
198
(957)
5,083
16,305
21,388 $
842 $
247 $
29 $
— $
4,218
1,774
127
—
—
3,619
(7)
1,902
(8)
2,217
4,821
—
(38)
(2,750)
(2,788)
(385)
251
(134)
1,899
14,406
16,305 $
730 $
— $
— $
188 $
3,381
462
148
(365)
(181)
(5,423)
692
(1,026)
(570)
116
(4,721)
700
(9)
(3,250)
(2,559)
(150)
541
391
(6,889)
21,295
14,406
815
—
—
—
The accompanying notes are an integral part of these financial statements.
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Note 1 — Company Overview
Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Eton is an innovative pharmaceutical company focused on developing and commercializing treatments for rare diseases. The Company currently
has four commercial rare disease products: ALKINDI SPRINKLE® for the treatment of adrenocortical insufficiency; Carglumic Acid for the treatment of
hyperammonemia due to NAGS deficiency; Betaine Anhydrous for the treatment of homocystinuria; and Nitisinone for the treatment of hereditary
tyrosinemia type 1 (HT-1). The Company has three additional product candidates in late-stage development: ET-400, ET-600, and ZENEO®
hydrocortisone autoinjector.
Note 2 — Liquidity Considerations
As of December 31, 2023, the Company had an accumulated deficit of $104,070 and for the year ended December 31, 2023 the Company had a
net loss of $936.
To date, the Company has generated revenues from multiple products and expects further growth in 2024 and beyond in accordance with
additional market penetration from these products plus revenues from additional products where it anticipates FDA approval. The Company currently
believes its existing cash and cash equivalents of $21,388 as of December 31, 2023 will be sufficient to fund its operating expenses and capital expenditure
requirements for at least the next twelve months from the date of issuance of these financial statements. This estimate is based on the Company’s current
assumptions, including assumptions relating to estimated sales and its ability to manage its spending. The Company could use its available capital resources
sooner than currently expected. Accordingly, the Company could seek to obtain additional capital through equity financings, the issuance of debt or other
arrangements. However, there can be no assurance that the Company will be able to raise additional capital if needed or under acceptable terms, if at all.
The sale of additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently
outstanding common shares. The Company’s existing long-term debt obligation contains covenants and limits the Company’s ability to pay dividends or
make other distributions to stockholders. If the Company experiences delays in product sales growth and completing its product development and obtaining
regulatory approval for its other product candidates and is unable to obtain such additional financing, operations would need to be scaled back or
discontinued.
Note 3 — Summary of Significant Accounting Policies
Basis of Presentation
The Company has prepared the accompanying financial statements in accordance with GAAP.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
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 the valuation of common stock,
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 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. 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 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. The total for these reserves amounted to $129 and $262 as of December 31, 2023 and 2022, respectively.
Inventories
The Company values its inventories at the lower of cost or net realizable value using the first-in, first-out method of valuation. The Company
reviews its inventories for potential excess or obsolete issues on an ongoing basis and records a write-down if an impairment is identified. Inventories at
December 31, 2023 and 2022 consist primarily of purchased finished goods. At December 31, 2023 and 2022, inventories are shown net of a reserve for
ALKINDI SPRINKLE® inventory due to the risk of expiry prior to being sold. There was an inventory reserve of $76 and $62 at December 31, 2023 and
2022, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is computed utilizing the straight-line method based on the
following estimated useful lives. Computer hardware and software is depreciated over three years. Equipment, furniture and fixtures is depreciated
over five years. Leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. Construction in
progress is capitalized but not depreciated until it is placed into service.
Maintenance and repairs are charged to expense as incurred, while renewals and improvements are capitalized.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
Intangible Assets
The Company capitalizes payments it makes for licensed products when the payment is based on FDA approval for the product and the cost is
recoverable based on expected future cash flows from the product. The cost is amortized on a straight-line basis over the estimated useful life of the product
commencing on the approval date in accordance with Accounting Standards Codification (“ASC”) 350 — Intangibles - Goodwill and Other. 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 $750 payment related
to the approval of Biorphen had been capitalized in 2019 and that cost was being amortized over five years. As a result of the Biorphen sale to Dr. Reddy’s
(see Note 14), 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 Q1 2022 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 $2,125 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. The intangible assets, net on the Company’s balance sheet reflected $1,286 of accumulated amortization as of December 31, 2023. The
Company recorded $790, $1,617, and $204 of amortization expense for the years ended December 31, 2023, 2022 and 2021 respectively. The table below
shows the estimated remaining amortization for these products for each of the five years from 2024 to 2028 and thereafter.
Year
2024
2025
2026
2027
2028
Thereafter
Total estimated amortization expense
Impairment of Long-Lived Assets
Amortization
Expense
880
880
880
756
423
920
4,739
$
$
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the Company’s statements of operations for the amount by which the carrying amount of the asset exceeds the fair value of the asset. No
impairment was recognized during the years ended December 31, 2023, 2022 and 2021.
Debt Issuance Costs and Debt Discount and Detachable Debt-Related Warrants
Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying balance sheets. The Company
amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the relative fair value
of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to
interest expense using the effective interest method.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
Leases
The Company accounts for leases in accordance with ASC Topic 842 — Leases. The Company reviews all relevant facts and circumstances of a
contract to determine if it is a lease whereby the terms of the agreement convey the right to control the direct use and receive substantially all the economic
benefits of an identified asset for a period of time in exchange for consideration. The associated right-of-use assets and lease liabilities are recognized at
lease commencement. The Company measures lease liabilities based on the present value of the lease payments over the lease term discounted using the
rate it would pay on a loan with the equivalent payments and term for the lease. The Company does not include the impact for lease term options that
would extend or terminate the lease unless it is reasonably certain that it will exercise any such options. The Company accounts for the lease components
separately from non-lease components for its operating leases.
The Company measures right-of-use assets based on the corresponding lease liabilities adjusted for (i) any prepayments made to the lessor at or
before the commencement date, (ii) initial direct costs it incurs, and (iii) any incentives under the lease. In addition, the Company evaluates the
recoverability of its right-of-use assets for possible impairment in accordance with its long-lived assets policy.
Operating leases are reflected on the balance sheets as operating lease right-of-use assets, current accrued liabilities and long-term operating lease
liabilities. The Company does not have any finance leases as of December 31, 2023 and 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.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty
about the successful award of a patent and the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Concentrations of Credit Risk, Sources of Supply and Significant Customers
The Company is subject to credit risk for its cash and cash equivalents which are invested in money market funds and U.S. treasury bills from time
to time. The Company maintains its cash and cash equivalent balances with one major commercial bank and the deposits held with the financial institution
exceed the amount of insurance provided on such deposits and is exposed to credit risk in the event of a default by the financial institutions holding its cash
and cash equivalents to the extent recorded on the balance sheets. The Company 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.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
The Company is also subject to credit risk from its accounts receivable related to product sales as it extends credit based on an evaluation of the
customer’s financial condition, and collateral is not required. Management monitors its exposure to accounts receivable by periodically evaluating the
collectability of the account receivable based on a variety of factors including the length of time the receivables are past due, the financial health of the
customer and historical experience. Based upon the review of these factors, the Company recorded no allowance for doubtful accounts at December 31,
2023 or 2022. The accounts receivable balance at December 31, 2023 and 2022 and product sales revenue recognized during the year ended December 31,
2023 and 2022 consist of sales to and amounts due from AnovoRX and Optime Cares for the Company's ALKINDI SPRINKLE®, Carglumic Acid, and
Betaine Anhydrous products, as well as from AmerisourceBergen Corporation, Cardinal Health Services and McKesson Corporation for sales of the
Company’s Biorphen product. AnovoRx sales made up 78.2% of 2023 total net revenues and 97.4% of net accounts receivable as of December 31, 2023,
and 45.5% of 2022 total net revenues and 79.8% 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 within the scope of other standards. Under ASC 606, an entity recognizes revenue when
its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for
those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs
the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a
performance obligation.
At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised
within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company
then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally
considered options. The Company assesses whether these options provide a material right to the customer and, if so, they are considered performance
obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes.
The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as)
each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Any amounts
received prior to revenue recognition will be recorded as deferred revenue. Amounts expected to be recognized as revenue within the twelve months
following the balance sheet date will be classified as current portion of deferred revenue in the Company’s balance sheets. Amounts not expected to be
recognized as revenue within the twelve months following the balance sheet date are classified as long-term deferred revenue, net of current portion.
Milestone Payments – If a commercial contract arrangement includes development and regulatory milestone payments, the Company will evaluate
whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur before recognizing the
associated revenue. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not
considered probable of being achieved until those approvals are received.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a
customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company will recognize
revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has
been satisfied or partially satisfied.
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, and Nisitinone 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, and Nitisinone 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, and Nitisinone 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.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
Cost of Product Sales
Cost of product sales consists of the profit-sharing and royalty fees with the Company’s product licensing and development partners, the purchase
costs for finished products from third-party manufacturers, the amortization of certain intangible assets, and freight and handling/storage costs from the
Company’s 3PL logistics service providers. The cost of sales for profit-sharing and royalty fees and costs for purchased finished products and the
associated inbound freight expense is recorded when the associated product sale revenue is recognized in accordance with the terms of shipment to
customers while outbound freight and handling/storage fees charged by the 3PL service provider are expensed as they are incurred. Cost of sales also
reflects any write-downs or reserve adjustments for the Company’s inventories.
Research and Development Expenses
Research and development (“R&D”) expenses include both internal R&D activities and external contracted services. Internal R&D activity
expenses include salaries, benefits and stock-based compensation and other costs to support the Company’s R&D operations. External contracted services
include product development efforts such as certain product licensor milestone payments, clinical trial activities, manufacturing and control-related
activities and regulatory costs. R&D expenses are charged to operations as incurred. The Company reviews and accrues R&D expenses based on services
performed and relies upon estimates of those costs applicable to the stage of completion of each project. Significant judgments and estimates are made in
determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.
Upfront payments and milestone payments made for the licensing of technology for products that are not yet approved by the FDA are expensed
as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D
activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.
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 Series A
Preferred, unvested restricted stock, stock options and warrants that are outstanding during the period. Common stock equivalents are excluded from the
computation when their inclusion would be anti-dilutive. No such adjustments were made for 2023, 2022 or 2021 as the Company reported a net loss for
the years ended December 31, 2023, 2022 and 2021 and including the effects of common stock equivalents in the diluted earnings per share calculation
would have been anti-dilutive (see Note 9).
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. Compensation expense is recognized over the period during which
services are rendered by 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 our common stock and updated assumption inputs in the Black-Scholes
option-pricing model (“BSM”).
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. The Company accounts for forfeitures as they occur.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
Income Taxes
As part of the process of preparing the Company’s financial statements, the Company must estimate the actual current tax liabilities and assess
temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheets. The Company must assess the likelihood that the deferred tax assets will be recovered from future
taxable income and, to the extent the Company believes that recovery is not likely, a valuation allowance must be established. To the extent the Company
establishes a valuation allowance or increase or decrease to this allowance in a period, the impact will be included in income tax expense in the statements
of operations. As of December 31, 2023 and 2022, the Company has established a 100% valuation reserve against its deferred tax assets.
The Company accounts for income taxes under the provisions of ASC 740 - Income Taxes. As of December 31, 2023 and 2022, there were no
unrecognized tax benefits included in the balance sheets that would, if recognized, affect the effective tax rate. The Company’s practice is to recognize
interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties in its balance sheets at
December 31, 2023 or 2022, and has not recognized interest and penalties in the statements of operations for the years ended December 31, 2023, 2022 and
2021. As of December 31, 2023, the Company is subject to taxation in the United States and certain individual states – primarily Illinois and Tennessee.
The Company’s tax losses from 2017 through 2023 are subject to examination by the federal and state tax authorities due to the carryforward of unutilized
net operating losses (“NOLs”).
Current accounting standards include guidance on the accounting for uncertainty in income taxes recognized in the financial statements. Such
standards also prescribe a recognition threshold and measurement model for the financial statement recognition of a tax position taken, or expected to be
taken, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company
believes that the ultimate deductibility of all tax positions is highly certain, although there is uncertainty about the timing of such deductibility. As a result,
no liability for uncertain tax positions was recorded as of December 31, 2023 or 2022.
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.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 3 — Summary of Significant Accounting Policies (continued)
Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their
placement within the fair value hierarchy levels. The determination of the fair values stated below takes into account the market for the Company’s
financials, assets and liabilities, the associated credit risk and other factors as required. The Company considers active markets as those in which
transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
The Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities 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 approximate its fair value.
Impact of Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate
Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU No. 2021-
01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"). Both ASU No. 2020-04 and ASU No. 2021-01 provide optional expedients and
exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or
another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 and ASU No. 2021-01 are effective upon issuance
for contract modifications and hedging relationships, and the Company is allowed to elect to apply the amendments prospectively through December 31,
2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends
the temporary accounting rules under Topic 848 to December 31, 2024. The Company transitioned to the secured overnight financing rate ("Term SOFR")
from LIBOR on August 22, 2023. There are no material impacts to the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 316): Measurement of Credit Losses on Financial
Instruments, which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard
requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. The new guidance also
modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination.
Subsequent to the issuance of ASU No. 2016-13, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-
Credit Losses. This ASU does not change the core principle of the guidance in ASU No. 2016-13, instead these amendments are intended to clarify and
improve operability of certain topics included within the credit losses standard. The FASB also subsequently issued ASU No. 2019-04 which did not
change the core principle of the guidance in ASU No. 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be
written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. The Company
prospectively adopted this guidance on the effective date of January 1, 2023 and the adoption did not have a material impact to the consolidated financial
statements and resulted in no adjustment to the Company’s prior year earnings.
Note 4 – Property and Equipment
Property and equipment consist of the following:
Computer hardware and software
Furniture and fixtures
Equipment
Leasehold improvements
Construction in progress
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2023
December 31,
2022
$
$
187 $
111
52
103
—
453
(395)
58 $
177
112
52
71
12
424
(352)
72
Depreciation expense for the years ended December 31, 2023, 2022 and 2021 was $44, $66 and $155, respectively.
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Note 5 – Debt
SWK Loan
Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
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 debt financing. The Company received proceeds of $5,000 at closing and was able to borrow an additional
$5,000 upon the FDA approval of a second product developed by the Company, excluding EM-100. In March 2020, in conjunction with the Company’s
ALKINDI SPRINKLE® product licensing agreement (see Note 14) and the Company’s March 2020 sale of shares of its common stock (see Note 6), the
Company and SWK amended the SWK Credit Agreement. The amendment provided the Company with the option to immediately draw an additional
$2,000 and the ability to borrow up to another $3,000 based upon the FDA approval of EM-100 and ALKINDI SPRINKLE® which subsequently occurred
in September 2020. Accordingly, the Company borrowed an additional $2,000 in August 2020. Under the terms of the SWK Credit Agreement, the
Company was required to maintain a minimum cash balance of $3,000, and pay 5.5% of the loan principal balance commencing in February 2022 and then
every three months thereafter until November 2024 at which time the remaining principal balance is due. Borrowings under the SWK Credit Agreement are
secured by the Company’s assets. The SWK Credit Agreement contains customary default provisions and covenants which include limits on additional
indebtedness. In February 2021, the Company notified SWK that it will not require additional borrowing capacity under the SWK Credit Agreement and
terminated the additional borrowing capacity with SWK.
In connection with the initial $5,000 borrowed in November 2019, the Company issued warrants to SWK to purchase 51,239 shares of the
Company’s common stock with an exercise price of $5.86 per share. The relative fair value of these 51,239 warrants was $226 and was estimated using the
Black-Scholes-Merton option pricing model with the following assumptions: fair value of the Company’s common stock at issuance of $5.75 per
share; seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 1.8%.
In connection with the additional $2,000 borrowed in August 2020, the Company issued warrants for 18,141 shares of its common stock at an
exercise price of $6.62 per share. The relative fair value of the 18,141 warrants was $94 and was estimated using the Black-Scholes-Merton option pricing
model with the following assumptions: fair value of the Company’s common stock at issuance of $6.85 per share; seven-year contractual term; 95%
volatility; 0% dividend rate; and a risk-free interest rate of 0.4%.
These warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance. The SWK Warrants
are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to adjustment in connection with
stock splits, dividends, reclassifications and other conditions.
In April 2022, the Company and SWK entered into an amendment to the SWK Credit Agreement which allowed for a deferral of loan principal
payments until May 2023 and reduced 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 $1,033 as principal due in the next 12 months and the remainder classified as long-term debt in its balance sheet at
December 31, 2022. Because LIBOR was phased out as of June 2023, the Company amended the Credit Agreement in August 2023 to refer to Term SOFR,
with an interest rate of Term SOFR plus 8.26%, subject to a stated Term SOFR floor rate of 5.0%.
The Company recorded interest expense of $1,060, $955 and $1,042 in 2023, 2022 and 2021, respectively, which included $117, $127 and $148,
respectively, of debt discount amortization. The Company had accrued interest of $332 and $231 as of December 31, 2023 and 2022, respectively, which is
included in accrued liabilities in the accompanying balance sheets.
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Note 5 – Debt (continued)
Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The table below reflects the future annual payments for the SWK loan principal and interest as of December 31, 2023.
2024
Total payments
Less: amount representing interest
Loan payable, gross
Less: unamortized discount
Debt, net of unamortized discount
PPP loan
Amount
6,483
6,483
(1,023)
5,460
(80)
5,380
$
On May 4, 2020, the Company received $361 in loan proceeds under the Paycheck Protection Program (“PPP”) from the Small Business
Administration (“SBA”) through its banking relationship with Bank of America. On May 20, 2021, the Company received notice that the loan principal and
cumulative interest of $4 was forgiven in full as permitted under the applicable SBA guidelines for PPP loans. The $365 gain on debt extinguishment is
reflected in non-operating income for the year ended December 31, 2021.
EIDL loan
On July 21, 2020, the Company received $150 in loan proceeds under the Economic Injury Disaster Loan program (“EIDL”) from the SBA. The
Company paid off the full EIDL loan principal and its cumulative interest of $6 in July 2021.
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.
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Note 6 — Common Stock (continued)
Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
For the years ended December 31, 2023 and 2022, the Company issued 207,626 (net shares issued after a portion of 407,808 shares was a cashless
exercise) and 25,000 shares, respectively, of its common stock resulting from stock option exercises under its 2018 Equity Incentive Plan (see Note 8). The
Company withheld 50,867 shares for payroll tax obligations totaling $180 for the year ended December 31, 2023. For the years ended December 31, 2023
and 2022, the Company issued 86,782 and 69,884 shares, respectively, under the Company’s Employee Stock Purchase Plan (“ESPP”). For the year ended
December 31, 2023, the Company issued 91,402 shares of its common stock due to the vesting of restricted stock units. In April 2021, the Company
issued 25,000 shares of its common stock to a member of its board of directors upon his retirement from the board in connection with previously vested
RSUs. During 2022, there were 1,067,242 warrants exercised, a portion of which was a cashless exercise, resulting in 632,231 shares of common stock
being issued by the Company.
Note 7 — Common Stock Warrants
Listed below is a summary of warrants outstanding as of December 31, 2023:
Description of Warrants
SWK Warrants – Debt (Tranche #1)
SWK Warrants – Debt (Tranche #2)
Total
No. of Shares
Exercise Price
51,239 $
18,141 $
69,380
5.86
6.62
6.05 (Avg)
The holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities Act of their
shares that are converted to common stock, including demand registration rights and piggyback registration rights. These rights are provided under the
terms of a registration rights agreement between the Company and the investors.
On June 26, 2022, 467,242 warrants from the 2017 preferred stock offering with an exercise price of $3.00 were set to expire. Prior to the
expiration, the Company entered into an agreement with the warrant holders, whereby it modified the terms of the warrants to 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 administration expense on the Statement of Operations
for the year ended December 31, 2022.
A rollforward of the warrants outstanding is listed in the table below:
Balance as of the beginning of the year
Expiration of National Securities Corp – November 2018 issuance
Balance as of the end of the year
No. of Shares
483,380
(414,000)
69,380
There were 1,067,242 warrants exercised on a cashless basis in 2022 resulting in 632,231 shares of common stock being issued by the Company.
There were 135,650 warrants exercised in 2021 (all on a cashless basis) resulting in 94,808 shares of common stock being issued by the Company. The
intrinsic value of the warrants exercised was $2,367 in 2022 and $806 in 2021. There were no warrants exercised in 2023.
Note 8 — Share-Based Payment Awards
The Company’s board of directors and stockholders approved the Eton Pharmaceuticals, Inc. 2017 Equity Incentive Plan in May 2017 (the “2017
Plan”), which authorized the issuance of up to 5,000,000 shares of the Company’s common stock. In conjunction with the Company’s IPO in November
2018, the Company’s stockholders and board of directors approved the 2018 Equity Incentive Plan, as amended (the “2018 Plan”) which succeeded the
2017 Plan. The Company has granted RSAs, stock options and RSUs for its common stock under the 2017 Plan and 2018 Plan as detailed in the tables
below. There were 663,598 shares available for future issuance under the 2018 Plan as of December 31, 2023.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 8 — Share-Based Payment Awards (continued)
Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the 2018
Plan. In addition, the 2018 Plan provides that commencing January 1, 2019 and through January 1, 2028, the share reserve will be increased by 4% of the
total number of shares outstanding as of the preceding December 31, subject to a reduction at the discretion of the Company’s board of directors. On
January 1, 2021, the share reserve was increased by 972,512 shares based on the 24,312,808 shares of common stock outstanding at December 31, 2020.
On January 1, 2022, the share reserve was increased by 985,040 shares based on the 24,626,004 shares of common stock outstanding at December 31,
2021. On January 1, 2023, the share reserve was increased by 1,014,124 shares based on the 25,353,119 shares of common stock outstanding at December
31, 2022. 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, 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 as the Company was not able to file certain product submissions to the FDA prior to
the five-year expiration date. Furthermore, these option awards to the Company’s product consultants would not vest unless certain product submissions are
made to the FDA, and accordingly, the Company has not recorded any expense for these contingently vesting option awards to its product consultants.
In July 2022 and September 2022, the Company’s board of directors approved modifications of certain outstanding awards of two senior
executives, one of whom retired in May 2022 and the other whose employment was terminated in July 2022. The combined awards had an exercise price
range of $1.37 to $8.61 which were set to expire 90 days after retirement or termination as the case may be, and the Company extended the expiration dates
to April 2023. No other terms were modified. Due to these modifications, the Company incurred a modification expense of approximately $104 that is
included in general and administration expense on the Statement of Operations for the year ended December 31, 2022.
For the years ended December 31, 2023, 2022 and 2021, the Company’s total stock-based compensation expense was $3,137, $4,218 and $3,381,
respectively. Of these amounts, $2,864, $3,954, and $2,838 was recorded in general and administrative expenses, respectively, and $273, $264, and $543
was recorded in R&D expenses, respectively.
Stock Options
The following table summarizes stock option activity during the year ended December 31, 2023:
Weighted Average
Weighted Average
Remaining
Shares
Exercise
Price
Contractual
Term
Aggregate
Intrinsic
Value
Options outstanding as of January 1, 2023
Issued
Exercised
Forfeited/Cancelled
Options outstanding as of December 31, 2023
Options exercisable at December 31, 2023
Options vested and expected to vest at December 31, 2023
4,402,292 $
1,108,291
(407,808)
(263,549)
4,839,226 $
3,399,896 $
4,839,226 $
4.71
3.51
2.23
5.94
4.57
4.78
4.57
7.3 $
6.7 $
7.3 $
3,467
2,432
3,467
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of
the Company’s common stock for those stock options that had strike prices lower than the fair value of the Company’s common stock at December 31. The
intrinsic value of the options exercised during 2023 was $612.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 8 — Share-Based Payment Awards (continued)
There were 207,626 and 25,000 shares issued for exercise of stock options during the years ended December 31, 2023 and 2022, respectively, for
proceeds of $149 and $35.
The assumptions used to calculate the estimated fair value of options granted during the years ended December 31, 2023, 2022 and 2021 under the
BSM were as follows:
Expected dividends
Expected volatility
Risk-free interest rate
Expected term (in years)
Weighted average grant date fair value
December 31,
2023
December 31,
2022
December 31,
2021
—%
70%
3.5 - 4.7%
6.3
2.32
$
—%
70%
1.5 - 3.9%
5.9
2.32
$
—%
70 - 80%
0.9 - 1.4%
6.0
5.64
$
Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options granted to employees and
directors, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).
The expected term of options granted to non-employees equals the contractual life of the options.
Expected Volatility — 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.
Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of
the Company’s stock options.
Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options
and therefore has estimated the dividend yield to be zero.
Fair value of Common Stock —The Company uses the closing stock price on the date of grant for the fair value of the common stock.
As of December 31, 2023, there was a total of $3,601 of unrecognized compensation costs related to non-vested stock option awards which will be
recognized over a weighted average period of 2 years.
Restricted Stock Units (RSUs)
The following table summarizes restricted stock unit activity during the year ended December 31, 2023:
Outstanding and unvested as of January 1, 2023
Granted
Vested
Forfeited
Outstanding and unvested as of December 31, 2023
Weighted Average
Grant-Date
Number of Units
Fair Value Per Unit
369,606 $
—
(91,402) $
(4,000) $
274,204 $
2.63
—
2.63
2.63
2.63
Stock-based compensation related to RSUs was $239 and $114 for the years ended December 31, 2023 and 2022, respectively. As of December
31, 2023, there was $608 of unrecognized stock-based compensation expense related to unvested RSUs which will be recognized over a weighted average
period of 2.5 years.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 8 — Share-Based Payment Awards (continued)
Employee Stock Purchase Plan
In December 2018, the Company’s board of directors adopted an initial offering of the Company’s common stock under the Company’s ESPP. The
Company’s ESPP provides for an initial reserve of 150,000 shares and this reserve is automatically increased on January 1 of each year by the lesser of 1%
of the outstanding common shares at December 31 of the preceding year or 150,000 shares, subject to reduction at the discretion of the Company’s board of
directors.
The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at a price per share that is at least the lesser
of (1) 85% of the fair market value of a share of common stock on the first date of an offering or (2) 85% of the fair market value of a share of common
stock on the date of purchase. After the initial offering period, subsequent twelve-month offering periods automatically commence over the term of the
ESPP on the day that immediately follows the conclusion of the preceding offering, each consisting of two purchase periods approximately six months in
duration ending on or around June 10 and December 10 each year, subject to a restart feature if the Company’s stock price drops at the end of a six-month
period within the twelve-month offering period.
The Company recorded an expense of $135, $128, and $73 in 2023, 2022 and 2021, respectively, related to the ESPP. For the years ended
December 31, 2023 and 2022, there were 86,782 and 69,884 share issuances, respectively, under the ESPP. The weighted average grant date fair value of
share awards in 2023, 2022 and 2021 was $1.27, $1.17, and $2.50 per share, respectively. Employees contributed $230 and $174 to the ESPP during 2023
and 2022, respectively. Of these amounts, $24 and $23 at December 31, 2023 and 2022, respectively, are included in accrued liabilities in the
accompanying balance sheets. As of December 31, 2023, there were 623,514 shares available for issuance under the ESPP.
Note 9 — Basic and Diluted Net Loss per Common Share
Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding during the period.
Common stock equivalents (using the treasury stock and “if converted” method) from stock options, unvested RSAs and RSUs, and warrants at December
31, 2023, 2022 and 2021 were 5,418,251, 5,494,153, and 4,286,687, respectively, and are excluded from the calculation of diluted net loss per share
because the effect is anti-dilutive. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the
issuance and delivery of the shares are deferred until the director retires from service as a director.
The following table shows the computation of basic and diluted net loss per common share:
Year ended
December 31,
2023
Year ended
December 31,
2022
Year ended
December 31,
2021
Net loss
Weighted average common shares outstanding (basic and diluted)
Net loss per common share (basic and diluted)
$
$
(936) $
25,645,366
(0.04) $
(9,021) $
25,145,657
(0.36) $
(1,955)
25,207,299
(0.08)
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 10 — Related-Party Transactions
Harrow
The Chief Executive Officer of Harrow Health, Inc. (“Harrow”) was a member of the Company’s board of directors until March 17, 2021 when he
retired from service with the board. The Company issued 25,000 shares to the Harrow CEO in April 2021 after his retirement from the Company’s board
associated with RSUs that were previously fully vested. As of December 31, 2023, Harrow owned 1,982,000 shares of Eton’s common shares which
represents approximately 7.7% of the Company’s common shares outstanding.
In March 2021, the Company closed its laboratory operation in Lake Zurich, Illinois and in May 2021 it reached an agreement for Imprimis
Pharmaceuticals, a subsidiary of Harrow, to purchase its lab equipment for $700 which was $181 above the Company’s net book value of the equipment.
Chief Executive Officer
The CEO has a partial interest in a company that the Company has partnered with for its EM-100/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 original agreement, the Company would pay Eyemax $250 upon FDA approval and $500 upon the first commercial sale of the product and
pay Eyemax a royalty of 10% on the net sales of all products. The Eyemax Agreement was for an initial term of 10 years, 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. The Company has realized $1,840 of the non-royalty
and royalty revenue as of December 31, 2023. 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, will be split between Eyemax and the Company. There were no amounts due to Eyemax under the terms of the Amended
Agreement as of December 31, 2023 or December 31, 2022, and Bausch Health discontinued sales of Alaway® Preservative Free effective March 24,
2023.
Note 11 — Leases
The Company recognizes a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, including operating
leases, and separates lease components from non-lease components related to its office space lease.
In January 2018, the Company signed an amended lease agreement to lease additional office space adjacent to its current corporate office space in
Deer Park, Illinois. In October 2020, the Company renewed its office lease for a two-year period through March 2023 and recorded $195 in ROU assets
and $195 in operating lease liabilities in association with the lease extension. In November 2022, the Company renewed its office lease for a two-year
period through March 2025 and recorded $188 in ROU assets and $188 in operating lease liabilities in association with the lease extension.
In March 2018, the Company entered into a lease for laboratory space at a complex in Lake Zurich, Illinois. The lease commenced in March
2018. In November 2020, this laboratory lease was extended to June 2021 and was not extended after that date as the Company completed an evaluation its
laboratory operations requirements and determined it would discontinue the laboratory activities and outsource its requirements.
The Company does not have any lease contracts that contain: (1) an option to extend that the Company is reasonably certain to exercise, (2) an
option to terminate that the Company is reasonably certain to exercise, or (3) an option to extend (or not to terminate) in which exercise of the option is
controlled by the lessor. Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants. Lease
liabilities and their corresponding right-of-use assets have been recorded based on the present value of the future lease payments over the expected lease
term. One of the Company’s lease agreements contains provisions for escalating rent payments over the term of the lease.
The Company’s leases do not contain readily determinable implicit discount rates, and therefore, the Company was required to use its incremental
borrowing rate of 7.8% to discount the future lease payments based on information available at lease commencement. In October 2020, the new discount
rate for the office lease extension was estimated at 5.4%. In November 2022, the new discount rate for an additional office lease extension was estimated
at 8.6%. The incremental borrowing rate was estimated by determining the rate of interest that the Company would have to pay to borrow on a
collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
72
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Note 11 — Leases (continued)
Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The Company’s operating lease cost as presented in the “Research and Development” and “General and Administrative” captions in the statements
of operations was $0, $0, and $9 and $67, $82, and $86 for the years ended December 31, 2023, 2022 and 2021, respectively. For the years ended
December 31, 2023, 2022 and 2021, the Company recorded $77, $86, and $113, respectively, in rent expense. Cash paid for amounts included in the
measurement of operating lease liabilities was $88, $88, and $83 for the years ended December 31, 2023, 2022, and 2021, respectively. The ROU asset
amortization for years ended December 31, 2023, 2022 and 2021 was $67, $62, and $88, respectively, and is reflected in depreciation and amortization in
the Company’s statements of cash flows. As of December 31, 2023, the weighted-average remaining lease term was 1.25 years, and the weighted-average
discount rate was 8.6%.
The table below presents the lease-related assets and liabilities recorded on the balance sheet as of December 31, 2023:
Assets
Operating lease right-of-use assets
Total leased assets
Liabilities
Operating lease liabilities, current
Operating lease liabilities, noncurrent
Total operating lease liabilities
Classification
Operating lease right-of-use assets, net
Accrued liabilities
Operating lease liabilities, net of current portion
The Company’s future annual lease commitments as of December 31, 2023 are as indicated below:
$
$
$
$
92
92
53
22
75
Undiscounted lease payments
Less: Imputed interest
Total lease liabilities
Note 12 – Income Taxes
Total
2024
2025
2026
$
$
81 $
(6)
75
58 $
23 $
—
The provision for income taxes for the Company consists of the following for the years ended December 31, 2023, 2022 and 2021:
Current:
Federal
State
Total current expense
Deferred:
Federal
State
Change in valuation allowance
Total deferred expense
Total provision
Year ended
December 31,
2023
Year ended
December 31,
2022
Year ended
December 31,
2021
$
$
61 $
186
247
(85)
(31)
116
—
247 $
— $
—
—
2,272
812
(3,084)
—
— $
—
—
—
460
185
(645)
—
—
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
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Note 12 – Income Taxes (continued)
Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The significant components of the Company’s deferred tax assets as of December 31, 2023 and 2022 are as follows:
Net operating losses
Stock-based expenses
Accruals and other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
December 31,
2023
December 31,
2022
$
$
15,447 $
3,372
2,697
21,516
(21,516)
— $
17,183
3,090
1,359
21,632
(21,632)
—
Based on the uncertainty of future taxable income at this time management believes a 100% valuation reserve for the $21,516 and
$21,632 deferred tax assets at December 31, 2023 and 2022, respectively, is appropriate.
A reconciliation of the statutory federal tax rate to effective tax rate is shown below:
Provision (benefit) at statutory rate
Permanent items (primarily warrants and stock compensation)
State tax benefit
Federal rate change
Other items
Increase (decrease) in valuation allowance
Income tax expense
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
2023
2022
2021
21.0%
39.1
6.5
—
—
(30.7)
35.9%
(21.0)%
(3.3)
(8.7)
—
—
33.0
—%
(21.0)%
(2.5)
(9.5)
—
—
33.0
—%
The Company has a federal and state NOL carryforward of $54,190 as of December 31, 2023. Under the Tax Act, federal NOLs incurred in
taxable years ending after December 31, 2017 in the amount of $54,190 may be carried forward indefinitely and are subject to an 80% usage limitation.
The state NOL carry forward will begin to expire in 2029.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a
corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year
period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-
change income may be limited.
Note 13 - Employee Savings Plan
The Company established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code, effective January 1, 2018. The plan
allows participating employees to deposit into tax deferred investment accounts up to 100% of their salary, subject to annual limits. The Company makes
certain matching contributions to the plan in amounts up to 4% of the participants’ annual cash compensation, subject to annual limits. For the years ended
December 31, 2023, 2022 and 2021, the Company made $242, $172, and $154, respectively, in matching contributions.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 14 — Commitments and Contingencies
Legal
The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any
pending or threatened litigation matters at this time that may have a material impact on the operations of the Company.
License and Product Development Agreements
The Company has entered into various agreements in addition to those discussed above which are described below.
The three oral solution pediatric neurology product candidates discussed below, Topiramate, Zonisamide and Lamotrigine, were developed by the
Company and its various product candidate development partners and the Company subsequently sold all its rights and interests in these three products to
Azurity in 2021, 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.
Prior to January 1, 2022, the Company worked with Tulex Pharmaceuticals, Inc. (“Tulex”) as a third-party contract manufacturer to develop an
oral solution for Topiramate (fka ET-101) which targets a neurological condition. In November 2021, the product received approval from the FDA and was
launched by Azurity in December 2021. The Company recognized a $5,000 milestone revenue at launch which was reflected in accounts receivable on the
Company’s balance sheet at December 31, 2021 and subsequently collected in January 2022.
On January 23, 2019, the Company entered into a Licensing and Supply Agreement (the “Agreement”) with Liquimeds Worldwide (“LMW”) for
Zonisamide oral liquid, a development stage product candidate (“ET-104”). Pursuant to the terms of the Agreement, the Company was to be responsible for
regulatory and marketing activities and LMW was responsible for development and manufacturing of ET-104. The Company paid $650 to Azurity upon
issuance of patent covering ET-104 listed in the FDA’s Orange Book in November 2022.
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Eton Pharmaceuticals, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 14 — Commitments and Contingencies (continued)
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 in October 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.
In June 2022, the Company sold its rights in Cysteine Hydrochloride, Biorphen®, and Rezipres® to Dr. Reddy’s. Under the terms of the
transaction, Dr. Reddy’s assumed immediate ownership of Eton’s rights and interest in the products. The Company received $5,000 at closing, recorded as
licensing revenue in the twelve months ended December 31, 2022. In accordance with the terms of the agreement, $812 of Sintetica profit share receivables
were expensed as cost of goods sold in the twelve months ended December 31, 2022.
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 upon signing and an additional $125 in November 2023, and could pay up to $1,000 in commercial
milestones. 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. 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.
Indemnification
As permitted under Delaware law and in accordance with the Company’s Amended and Restated Bylaws, the Company is required to indemnify
its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to
indemnification agreements with its directors and officers. The Company believes the fair value of the indemnification rights and agreements is minimal.
Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of December 31, 2023 or 2022.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART II (CONTINUED)
None.
Item 9A. 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 CEO and our CFO, 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.
As of December 31, 2023, an evaluation was conducted under the supervision and with the participation of our management, including our
CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, such officers have concluded that our disclosure
controls and procedures are effective as of December 31, 2023.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term
is defined in Rule 13a-15(f) under the Exchange Act. Our management conducted an evaluation, with the participation of our CEO and CFO, of the
effectiveness of our internal control over financial reporting as of December 31, 2023, based on the criteria set forth in the 2013 Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2023.
This report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial
reporting, in accordance with applicable SEC rules that permit us to provide only management’s report in this report.
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) under the Exchange Act) that
occurred during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls or our internal
control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. 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. Further, because of the inherent limitations in all control
systems, no evaluation of controls 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 detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is based in part on 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. Projections of
any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or procedures.
Item 9B. Other Information
Insider Trading Arrangements and Related Disclosure
During the three months ended December 31, 2023, none of our directors or officers 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.
We are committed to promoting high standards of ethical business conduct and compliance with applicable laws, rules and regulations. As part of
this commitment, we have adopted our Insider Trading Policy governing the purchase, sale, and/or other dispositions of our securities by our directors,
officers, employees and designated contractors. We believe our Insider Trading Policy is reasonably designed to promote compliance with insider trading
laws, rules and regulations, and the exchange listing standards applicable to us. A copy of our Insider Trading Policy, including any amendments thereto, is
filed as Exhibit 19.1 to this Annual Report on Form 10-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item and not set forth below will be set forth in the section headed “Election of Directors” and “Executive
Officers” in our Proxy Statement for our 2024 Annual Meeting of Stockholders (“Proxy Statement”), to be filed with the SEC within 120 days after the end
of the fiscal year ended December 31, 2023, and is incorporated herein by reference.
We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal
accounting officer) and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on our
website at http://ir.etonpharma.com under the Corporate Governance section of our Investor Relations page. We will promptly disclose on our website (i)
the nature of any amendment to the policy that applies to our principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of the policy that is
granted to one of these specified individuals that is required to be disclosed pursuant to SEC rules and regulations, the name of such person who is granted
the waiver and the date of the waiver.
Item 11. Executive Compensation
The information required by this item will be set forth in the section headed “Executive Compensation” in our Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management”
in our Proxy Statement and is incorporated herein by reference.
The information required by Item 201(d) of Regulation S-K will be set forth in the section headed “Executive Compensation” in our Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in the section headed “Transactions With Related Persons” in our Proxy Statement and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be set forth in the section headed “Ratification of Selection of Independent Registered Public
Accounting Firm” in our Proxy Statement and is incorporated herein by reference.
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Table of Contents
Item 15. Exhibits, Financial Statement Schedules
(1) Index to Financial Statements
PART IV
The following financial statements of Eton Pharmaceuticals, Inc. and the Report of the Independent Registered Public Accounting Firm are
included in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm (PCAOB ID:170)
Balance Sheets as of December 31, 2023 and 2022
Statements of Operations for the years ended December 31, 2023, 2022 and 2021
Statements of Stockholders’ Equity for the years ended December 31, 2023, 2022 and 2021
Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021
Notes to the Financial Statements
(2) Financial Statement Schedules
51
53
54
55
56
57
Financial statement schedules have been omitted in this report because they are not applicable, not required under the instructions, or the
information requested is set forth in the financial statements or related notes thereto.
(3) Exhibits
The following exhibits have been filed or are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
EXHIBIT INDEX
Exhibit
No.
3.1
Description
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K, filed November 20, 2018).
3.2
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K,
filed November 20, 2018).
4.1
Specimen Certificate representing shares of common stock of Registrant (incorporated by reference to Exhibit 4.1 to the Registrant’s
Registration Statement on Form S-1, as amended (File No. 333-226774), originally filed August 10, 2018).
4.2
Form of Underwriter’s Warrant (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1, as amended
(File No. 333-226774), originally filed August 10, 2018).
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Exhibit
No.
4.3
Description
Warrant dated November 13, 2019 issued to SWK Holdings LLC. (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2019 filed March 5, 2020).
10.1
Registration Rights Agreement dated June 19, 2017 by and among the Registrant and certain of its stockholders (incorporated by reference to
Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-226774), originally filed August 10, 2018).
10.2†
Asset Purchase Agreement (DS-200) dated June 23, 2017 between Selenix, LLC and the Registrant (incorporated by reference to Exhibit 10.5
to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-226774), originally filed August 10, 2018).
10.3
Amended and Restated Agreement relating to sales and marketing dated February 18, 2019 between the Registrant and Eyemax, LLC
(incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019)
10.4†
Sales/Marketing Agreement (DS-300) dated November 17, 2017 by and among AL Pharma, Inc., SCS National, LLC, Dry Creek Project, LLC
and the Registrant (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, as amended (File No.
333-226774), originally filed August 10, 2018).
10.5+ Offer Letter Agreement by and between the Registrant and Sean E. Brynjelsen, dated as of May 17, 2017 (incorporated by reference to Exhibit
10.12 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-226774), originally filed August 10, 2018).
10.6+ Offer Letter Agreement by and between the Registrant and James Gruber, dated as of March 25, 2022.
10.7+ 2018 Equity Incentive Plan as amended December 2020 (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2020 filed on March 16, 2021).
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Exhibit
No.
10.8+ 2018 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1, as
Description
amended (File No. 333-226774), originally filed August 10, 2018).
10.9
10.10
Amendment No. 1 dated August 29, 2018 to Sales/Marketing Agreement (DS-300) dated November 17, 2017 between AL Pharma, Inc. and the
Registrant (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-
226774), originally filed August 10, 2018).
Credit Agreement dated as of November 13, 2019, by and among the Company and SWK Funding LLC (incorporated by reference to Exhibit
10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019 filed March 5, 2020) (as amended on April 5,
2022 and such amendment is incorporated by reference to exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q for the quarter ended
March 31, 2022).
19.1
23.1
24.1
31.1*
Insider Trading Policy
Consent of Independent Registered Public Accounting Firm.
Power of Attorney. Reference is made to the signature page hereto.
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 and Accounting 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 and
Accounting Officer), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97
101
Policy Relating to Recovery of Erroneously Awarded Compensation
The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in
Inline Extensible Business Reporting Language (iXBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statement of
Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit), (iv) the Statements of Cash Flows and (v) Notes to Financial
Statements.
104
The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL (included
as Exhibit 101)
†
+
*
Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
Indicates management compensatory plan, contract or arrangement.
These certifications are being furnished solely to accompany this Annual 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.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report to be signed
on its behalf by the undersigned thereunto duly authorized.
March 14, 2024
ETON PHARMACEUTICALS, INC.
By: /s/ Sean E. Brynjelsen
Sean E. Brynjelsen
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James Gruber
James Gruber
Chief Financial Officer
(Principal Financial and Accounting Officer)
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POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints each of Sean Brynjelsen and James Gruber, his or her true and lawful
attorney-in-fact and agent, each with full power of substitution and resubstitution, severally, for him or her and in his or her name, place and stead, in any
and all capacities, to sign this Annual Report on Form 10-K of Eton Pharmaceuticals, Inc., and any or all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report to be signed
on its behalf by the undersigned thereunto duly authorized.
Signature
Title
Date
/s/ Sean E. Brynjelsen
Sean E. Brynjelsen
/s/ James Gruber
James Gruber
/s/ Jennifer M. Adams
Jennifer M. Adams
/s/ Charles J. Casamento
Charles J. Casamento
/s/ Paul V. Maier
Paul V. Maier
/s/ Norbert G. Riedel, Ph.D.
Norbert G. Riedel, Ph.D.
President, Chief Executive Officer, and Director
March 14, 2024
(Principal Executive Officer)
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
83
March 14, 2024
March 14, 2024
March 14, 2024
March 14, 2024
March 14, 2024
Exhibit 19.1
I. Purpose
Insider Trading Policy
(Revised December 2023)
Anyone who has knowledge of material nonpublic information may be considered an “Insider” for purposes of the federal securities laws prohibiting
insider trading. As an officer, director, or employee of Eton Pharmaceuticals, Inc. (the “Company”) you may be in a position to profit financially from
buying, selling or dealing stock of the Company or another publicly traded company with which the Company has business dealings (each, a “Third
Party”), or to disclose such information to a third party who does so (the “Tippee”). As a result, it is a violation of the policy of Eton Pharmaceuticals, Inc.
(the “Company”) and the federal securities laws for any officer, director or employee of the Company to (a) trade in securities of the Company while aware
of “material nonpublic information” concerning the Company or (b) communicate, “tip” or disclose material nonpublic information to outsiders so that they
may trade in securities of the Company based on that information.
To prevent the appearance of or improper insider trading or tipping, the Company has adopted this Insider Trading Policy (“Policy”) for all of its directors,
officers and employees and their family members, as well as for others who have access to information through business relationships with the Company.
The consequences of prohibited insider trading or tipping can be severe. Violation of this Policy by any officer or employee may result in disciplinary
action by the Company up to and including immediate termination for cause. Moreover, persons violating insider trading or tipping rules may be required
to:
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Disgorge the profit made or the loss avoided by the trading, whether received by the insider or someone receiving a tip;
Pay significant civil penalties; and
Pay a criminal penalty and serve time in jail.
In addition to individual sanctions, the Company may also be required to pay civil or criminal penalties.
II. Scope
A.
Covered Persons
This Policy applies to all directors, officers and employees of the Company (“Insiders”) and their respective family members and any outsiders or
consultants whom the Compliance Officer (defined below) may designate as Insiders because they have access to material nonpublic information
concerning the Company (collectively, “Covered Persons”).
B.
Covered Transactions
The Policy applies to any and all transactions in the Company's securities. For purposes of the Policy, the Company's securities include its common stock,
options to purchase or sell common stock and any other type of securities that the Company may issue, such as preferred stock, convertible debentures,
warrants and exchange-traded options or other derivative securities and short sales (collectively, “Company Securities”). Transactions in Company
Securities include not only market transactions, but also private sales of Company Securities, pledges of Company Securities to secure a loan or margin
account, as well as charitable donations of Company Securities.
C.
Policy Delivery
The Policy will be delivered to all directors, officers and employees and other designated persons at the start of their relationship with the Company.
III. Section 16 Persons and Designated Employees
A.
Section 16 Persons.
Each member of the Company’s Board of Directors (the “Board”) and those officers of the Company designated by the Board to be Section 16 officers of
the Company (“Section 16 Persons”) are subject to the reporting provisions and trading restrictions of Section 16 of the Securities Exchange Act of 1934
(the “Act”) and the underlying rules and regulations promulgated by the U.S. Securities and Exchange Commission (“SEC”). Section 16 Persons must
obtain prior approval of all trades in Company Securities from the Compliance Officer in accordance with the procedures set below.
B.
Designated Employees.
In addition to Section 16 Persons, the Compliance Officer may designate additional officers and employees as “Designated Employees.” Designated
Employees are those officers or employees or outside consultants or contractors that the Company considers, because of their duties, to have regular access
to material nonpublic information. In addition to the Policy’s general proscription against insider trading or tipping, Designated Employees must comply
with additional trading restrictions detailed below.
IV. Definition of “Material Nonpublic Information”
A. “Material” Information
“Material Information” is any information about the Company that a reasonable investor would consider important in making an investment decision to buy
or sell the Company’s Securities. If an investor would want to buy or sell securities based in part on the information, the information would be considered
material. In simple terms, Material Information is any type of information that could reasonably be expected to affect the price of the Company’s Securities.
While it is not possible to identify all information that would be deemed “material,” the following types of information ordinarily would be considered
material:
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Clinical developments;
Communications from and to government agencies;
Financial performance, especially quarterly and year-end earnings;
Significant changes in financial performance outlook or liquidity of the Company as a whole or of a reporting segment of the Company's business;
Company projections that significantly differ from external expectations;
Potential mergers and acquisitions or the sale of significant Company assets or subsidiaries;
New major products or product candidates, contracts, orders, suppliers, customers or finance sources, or the loss thereof;
Potential acquisitions of additional product candidates or technologies;
• Major discoveries or significant changes or developments in products or product lines, research or technologies;
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Approvals or denials of requests for regulatory approval by government agencies of products, patents or trademarks;
Significant changes or developments in supplies or inventory, including significant product defects, recalls or product returns;
Significant pricing changes;
Stock splits, public or private securities/debt offerings or changes in Company dividend policies or amounts;
Significant changes in control or senior management;
Significant labor disputes or negotiations, including possible strikes;
Actual or potential exposure to major litigation, or the resolution of such litigation;
Government investigations;
Possible proxy contests;
Imminent or potential changes in the Company’s credit rating by a rating agency;
Voluntary calls of debt or preferred stock of the Company;
The contents of forthcoming publications that may affect the market price of Company Securities;
Statements by stock market analysts regarding the Company and/or its securities;
Significant changes in sales volumes, market share, production scheduling, product pricing or mix of sales;
Analyst upgrades or downgrades of a Company Security;
Significant changes in accounting treatment, write-offs or effective tax rate;
Impending bankruptcy or financial liquidity problems of the company or one of its subsidiaries or significant business partners;
Gain or loss of a substantial customer or supplier;
Information on cybersecurity incidents experienced by the Company that have not yet been made public; or
B. “Nonpublic” Information
Information is considered “nonpublic” until it has not been widely disseminated to the public through SEC filings, major newswire services, national news
services and financial news services and there has been sufficient time for the market to digest that information. For purposes of this Policy, information is
public after the close of trading on the second full business day after the Company's widespread public release of the information. Thus, no transaction
should take place until the third business day following the public release of the Material Information.
Designated Employees of the Company who are most likely to possess Material Information about the Company are subject to trading within the
Company’s “window period” which commences on the third business day following public release of the Company’s annual or quarterly revenues, as the
case may be, and ends on the last trading day of the week preceding the end of each calendar quarter (the “Window Period”). The Window Period may be
modified on a case-by-case basis from time to time if, in the judgment of the Compliance Officer, such modification does not pose a material risk.
Additional employees of the Company may also be subject to the Window Period Policy from time to time as determined by the Compliance Officer.
V. Statement of Company Policy and Procedures
A. Prohibited Activities
No Insider may trade in Company Securities while aware of material nonpublic information concerning the Company.
No Insider may trade in Company Securities during any special trading blackout periods as designated by the Compliance Officer. The deviation of any
blackout period as well as those Insiders subject to the blackout shall be determined by the Compliance Officer. Moreover, the Insider will not disclose to
any person the applicability of a special blackout period without prior permission of the Board.
No Section 16 Person or Designated Employee may trade in Company Securities without prior written approval of the Compliance Officer under the
procedures set forth below. To the extent possible, Section 16 Persons and Designated Employees should retain all records and documents that support their
reasons for making each trade.
No Section 16 Person or Designated Employee may trade in Company Securities outside of the applicable Window Period.
The Compliance Officer may not trade in Company Securities unless the trade(s) have been approved by the Chief Executive Officer in accordance with
the procedures set forth below.
No Insider may “tip” or disclose material nonpublic information concerning the Company to any outside person, including family members, even if that
person is expected to hold such “tip” in confidence, unless required as part of that Insider's regular duties for the Company or authorized by the Board. In
the case of inadvertent disclosure to an outside person, the Insider must advise the Compliance Officer as soon as the inadvertent disclosure has been
discovered. To protect against inadvertent disclosures, all inquiries from outsiders regarding material nonpublic information about the Company must be
forwarded to the Compliance Officer.
No Insider may give trading advice of any kind about the Company to anyone, whether or not such Insider is aware of material nonpublic information
about the Company.
No Insider may trade in any interest or position relating to the future price of Company Securities, such as a put, call or short sale.
Without the specific prior approval of the Compliance Officer, the Chief Executive Officer, or the Audit Committee, no Insider shall accept outside
employment, as a consultant, independent contractor or employee, where the Insider is being compensated for the Insider's knowledge of the Company or
the industry or potential products of the Company.
Without the specific prior approval of the Audit Committee, no Insider shall respond to market rumors or otherwise make any public statements regarding
the Company or its prospects. This includes responding to or commenting on Internet-based bulletin boards or social media platforms. If you become aware
of any rumors or false statements, you should report them to the Compliance Officer.
B. Trading Windows and Blackout Periods
Provided that no other restrictions on trading in Company Securities apply, Section 16 Persons and Designated Employees may trade in Company
Securities during and only during the Window Period.
Notwithstanding the above provisions, any Section 16 Person or Designated Employee who is aware of material nonpublic information concerning the
Company may not trade in Company Securities even during a trading window until three business days following the widespread public release of such
information.
C. Procedures for Approving Trades by Section 16 Individuals
No Section 16 Person or Designated Employee may trade in Company Securities until:
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The Section 16 Person or Designated Employee seeking to trade has notified the Compliance Officer in writing prior to the proposed trade(s) and
the amount and nature of the proposed trade(s); and
The Section 16 Person or Designated Employee seeking to trade has certified in writing to the Compliance Officer no more than three business
days prior to the proposed trade(s) that he or she is not aware of material nonpublic information concerning the Company.
If the Compliance Officer desires to complete any trades involving Company Securities, he or she must first obtain the approval of the Chief Executive
Officer.
The existence of the foregoing approval procedures does not in any way obligate the Compliance Officer, Chief Executive Officer or the Board of the
Company to approve any trades requested by Section 16 Persons or the Compliance Officer.
All trades approved under this section must be exercised within 24 hours of the approval (the “Approval Period”). Provided, however, if the Insider comes
into possession of material nonpublic information before trading, the Insider may not trade. Trades not exercised within the Approval Period require new
approval from the Compliance Officer.
VI. Exceptions to Application of Policy
A.
Employee Benefit Plans
The trading prohibitions and restrictions set forth in this Policy do not apply to periodic contributions by the Company or employees to the Company’s
Stock Purchase Plan (“SPP”) pursuant to the terms and conditions of those plans. However, no officer or employee may alter his or her instructions
regarding the purchase or sale of Company Securities in such plans:
• While aware of material nonpublic information;
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•
In the case of Section 16 Persons or Designated Employees, prior to receiving approval of the purchase or sale as described above; and
In the case of Section 16 Persons and Designated Employees, while any applicable Window Period is closed or applicable special blackout period
is in effect.
Stock Option Plans. Insiders may exercise company stock options where no company stock is sold in the market. Cashless sales—e.g., “cashless sales”
where company stock is sold to pay for exercising the options—are considered under this Policy to be transactions in Company Securities and must comply
with the provisions of this Policy, including the applicability of any prior approval, Window Period or blackout period requirements as they may apply to
an Insider. No cashless sale is permitted when the insider is in possession of material, nonpublic information, except as provided below.
B.
Rule 10b5-1 Plans
Exchange Act Rule 10b5-l was adopted by the SEC to protect persons from insider trading liability for transactions under a written trading plan previously
established at a time when the insider did not possess material nonpublic information. Under a properly established 10b5-1 plan with respect to securities
(“10b5-1 Plan”), Insiders may complete transactions in Company Securities at any time, including during blackout periods and outside the Window Period
or even when the Insider possesses material nonpublic information. Thus, a 10b5-1 Plan offers an opportunity for Insiders to establish a systematic program
of transactions in Company Securities over periods of time that might include periods in which such transactions would otherwise be prohibited under the
federal securities laws or this policy. A variety of arrangements can be structured to meet the requirements of Rule 10b5-1. In particular, a 10b5-1 Plan can
take the form of a blind trust, other trust, pre-scheduled stock option exercises and sales, pre-arranged trading instructions and other brokerage and third-
party arrangements over which the Insider has no control once the plan takes effect.
Insiders who desire to implement a 10b5-1 Plan must first obtain approval of the plan by the Compliance Officer. To be eligible for approval, the 10b5-1
Plan:
• Must be established during a trading window (and not during any black out period);
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Bust be in writing;
• Must either irrevocably set forth the future date or dates on which purchase or sale of securities are to be made, the prices at which the securities
are to be purchased or sold, the broker who will be responsible for effecting the transactions (or method of transaction if not through a broker), or
provide a formula for determining the price of the securities to be purchased or sold and the date or dates on which the transactions are to be
completed;
• May not permit the direct or indirect exercise of any influence over the timing or terms of the purchase or sale by the Insider; and
• May not take effect until after the plan is approved by the Board.
The Compliance Officer will maintain a copy of all 10b5-1 Plans.
The Insider must provide the Compliance Officer written notice of any termination or modification (in which case, the modification must be approved in
writing by the Compliance Officer prior to effectiveness and may not take effect until after the plan is approved by the Board.
VII. Reporting of Violations
Any Insider who violates this Policy or any federal, state or self-regulatory organization (“SRO”) rule or law governing insider trading or tipping or knows
of any such violation by any other Insider, must report the violation immediately to the Compliance Officer. Upon receipt of notice of a potential violation
of this Policy, the Compliance Officer
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•
Shall make inquiry either through the office of the Company’s counsel or with assistance of outside counsel, to determine whether a violation may
have occurred;
Shall report the potential violation of this Policy to the Audit Committee if the Compliance Officer concludes a violation occurred or if the
Compliance Officer is unable to conclude that no violation occurred; and
Upon determining that any such violation has occurred, in consultation with the Company's Disclosure Committee and, where appropriate, the
Chair of the Audit Committee of the Board, will determine whether the Company should release any material nonpublic information.
If the Compliance Officer or Audit Committee determines that a violation of the Policy occurred, they may discipline the Insider, including immediate
termination. The Audit Committee may also report the violation to federal or state law enforcement agencies and/or applicable SRO.
VIII. Inquiries
Please direct all inquiries regarding any of the provisions or procedures of this Policy to the Compliance Officer.
IX. Insider Trading Compliance Officer
The Company has designated the Chief Financial Officer as its Insider Trading Compliance Officer (the “Compliance Officer”). The Compliance Officer
will review and either approve or prohibit all proposed trades by Section 16 Persons in accordance with the procedures set forth above.
In addition to the trading approval duties described above, the duties of the Compliance Officer shall include the following:
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Administering this Policy and monitoring and enforcing compliance with all Policy provisions and procedures;
• With the assistance of the Human Resources Department, overseeing the training of new and existing officers, directors, employees and others on
the requirements of this Policy;
Responding to all inquiries relating to this Policy and its procedures;
Designating and announcing special trading blackout periods during which Insiders, that the Compliance Officer determines, may not trade in
Company Securities;
Providing copies of this Policy and other appropriate materials to all current and new directors, officers, employees and such other persons whom
the Compliance Officer determines may regularly have access to material nonpublic information concerning the Company;
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Administering, monitoring and enforcing compliance with all federal, state and SRO insider trading statutes, regulations and rules;
Proposing recommendations for revisions to the Policy to the board of directors as necessary to reflect changes in insider trading laws, regulations
or rules of any federal or state governmental body or SRO; and
• Maintaining as Company records originals or copies of all documents required by the provisions of this Policy or the procedures set forth herein,
and copies of all required SEC reports relating to insider trading.
The Compliance Officer may designate one or more individuals who may perform the Compliance Officer's duties in the event that the Compliance Officer
is unable or unavailable to perform such duties.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in Registration Statement Nos. 333-228493 and 333-230572 on Form S-8 and Registration Statement
Nos. 333-235329 and 333-240252 on Form S-3 of our report dated March 14, 2024, relating to the financial statements of Eton Pharmaceuticals, Inc.,
appearing in this Annual Report on Form 10-K of Eton Pharmaceuticals, Inc. for the year ended December 31, 2023.
Exhibit 23.1
/s/ KMJ Corbin & Company LLP
Irvine, California
March 14, 2024
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Sean E. Brynjelsen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Eton Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 14, 2024
By:
/s/ Sean E. Brynjelsen
Sean E. Brynjelsen
Principal Executive Officer
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, James Gruber, certify that:
1. I have reviewed this Annual Report on Form 10-K of Eton Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 14, 2024
By:
/s/ James Gruber
James Gruber
Principal Financial and Accounting Officer
ETON PHARMACEUTICALS, INC.
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Sean E. Brynjelsen, President and Chief Executive Officer of Eton
Pharmaceuticals, Inc. (the “Company”), and James Gruber, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2023 (the “Annual Report”), to which this Certification is
attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 14th day of March, 2024.
/s/ Sean E. Brynjelsen
Sean E. Brynjelsen
President and Chief Executive Officer
(Principal Executive Officer)
/s/ James Gruber
James Gruber
Chief Financial Officer
(Principal Financial and Accounting Officer)
*
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or
after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.
Exhibit 97
Introduction
Eton Pharmaceuticals, Inc.
Clawback Policy
The Board of Directors (the “Board”) of Eton Pharmaceuticals, Inc. (the “Company”) believes that it is in the best interests of the Company and its
stockholders to adopt a policy that reflects that portion of the Company’s compensation philosophy related to incentive compensation. The Board has
therefore adopted this policy which provides for the recoupment of certain executive compensation in the event of an accounting restatement resulting from
material noncompliance with financial reporting requirements under the federal securities laws (the "Policy"). This Policy is designed to comply with
Section 10D of the Securities Exchange Act of 1934 (the "Exchange Act") and Nasdaq Listing Rule 5608 (the "Clawback Listing Standards").
Administration
This Policy shall be administered by the Board or, if so designated by the Board, the Compensation Committee, in which case references herein to the
Board shall be deemed references to the Compensation Committee. Any determinations made by the Board shall be final and binding on all affected
individuals.
Covered Executives
This Policy applies to the Company's current and former executive officers, as determined by the Board in accordance with the definition in Section 10D of
the Exchange Act and the Clawback Listing Standards, who may from time to time be deemed subject to the Policy by the Board ("Covered Executives").
Recoupment; Accounting Restatement
In the event the Company is required to prepare an accounting restatement of its financial statements due to the Company's material noncompliance with
any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued
financial statements that is material to the previously issued financial statements or that would result in a material misstatement if the error were corrected
in the current period or left uncorrected in the current period, the Board will require reimbursement or forfeiture of any excess Incentive Compensation
received by any Covered Executive during the three completed fiscal years immediately preceding the date on which the Company is required to prepare an
accounting restatement.
Incentive Compensation
For purposes of this Policy, Incentive Compensation means any of the following; provided that, such compensation is granted, earned, or vested based
wholly or in part on the attainment of a financial reporting measure:
● Annual bonuses and other short- and long-term cash incentives.
● Stock options.
● Stock appreciation rights.
● Restricted stock.
● Restricted stock units.
● Performance shares.
● Performance units.
Financial reporting measures include:
● Company stock price.
● Total shareholder return.
● Revenues.
● Net income.
● Earnings before interest, taxes, depreciation, and amortization (EBITDA).
● Funds from operations.
● Liquidity measures such as working capital or operating cash flow.
● Return measures such as return on invested capital or return on assets.
● Earnings measures such as earnings per share.
Excess Incentive Compensation: Amount Subject to Recovery
The amount to be recovered will be the excess of the Incentive Compensation paid to the Covered Executive based on the erroneous data over the Incentive
Compensation that would have been paid to the Covered Executive had it been based on the restated results, as determined by the Board, without regard to
any taxes paid by the Covered Executive in respect of the Incentive Compensation paid based on the erroneous data.
If the Board cannot determine the amount of excess Incentive Compensation received by the Covered Executive directly from the information in the
accounting restatement, then it will make its determination based on a reasonable estimate of the effect of the accounting restatement.
Method of Recoupment
The Board will determine, in its sole discretion, the method for recouping Incentive Compensation hereunder which may include, without limitation:
(a) requiring reimbursement of cash Incentive Compensation previously paid;
(b) seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards;
(c) offsetting the recouped amount from any compensation otherwise owed by the Company to the Covered Executive;
(d)) cancelling outstanding vested or unvested equity awards; and/or
(e) taking any other remedial and recovery action permitted by law, as determined by the Board.
No Indemnification
The Company shall not indemnify any Covered Executives against the loss of any incorrectly awarded Incentive Compensation.
Interpretation
The Board is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of
this Policy. It is intended that this Policy be interpreted in a manner that is consistent with the requirements of Section 10D of the Exchange Act, any
applicable rules or standards adopted by the Securities and Exchange Commission, and the Clawback Listing Standards.
Effective Date
This Policy shall be effective as of November 10, 2023 (the "Effective Date") and shall apply to Incentive Compensation that is received by Covered
Executives on or after the Effective Date, even if such Incentive Compensation was approved, awarded, or granted to Covered Executives prior to the
Effective Date.
Amendment; Termination
The Board may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary to reflect final regulations adopted
by the Securities and Exchange Commission under Section 10D of the Exchange Act and to comply with the Clawback Listing Standards and any other
rules or standards adopted by a national securities exchange on which the Company's securities are listed. The Board may terminate this Policy at any time.
Other Recoupment Rights
Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the
Company pursuant to the terms of any similar policy in any employment agreement, equity award agreement, or similar agreement and any other legal
remedies available to the Company.
Relationship to Other Plans and Agreements
The Board intends that this Policy will be applied to the fullest extent of the law. The Board may require that any employment agreement, equity award
agreement, or similar agreement entered into on or after the Effective Date shall, as a condition to the grant of any benefit thereunder, require a Covered
Executive to agree to abide by the terms of this Policy. In the event of any inconsistency between the terms of the Policy and the terms of any employment
agreement, equity award agreement, or similar agreement under which Incentive Compensation has been granted, awarded, earned or paid to a Covered
Executive, whether or not deferred, the terms of the Policy shall govern.
[Acknowledgment
The Covered Executive shall sign an acknowledgment form [in the form attached hereto as Exhibit [INSERT EXHIBIT NUMBER OR LETTER] in which
they acknowledge that they have read and understand the terms of the Policy and are bound by the Policy.]
Impracticability
The Board shall recover any excess Incentive Compensation in accordance with this Policy unless such recovery would be impracticable, as determined by
the Board in accordance with Rule 10D-1 of the Exchange Act and the listing standards of the national securities exchange on which the Company's
securities are listed.
Successors
This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal
representatives.