Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
1 — Company Overview
Eton
Pharmaceuticals, Inc. (“Eton” or the “Company”) was incorporated as a Delaware corporation on April 27,
2017 and was initially set up as a wholly owned subsidiary of Harrow Health, Inc. or “Harrow” (fka Imprimis Pharmaceuticals,
Inc.). In June 2017, the Company raised $20,055 in start-up capital through a private sale of preferred stock and a separate management
team was then established for Eton with its corporate offices located in Deer Park, Illinois. In November 2018, the Company completed
an initial public offering (the “IPO”) and received net proceeds of $21,960, after deducting underwriting discounts
and commissions and offering-related expenses. In November 2019, the Company entered into a credit agreement and received net
proceeds of $4,750 and in August 2020 the Company received net proceeds of $1,965 under the credit agreement (see Note 5). In
March and April 2020, Eton received net proceeds of $7,756 from the sale of shares of its common stock (see Note 6). In October
2020, the Company received net proceeds of approximately $21,040 from a public offering for its shares (see Note 12).
Eton
is a specialty pharmaceutical company focused on developing, acquiring, and commercializing innovative products. Eton is primarily
focused on hospital injectable and pediatric rare disease products. The Company seeks to improve the formula, delivery system,
or safety of existing molecules in order to address unmet patient needs. Eton pursues what it perceives to be low-risk product
candidates where existing published literature, historical clinical trials, or physician usage has established safety and/or efficacy
of the molecule, thereby reducing the incremental clinical burden required for the Company to bring the product to patients.
Note
2 — Liquidity Considerations
As
of September 30, 2020, the Company had an accumulated deficit of $84,471 and for the nine months ended September 30, 2020, the
Company had net cash used in operating activities of $15,164.
To
date, the Company has generated limited revenues and has incurred negative cash flows from operating activities since its inception
in 2017. The Company received its first product approval from the U.S. Food and Drug Administration (“FDA”), Biorphen®,
in October 2019 and currently believes its future revenues and its cash and cash equivalents of $7,332 as of September 30, 2020
combined with the $21,040 of net proceeds from its October 2020 public offering discussed in Note 1 above will be sufficient to
fund its operating expenses and capital expenditure requirements for at least the next twelve months from the date of the filing
of this Report. This estimate is based on the Company’s current assumptions, including expected sales for Biorphen and Alkindi
Sprinkle and its ability to manage its spending. The Company could use its available capital resources sooner than currently expected,
and accordingly, could seek to obtain additional capital through equity financings, additional drawdowns under its current credit
agreement (see Note 5), the sale of additional debt, or through 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 could contain senior rights and preferences compared to currently outstanding
common shares. Issued debt securities may contain covenants and limit the Company’s ability to pay dividends or make other
distributions to stockholders. If the Company is not able to achieve significant revenues from product sales and licensing, encounters
delays in completing its product development and obtaining regulatory approval for its product candidates, and is unable to obtain
such additional financing, its 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 accounting principles generally accepted in the
United States of America (“GAAP”).
Unaudited
Interim Financial Information
The
accompanying interim condensed financial statements are unaudited and have been prepared on the same basis as the audited financial
statements and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company’s
financial position as of September 30, 2020 and the results of its operations and its cash flows for the periods ended September
30, 2020 and 2019. The financial data and other information disclosed in these notes related to the three and nine-month periods
ended September 30, 2020 and 2019 are also unaudited. The results for the nine-month period ended September 30, 2020 are not necessarily
indicative of results to be expected for the year ending December 31, 2020, any other interim periods or any future year or period.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed
financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and
assumptions reflected in these condensed financial statements include, but are not limited to, provisions for uncollectible receivables
and sales returns, valuation of inventories, useful lives of assets and the impairment of property and equipment, the accrual
of research and development expenses and the valuation of common stock, stock options and warrants. Estimates are periodically
reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which
they become known. Actual results could differ from those estimates or assumptions.
Intangible
Assets
The
Company capitalizes payments it makes for licensed products when the payment is based on FDA approval for the product and the
cost is recoverable based on expected future cash flows from the product. The cost is amortized on a straight-line basis over
the estimated useful life of the product commencing on the approval date in accordance with Accounting Standards Codification
(“ASC”) 350 — Intangibles - Goodwill and Other. A $750 payment related to the approval of the Company’s
Biorphen product has been capitalized and that cost is being amortized over five years.
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized in the Company’s statements of operations for the amount
by which the carrying amount of the asset exceeds the fair value of the asset. No impairment has been recognized since the Company’s
inception in 2017.
Revenue
Recognition for Contracts with Customers
The
Company intends to generate its future revenues from direct sales of its approved Biorphen and Alkindi Sprinkle products as well
as other of its products which are in development. In addition, the Company anticipates it will receive revenues from product
licensing agreements for which it has contracted for milestone payments and royalties from products it has developed or for which
it has acquired the rights to a product developed by a third party.
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.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
The
Company 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.
Royalties
– For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which
are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties
relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation
to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not
recognized any royalty revenue resulting from any of its licensing arrangements.
Significant
Financing Component – In determining the transaction price, the Company will adjust consideration for the effects of
the time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services
to the licensees will be more than one year.
The
Company sells Biorphen in the U.S. to wholesale pharmaceutical distributors, which then sell the product to hospitals and other
end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and
delivery of individual shipments of Biorphen represent performance obligations under each purchase order. The Company uses a third-party
logistics (“3PL”) vendor to process and fulfill orders and has concluded it is the principal in the sales to wholesalers
because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. The Company has no significant
obligations to wholesalers to generate pull-through sales.
Selling
prices initially billed to wholesalers are subject to discounts for prompt payment and subsequent chargebacks when the wholesalers
sell Biorphen at negotiated discounted prices to members of certain group purchasing organizations (“GPOs”) and government
programs. In addition, the Company pays fees to wholesalers for their distribution services, inventory reporting and chargeback
processing. The Company pays GPO fees for administrative services and for access to GPO members and concluded the benefits received
in exchange for these fees are not distinct from its sales of Biorphen, and accordingly it applies these amounts to reduce revenues.
Wholesalers also have rights to return unsold product nearing or past the expiration date. Because of the shelf life of Biorphen
and the Company’s lengthy return period, there may be a significant period of time between when the product is shipped and
when the Company 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 arising from all of the above factors. In September 2020, the Company reduced
its estimated selling price for Biorphen through wholesalers and recorded a $192 reduction to revenue based on the shelf stock
inventory held at its wholesale customers. The Company has developed estimates for future returns and chargebacks of Biorphen
and the impact of the 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 recognizes revenue from Biorphen product sales and related cost of sales upon product delivery to the wholesaler location.
At that time, the wholesalers take control of the product as they take title, bear the risk of loss, 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.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Upon
recognition of revenue from product sales of Biorphen, the estimated amounts of credit for product returns, chargebacks, distribution
fees, prompt payment discounts, and GPO fees are included in sales reserves, accrued liabilities and net of accounts receivable.
The Company monitors actual product returns, chargebacks, discounts and fees subsequent to the sale. If these amounts end up differing
from the Company’s estimates, it will make adjustments to these allowances, which are applied to increase or reduce product
sales revenue and earnings in the period of adjustment.
In
addition, the Company anticipates it will receive revenues from product licensing agreements where it has contracted for milestone
payments and royalties from products it has developed or for which it has acquired the rights to a product developed by a third
party.
Cost
of Product Sales
Cost
of product sales consists of the profit-sharing fees with the Company’s product licensing and development partners, the
purchase costs for finished products from third-party manufacturers and freight and handling/storage costs from the Company’s
3PL logistics service provider. The cost of sales for profit-sharing 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.
In the case where there is a loss under the profit-sharing arrangement, the Company is able to true-up and recover the loss from
its development partners, as occurred with Biorphen in the three-month period ended September 30, 2020.
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 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. 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 on products which are not yet approved by the FDA are expensed
as R&D in the period in which they are incurred. Milestone payments for FDA-approved products are capitalized and amortized
over the expected economic life of the product. Nonrefundable advance payments for goods or services to be received in the future
for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services
are performed.
Earnings
(Loss) Per Share
Basic
net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number
of common and common equivalent shares, such as unvested restricted stock awards (“RSA”), restricted stock units (“RSU’”),
stock options and warrants, 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 September 30, 2020 and 2019 were 3,308,152 and 3,573,885,
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 are RSUs awarded to directors that have vested, but the issuance and delivery
of the common shares are deferred until the director retires from service as a director.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
Stock-Based
Compensation
The
Company accounts for stock-based compensation under the provisions of ASC 718 Compensation — Stock Compensation. The guidance
under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant and record
expense over the related service periods, which are generally the vesting period of the equity awards. The Company estimates the
fair value of stock-based option awards using the Black-Scholes-Merton option-pricing model (“BSM”). The BSM requires
the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term, forfeitures
and the fair value of the underlying common stock on the date of grant, among other inputs. The risk-free interest rate was determined
from the implied yields for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options
or warrants. Dividends on common stock are assumed to be zero for the BSM valuation of the stock options. The expected term of
stock options granted is based on vesting periods and the contractual life of the options. Expected volatilities are based on
comparable companies’ historical volatility along with a limited weighting included for the Company’s own volatility
subsequent to its IPO, which management believes represents the most accurate basis for estimating expected future volatility
under the current conditions. The Company accounts for forfeitures as they occur. Since the IPO in November 2018, the Company
has used the closing common stock price on the date of grant for the fair value of the common stock.
Fair
Value Measurements
We
measure certain of our assets and liabilities at fair value. Fair value represents the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value
accounting requires characterization of the inputs used to measure fair value into a three-level fair value hierarchy as follows:
Level
1 — Inputs based on quoted prices in active markets for identical assets or liabilities. An active market is a market
in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level
2 — Observable inputs that reflect the assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent from the entity.
Level
3 — Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best information available.
Fair
value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s
assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation
of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values
stated below take into account the market for the Company’s financials, assets and liabilities, the associated credit risk
and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities
occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
The
Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities,
PPP and EIDL loans and long-term debt obligation. The carrying amounts of these financial instruments, except for the PPP and
EIDL loans and long-term debt obligation, approximate their fair values due to the short-term maturities of these instruments.
Based on borrowing rates currently available to the Company, the carrying value of the PPP and EIDL loans and long-term debt obligation
approximate their fair values.
Impact
of New Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The new guidance removes, modifies, and adds to
certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The Company adopted the new guidance
on January 1, 2020 which did not have a material impact on its financial position or results of operations.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
3 — Summary of Significant Accounting Policies (continued)
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions
to the general principles of ASC 740 in order to simplify the complexities of its application. These changes include eliminations
to the exceptions for intraperiod tax allocation, recognizing deferred tax liabilities related to outside basis differences, and
year-to-date losses in interim periods, among others. The Company adopted the new guidance on January 1, 2020 which did not have
a material impact on its financial position or results of operations.
Note
4 – Property and Equipment
Property
and equipment consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Computer hardware and software
|
|
$
|
175
|
|
|
$
|
174
|
|
Furniture and fixtures
|
|
|
134
|
|
|
|
133
|
|
Equipment
|
|
|
994
|
|
|
|
994
|
|
Leasehold improvements
|
|
|
155
|
|
|
|
152
|
|
Construction in progress
|
|
|
1
|
|
|
|
9
|
|
|
|
|
1,459
|
|
|
|
1,462
|
|
Less: accumulated depreciation
|
|
|
(605
|
)
|
|
|
(345
|
)
|
Property and equipment, net
|
|
$
|
854
|
|
|
$
|
1,117
|
|
Depreciation
expense for the three-month periods ended September 30, 2020 and 2019 was $86 and $86, respectively. Depreciation expense for
the nine-month periods ended September 30, 2020 and 2019 was $260 and $197, respectively.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
5 — Long-Term Debt
SWK
Loan
On
November 13, 2019, the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Holdings Corporation
(“SWK”) which provided for up to $10,000 in financing. The Company received proceeds of $5,000 at closing and was
able to borrow an additional $5,000 upon the FDA approval of a second product developed by the Company, excluding EM-100. In March
2020, in conjunction with the Company’s Alkindi Sprinkle product licensing agreement (see Note 11) and the Company’s
March 2020 sale of additional shares of its common stock (see Note 6), the Company and SWK amended the SWK Credit Agreement. The
amendment provided the Company with the option to immediately draw $2,000 and the ability to borrow an additional $3,000 based
upon the FDA approval of EM-100 and Alkindi Sprinkle which subsequently occurred in September 2020. Accordingly, the Company borrowed
an additional $2,000 on August 11, 2020. The term of the SWK Credit Agreement is for five years and borrowings bear interest at
a rate of LIBOR 3-month plus 10.0%, subject to a stated LIBOR floor rate of 2.0%. A 2.0% unused credit limit fee is assessed during
the first twelve months after the date of the SWK Credit Agreement and loan fees include a 5.0% exit fee based on the principal
amounts drawn which is payable at the end of the term of the SWK Credit Agreement. The Company is required to maintain a minimum
cash balance of $3,000, will only pay interest on the debt until May 2022 and then will pay 5.5% of the loan principal balance
commencing on February 15, 2022 and then every three months thereafter until November 13, 2024 at which time the remaining principal
balance is due. Borrowings under the SWK Credit Agreement are secured by the Company’s assets. The SWK Credit Agreement
contains customary default provisions and covenants which include limits on additional indebtedness. In March 2020, SWK provided
a waiver for the Company to obtain loans with the Small Business Association. The Company is currently in the process of negotiating
covenant targets for EBITDA and revenue for the SWK Credit Agreement.
In
connection with the initial $5,000 borrowed in November 2019, the Company issued warrants to SWK to purchase 51,239 shares of
the Company’s common stock with an exercise price of $5.86 per share. The relative fair value of these 51,239 warrants was
$226 and was estimated using the Black-Scholes-Merton option pricing model with the following assumptions: fair value of the Company’s
common stock at issuance of $5.75 per share; seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest
rate of 1.8%.
In
connection with the additional $2,000 borrowed in August 2020, the Company issued warrants for 18,141 shares of its common stock
at an exercise price of $6.62 per share. The relative fair value of the 18,141 warrants was $94 and was estimated using the Black-Scholes-Merton
option pricing model with the following assumptions: fair value of the Company’s common stock at issuance of $6.85 per share;
seven-year contractual term; 95% volatility; 0% dividend rate; and a risk-free interest rate of 0.4%.
These
warrants (the “SWK Warrants”) are exercisable immediately and have a term of seven years from the date of issuance.
The SWK Warrants are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise
subject to change in connection with stock splits, dividends, reclassifications and other conditions.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
5 — Long Term Debt (continued)
Interest
expense of $617 was recorded during the nine months ended September 30, 2020 which included $85 of debt discount amortization.
As of September 30, 2020, $123 of accrued interest is included in accrued liabilities.
The
table below reflects the future payments for the SWK loan principal and interest as of September 30, 2020.
|
|
Amount
|
|
2020
|
|
$
|
247
|
|
2021
|
|
|
879
|
|
2022
|
|
|
2,202
|
|
2023
|
|
|
1,756
|
|
2024
|
|
|
5,299
|
|
Total payments
|
|
|
10,383
|
|
Less: amount representing interest
|
|
|
(3,383
|
)
|
Loan payable, gross
|
|
|
7,000
|
|
Less: unamortized discount
|
|
|
(504
|
)
|
Long-term debt, net of unamortized discount
|
|
$
|
6,496
|
|
PPP
loan
On
May 4, 2020, the Company received $361 in loan proceeds under the Paycheck Protection Program (“PPP”) from the Small
Business Administration (“SBA”) through its banking relationship with Bank of America. The loan bears a 1.0% annual
interest rate and is payable in monthly installments commencing on November 4, 2020 until paid in full on May 4, 2022. The Company
recorded $1 in interest expense for the nine-month period ended September 30, 2020. The Company intends to pursue full or partial
forgiveness of the loan as permitted under the applicable SBA guidelines for PPP loans.
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 loan bears a 3.75% annual interest rate and is payable in monthly installments commencing on July 21, 2021 until
paid in full on July 21, 2050. The Company recorded $2 in interest expense for the nine-month period ended September 30, 2020.
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.
In
March and April 2020, the Company entered into securities purchase agreements with various investors and sold an aggregate of
2,600,000 shares of its common stock at a price of $3.00 per share and received $7,756 in net proceeds after deducting issuance
costs associated with the sale.
In
March 2020, the Company issued 379,474 shares of its common stock to Diurnal Limited (“Diurnal”) as a milestone fee
for acquiring the U.S. marketing rights to Alkindi Sprinkle®, an orphan drug product currently under review with the FDA (see
Note 11). The shares were valued at $1,264 based on the Company’s closing stock price on the date of issuance and this amount
was recorded as a component of the Company’s research and development expense and an addition to its paid-in-capital.
During
the nine months ended September 30, 2020, the Company issued 102,378 shares of its common stock resulting from stock option exercises
under its 2018 Equity Incentive Plan (see Note 8). In April 2020, the Company issued 15,190 shares of its common stock as an RSA
to a new employee. This RSA vests 25% every three months and will be 100% vested in April 2021. In June 2020, the Company issued
14,005 shares of its common stock to employees in accordance with its Employee Stock Purchase Plan (“ESPP”).
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
7 — Common Stock Warrants
The
Company’s outstanding warrants to purchase shares of its common stock at September 30, 2020 are summarized in the table
below.
Description
of Warrants
|
|
No.
of Shares
|
|
|
Exercise
Price
|
|
Business
Advisory Warrants
|
|
|
600,000
|
|
|
$
|
0.01
|
|
Placement
Agent Warrants – 2017 Preferred Stock Offering
|
|
|
607,096
|
|
|
$
|
3.00
|
|
Placement
Agent Warrants - IPO
|
|
|
414,000
|
|
|
$
|
7.50
|
|
SWK
Warrants – Debt (Tranche #1)
|
|
|
51,239
|
|
|
$
|
5.86
|
|
SWK
Warrants – Debt (Tranche #2)
|
|
|
18,141
|
|
|
$
|
6.62
|
|
Total
|
|
|
1,690,476
|
|
|
$
|
3.17
(Avg)
|
|
The
holders of these warrants or their permitted transferees, are entitled to rights with respect to the registration under the Securities
Act of 1933, as amended (the “Securities Act”) for their shares that are converted to common stock, including demand
registration rights and piggyback registration rights. These rights are provided under the terms of a registration rights agreement
between the Company and the investors.
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 (the “2018 Plan”) which succeeded the 2017 Plan. The Company has granted RSAs, stock
options and RSUs for its common stock under the 2018 Plan as detailed below. There were 453,246 shares available for future issuance
under the 2018 Plan as of September 30, 2020.
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 annually by 4% of the total number of shares of common stock outstanding as of the preceding December
31, subject to a reduction at the discretion of the Company’s board of directors. The exercise price for stock options granted
is not less than the fair value of common stock as determined by the board of directors as of the date of grant. The Company uses
the closing stock price on the date of grant as the exercise price.
During
the third quarter of 2017, the Company issued 25,000 RSU’s to each of its four outside directors (100,000 total share units).
The RSU’s issued to the outside directors were 100% vested at June 30, 2018. The associated 100,000 shares of the Company’s
common stock will not be issued until the individual director retires from service from the Company’s board of directors.
The Company has not issued any additional RSU’s.
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 that expire within five years if the Company is 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
do not vest unless certain product submissions are made to the FDA, and accordingly, the Company has not recorded any expense
for these contingently vesting option awards to its product consultants.
For
the three months ended September 30, 2020 and 2019, the Company’s total stock-based compensation expense was $724 and $537,
respectively. Of these amounts, $647 and $460 was recorded in general and administrative expenses, respectively, and $77 and $77
was recorded in research and development expenses, respectively.
For
the nine months ended September 30, 2020 and 2019, the Company’s total stock-based compensation expense was $1,803 and $1,387,
respectively. Of these amounts, $1,623 and $1,150 was recorded in general and administrative expenses, respectively, and $180
and $237 was recorded in research and development expenses, respectively.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
8 — Share-Based Payment Awards (continued)
A
summary of stock option activity is as follows:
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Term (Yrs)
|
|
|
Aggregate Intrinsic
Value
|
|
Options outstanding as of December 31, 2019
|
|
|
1,829,878
|
|
|
$
|
4.01
|
|
|
|
8.1
|
|
|
$
|
6,014
|
|
Issued
|
|
|
1,372,000
|
|
|
$
|
3.85
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(102,378
|
)
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(237,500
|
)
|
|
$
|
5.72
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2020
|
|
|
2,862,000
|
|
|
$
|
3.89
|
|
|
|
8.4
|
|
|
$
|
11,492
|
|
Options exercisable at September 30, 2020
|
|
|
1,187,027
|
|
|
$
|
3.71
|
|
|
|
7.8
|
|
|
$
|
4,971
|
|
Options vested and expected to vest at September 30, 2020
|
|
|
2,812,000
|
|
|
$
|
3.93
|
|
|
|
8.5
|
|
|
$
|
11,166
|
|
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.
The
assumptions used to calculate the fair value of options granted during the nine months ended September 30, 2020 under the BSM
were as follows:
Expected
dividends
|
|
—
|
%
|
Expected
volatility
|
|
|
95
|
%
|
Risk-free
interest rate
|
|
|
0.4
- 0.7
|
%
|
Expected
term
|
|
|
5.3
– 6.1 years
|
|
Weighted
average fair value
|
|
$
|
2.91
|
|
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 ten years). The expected term of options granted to non-employees equals the contractual life of
the options.
Expected
Volatility — Due to the Company’s limited operating history and a lack of Company-specific historical and implied
volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar
companies that are publicly traded. The Company has continued this methodology plus given some limited weighting to its own volatility
in the periods subsequent to its November 2018 IPO. The historical volatility data was computed using the daily closing prices
for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.
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.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
8 — Share-Based Payment Awards (continued)
As
of September 30, 2020, there was a total of $4,810 of unrecognized compensation costs related to non-vested stock option and restricted
awards. In the nine-month period ended September 30, 2020, there were six stock option exercises which totaled 102,378 shares
at an average exercise price of $1.37 per share with an intrinsic value of $436. There were seven stock option exercises for 134,122
shares during the nine months ended September 30, 2019 at an average exercise price of $1.15 per share with an intrinsic value
of $786.
In
December 2018, the Company’s board of directors approved and adopted an initial offering of the Company’s common stock
under the Company’s 2018 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. As of September
30, 2020, there were 391,110 shares available for issuance under the ESPP.
The
annual offerings consist of two stock purchase periods, with the first purchase period ending in June and the second purchase
period ending in December. The terms of the ESPP permit employees of the Company to use payroll deductions to purchase stock at
a price per share that is at least the lesser of (1) 85% of the fair market value of a share of common stock on the first date
of an offering or (2) 85% of the fair market value of a share of common stock on the date of purchase. After the initial offering
period ended, 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.
For
the first nine months of 2020 and 2019 there were 14,005 and 23,083 share issuances under the ESPP. The weighted average grant
date fair value of share awards in the first nine months of 2020 and 2019 was $2.43 and $2.57, respectively. Employees contributed
$100 and $199 via payroll deductions during the nine months ended September 30, 2020 and 2019, respectively. The Company recorded
an expense of $38 and $93 related to the ESPP in the nine-month periods ended September 30, 2020 and 2019, respectively. As of
September 30, 2020 and December 31, 2019, the accompanying condensed balance sheets include $32 and $79, respectively, in accrued
liabilities for remaining employee ESPP contributions.
Note
9 — Related Party Transactions
Harrow
Harrow
was issued 3,500,000 shares of the Company’s common stock at the formation of the Company at the $0.001 par value per share
price as the paid-in-capital contribution from Harrow. The Company and Harrow signed licensing agreements for two products developed
by Harrow whereby Harrow assigned the product rights to the Company. In July 2018, the Company determined that one of the products
was not viable for its portfolio of product opportunities and cancelled the licensing agreement and the product rights were returned
to Harrow.
As
part of the early start-up for the Company’s pharmaceutical business in 2017, key executives at Harrow received a total
of 1,500,000 shares of restricted common stock in the Company for consulting services, and certain Harrow managers also received
stock options to purchase a total of 130,000 shares of common stock from the Company (20,000 of these options were forfeited in
2018). The restricted stock and stock options vested in full on April 30, 2018.
Additionally,
the Chief Executive Officer of Harrow is a member of the Company’s board of directors.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
9 — Related Party Transactions (continued)
Chief
Executive Officer
The
Company’s CEO has a partial interest in several companies that the Company is working with for product development and potential
marketing if the products are approved by the FDA as detailed below.
The
Company acquired the exclusive rights to sell the EM-100 product in the United States pursuant to a sales and marketing agreement
(the “Eyemax Agreement”) dated August 11, 2017 between the Company and Eyemax LLC (“Eyemax”), an entity
affiliated with the Company’s CEO. The Company also held a right of first refusal to obtain the exclusive license rights
for geographic areas outside of the United States. Pursuant to the Eyemax Agreement, the Company is responsible for all costs
of testing and FDA approval of the product, other than the FDA filing fee which will be paid by Eyemax. The Company was also responsible
for commercializing the product in the United States at its expense. The Company paid Eyemax $250 upon execution of the Eyemax
Agreement, which was recorded as a component of R&D expense. Under the terms of the original agreement, the Company would
pay Eyemax $250 upon FDA approval and $500 upon the first commercial sale of the product and pay Eyemax a royalty of 10% on the
net sales of all products. The Eyemax Agreement was for an initial term of 10 years from the date of the Eyemax Agreement, subject
to successive two-year renewals unless the Company elected to terminate the Eyemax Agreement.
On
February 18, 2019, the Company entered into an Amended and Restated Agreement with Eyemax amending the Sales Agreement (the “Amended
Agreement”). Pursuant to the Amended Agreement, Eyemax sold the Company all of its right, title and interest in EM-100,
including any such product that incorporates or utilizes Eyemax’s intellectual property rights. Under the Amended Agreement,
the Company assumed certain liabilities of Eyemax under its Exclusive Development & Supply Agreement with Excelvision SAS
dated as of July 11, 2013, as amended (the “Excelvision Agreement”), with respect to certain territories and arising
during certain time periods. Pursuant to the Amended Agreement, the Company remains obligated to pay Eyemax two milestones payments:
(i) one milestone payment for $250 upon regulatory approval in the territory by the FDA of the first single agent product and
(ii) one milestone payment for $500 following the first commercial sale of the first single agent product in the territory. Following
payment of the milestones, the Company is entitled to retain all of the non-royalty transaction revenues and royalties up to $2,000
(the “Recovery Amount”). After the Company has retained the full Recovery Amount, it is entitled to retain half of
all royalty and non-royalty transaction revenue. The Amended Agreement also contains customary representations, warranties, covenants
and indemnities by the parties. The EM-100 asset and its associated product rights were sold to Bausch on February 18, 2019 and
future potential royalties of twelve percent of net sales of Bausch sales of EM-100, pending an FDA approval for EM-100, will
be split between Eyemax and the Company. The royalty from Bausch is subject to reduction if a competitive product with the same
active pharmaceutical ingredient is launched in the U.S. or if the EM-100 U.S market share falls below a specified target percentage.
In accordance with the FDA approval for EM-100 on September 24, 2020, the Company owed Eyemax $250 as of September 30, 2020. There
were no amounts due at December 31, 2019.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
10 — Leases
The
Company recognizes a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases,
including operating leases. The Company separates lease components from non-lease components related to its office space lease.
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 not 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.
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.
The
Company’s operating lease cost as presented in the “Research and Development” and “General and Administrative”
captions in the condensed statements of operations was $13 and $21, respectively, for the three months ended September 30, 2020
and $13 and $21, respectively, for the three months ended September 30, 2019. The Company’s operating lease cost as presented
in the “Research and Development” and “General and Administrative” captions in the condensed statements
of operations was $41 and $62, respectively, for the nine months ended September 30, 2020 and $41 and $64, respectively, for the
nine months ended September 30, 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $99
for the nine months ended September 30, 2020. The ROU asset amortization for the three and nine-month periods ended September
30, 2020 was $33 and $97, respectively, and is reflected within depreciation and amortization on the Company’s condensed
statements of cash flows. The ROU asset amortization for the three and nine-month periods ended September 30, 2019 was $31 and
$90, respectively, and is reflected within depreciation and amortization on the Company’s condensed statements of cash flows.
As of September 30, 2020, the weighted-average remaining lease term was 0.5 years, and the weighted-average incremental borrowing
rate was 7.8%.
The
table below presents the lease-related assets and liabilities recorded on the balance sheet as of September 30, 2020 (in thousands).
Assets
|
|
Classification
|
|
|
|
Operating
lease right-of-use assets
|
|
Operating
lease right-of-use assets, net
|
|
$
|
63
|
|
Total
leased assets
|
|
|
|
$
|
63
|
|
Liabilities
|
|
|
|
|
|
|
Operating
lease liabilities, current
|
|
Accrued
liabilities
|
|
$
|
53
|
|
Total
operating lease liabilities
|
|
|
|
$
|
53
|
|
The
Company’s future lease commitments for its administrative offices in Deer Park, Illinois and its laboratory facility in
Lake Zurich, Illinois as of September 30, 2020 are as indicated below:
|
|
Total
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
Undiscounted lease payments
|
|
$
|
54
|
|
|
|
35
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
Less: Imputed interest
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
October 16, 2020, the Company negotiated a new two-year lease for its administrative offices in Deer Park, Illinois commencing
on April 1, 2021 and ending on March 31, 2023.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
11 — Commitments and Contingencies
Legal
The
Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware
of any pending or threatened litigation matters at this time that may have a material impact on the operations of the Company.
On
May 7, 2020, the Company announced that it has been confirmed as the first filer of a patent challenge against Exela Pharma Science’s
Elcys product (cysteine hydrochloride injection). This case matter is still pending at this time.
License
and product development agreements
The
Company has entered into various agreements in addition to those discussed above which are described below.
The
Company acquired the exclusive rights to sell the DS-300 product in the United States pursuant to a sales and marketing agreement
dated November 17, 2017 with an unaffiliated third party (the “Sales Agreement”). Pursuant to the Sales Agreement,
the licensor is responsible for obtaining FDA approval, at its expense, and the Company is responsible for commercializing the
product in the United States at its expense. The Company will be responsible for Paragraph IV litigation management and expense
for the product and will be entitled to 62.5% of the net profit from the sale of the product. The initial term is for the first
10 years following the first commercial sale of the product.
The
Company acquired the exclusive license to develop, manufacture and sell ET-103 in the United States pursuant to an Exclusive License
and Supply Agreement dated August 3, 2018 between the Company and Liqmeds Worldwide Limited (“LMW”), an unaffiliated
entity. Pursuant to the agreement, the Company will be responsible for, and will own, all regulatory filings and approvals at
its expense, provided that it shall have the right to recoup 35% of any regulatory filing fees from the initial profits from the
sale of ET-103 and, provided further, the licensor shall be responsible for any bioequivalence study and shall be responsible
for 60% of the costs of such study. An affiliate of the licensor shall manufacture the ET-103 and sell it to the Company at its
cost. The Company paid the licensor $350 upon execution of the agreement and will pay the licensor $1,500 upon the FDA’s
acceptance of an NDA for review, $1,000 upon FDA approval, $1,500 upon issuance of patent covering ET-103 listed in the FDA’s
Orange Book and $500 in the event of product sales in excess of $10,000 in any calendar year. In addition, the Company is required
to pay the licensor 35% of the net profit from product sales. The license agreement is for an initial term of 10 years from the
date of the first commercial sale of the product, subject to two-year renewals unless either party elects to terminate no less
than 12 months prior to the then current term. The agreement also contains customary representations, warranties, covenants and
indemnities by the parties.
On
January 23, 2019, the Company entered into a Licensing and Supply Agreement (the “Agreement”) with LMW for ET-104
oral liquid, a development stage product candidate (“ET-104”). Pursuant to the terms of the Agreement, the Company
will be responsible for regulatory and marketing activities. LMW will be responsible for development and manufacturing of ET-104.
The Company paid the licensor $350 upon execution of the Agreement and an additional $350 after receiving successful bioequivalence
study results, and will pay $325 based upon the FDA’s acceptance of the NDA for review which occurred on September 27, 2020,
$325 upon FDA approval of the NDA, $650 upon issuance of patent covering ET-104 listed in the FDA’s Orange Book and $500
in the event that product sales in excess of $10,000 are achieved within a calendar year. In addition, the Company is required
to pay the licensor 35% of the net profit from product sales. The Agreement is for an initial term of 10 years from the date of
the first commercial sale of the product. The Company will retain sole ownership of the NDA after expiration of the Agreement.
On
February 8, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-202 License Agreement”)
with Sintetica SA (“Sintetica”) for marketing rights in the United States to Biorphen® which is used for the treatment
of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia. The product was submitted
to the FDA for review and received FDA approval on October 21, 2019. Pursuant to the terms of the ET-202 License Agreement, the
Company is responsible for marketing activities and Sintetica is responsible for development, manufacturing, and regulatory activities
for the product. In 2019, the Company paid Sintetica a licensing payment of $2,000 upon execution of the ET-202 License Agreement
and paid $750 upon the commencement of commercial product shipments. Sintetica supplies Biorphen to the Company at its direct
costs and the Company retains 5% of net sales as a marketing fee. Sintetica is entitled to receive the first $500 of product profits.
All additional profit will be split 50% to the Company and 50% to Sintetica. The ET-202 License Agreement has a ten-year term
commencing on November 26, 2019. There was a gross loss for the three-month period ended September 30, 2020 due to a September
product price reduction through the Company’s wholesaler customers and the Company will true-up this amount due from Sintetica.
Eton
Pharmaceuticals, Inc.
Notes
to Condensed Financial Statements
(in
thousands, except share and per share amounts)
(Unaudited)
Note
11 — Commitments and Contingencies (continued)
On
February 8, 2019, the Company also entered into an Exclusive Licensing and Supply Agreement (the “ET-203 License Agreement”)
with Sintetica for marketing rights in the United States to ET-203, an injectable product candidate for use in the hospital setting.
Pursuant to the terms of the ET-203 License Agreement, the Company will be responsible for marketing activities and Sintetica
will be responsible for development, manufacturing, and regulatory activities related to obtaining regulatory approval. The Company
paid Sintetica a licensing payment of $1,000 upon execution of the ET-203 License Agreement and will pay $750 upon FDA approval
and the commercial sale of the product candidate. Upon approval, Sintetica will supply ET-203 to the Company at its direct costs.
The Company will retain 5% of net sales as a marketing fee. Sintetica will be entitled to receive the first $500 of product profits.
All additional profit will be split 50% to the Company and 50% to Sintetica. The ET-203 License Agreement has a ten-year term
from first commercial sale of product.
On
June 12, 2019, the Company entered into an Exclusive Licensing and Supply Agreement (the “ET-105 License Agreement”)
with Aucta Pharmaceuticals, Inc. (“Aucta”) for marketing rights in the United States to ET-105, a product candidate
for use as an adjunct therapy for partial seizures, primary generalized tonic-clonic seizures, and generalized seizures of Lennox-Gastaut
syndrome in patients two years of age and older. Pursuant to the terms of the ET-105 License Agreement, the Company will be responsible
for marketing activities and Aucta will be responsible for development, manufacturing, and regulatory activities related to obtaining
regulatory approval. The Company paid Aucta a licensing payment of $2,000 in August 2019 upon receiving an acceptance for review
letter from the FDA and will pay $2,000 upon FDA approval and commercial sales of the product candidate and another $1,000 upon
issuance of an Orange-book listed patent. Aucta will receive a 15% royalty on net sales and will be entitled to receive milestone
payments of up to $18,000 based on commercial success of the product, including:
|
●
|
$1,000
when net sales exceed $10 million in a calendar year
|
|
●
|
$2,000
when net sales exceed $20 million in a calendar year
|
|
●
|
$5,000
when net sales exceed $50 million in a calendar year
|
|
●
|
$10,000
when net sales exceed $100 million in a calendar year
|
On
March 27, 2020, the Company entered into an Exclusive Licensing and Supply Agreement (the “Alkindi License Agreement”)
with Diurnal for marketing Alkindi Sprinkle in the United States. Alkindi Sprinkle’s New Drug Application (NDA) was approved
by the FDA on September 29, 2020 as a replacement therapy for pediatric adrenal insufficiency (AI), including congenital adrenal
hyperplasia (CAH) in patients from birth to less than 17 years of age.
For
the initial licensing milestone fee, the Company paid Diurnal $3,500 in cash and issued 379,474 shares of its common stock to
Diurnal which were valued at $1,264 based on the Company’s closing stock price of $3.33 on March 26, 2020 (see Note 6).
The total amount of $4,764 was recorded as a component of research and development expense in the Company’s condensed statement
of operations for the nine-month period ended September 30, 2020. The Company will pay Diurnal $2,500 after the commercial launch
subject to the product also obtaining orphan drug exclusivity status from the FDA.
Indemnifications
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 September 30, 2020 or December 31, 2019.
Note
12 — Subsequent Events
On
October 16, 2020, the Company completed a public offering for 3,220,000 shares of its common stock at a public offering price
of $7.00 per share. The Company received approximately $21,040 of net proceeds from the offering.