Eton Pharmaceuticals Inc

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.

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