Quarterly Report (10-q)

Date : 08/02/2019 @ 7:32PM
Source : Edgar (US Regulatory)
Stock : Durect Corp (DRRX)
Quote : 2.14  0.24 (12.63%) @ 12:59AM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019  

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 000-31615

 

DURECT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

94-3297098

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10260 Bubb Road

Cupertino, California 95014

(Address of principal executive offices, including zip code)

(408) 777-1417

(Registrant’s telephone number, including area code)

 

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock $0.0001 par value per share

Preferred Share Purchase Rights

 

DRRX

 

The NASDAQ Stock Market LLC

(The Nasdaq Capital Market)

 

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 a check mark whether the registrant 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

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company  

 

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of July 30, 2019, there were 191,942,234 shares of the registrant’s Common Stock outstanding.

 

 

 

 


INDEX

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Balance Sheets as of June 30 , 2019 and December 31, 2018

3

 

 

 

 

Condensed Statements of Comprehensive Loss for the three and six months ended June 30 , 2019 and 2018

4

 

 

 

 

Condensed Statements of Stockholders’ Equity for the three and six month periods ended June 30 , 2019 and 2018

   5

 

 

 

 

Condensed Statements of Cash Flows for the six months ended June 30 , 2019 and 2018

6

 

 

 

 

Notes to Condensed Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 3.

Defaults Upon Senior Securities

56

 

 

 

Item 4.

Mine Safety Disclosures

56

 

 

 

Item 5.

Other Information

56

 

 

 

Item 6.

Exhibits

56

 

 

 

Signatures

57

 

 

2


PART I. FINANCI AL INFORMATION

Item 1.

Financial Statements

DURECT CORPORATION

CONDENSED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

(Note 1)

 

A S S E T S

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,943

 

 

$

31,644

 

Short-term investments

 

 

996

 

 

 

2,671

 

Accounts receivable (net of allowances of $65 at June 30, 2019 and $102 at

   December 31, 2018)

 

 

2,142

 

 

 

1,757

 

Inventories, net

 

 

3,665

 

 

 

3,421

 

Prepaid expenses and other current assets

 

 

1,336

 

 

 

2,247

 

Total current assets

 

 

45,082

 

 

 

41,740

 

Property and equipment, net

 

 

533

 

 

 

605

 

Operating lease right-of-use assets

 

 

6,717

 

 

 

 

Goodwill

 

 

6,399

 

 

 

6,399

 

Long-term restricted investments

 

 

150

 

 

 

150

 

Other long-term assets

 

 

1,106

 

 

 

1,105

 

Total assets

 

$

59,987

 

 

$

49,999

 

L I A B I L I T I E S  A N D  S T O C K H O L D E R S’  E Q U I T Y

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,012

 

 

$

1,589

 

Accrued liabilities

 

 

4,377

 

 

 

4,668

 

Contract research liabilities

 

 

1,204

 

 

 

1,405

 

Term loan, current portion, net

 

 

972

 

 

 

 

 

Operating lease liabilities, current portion

 

 

2,014

 

 

 

 

Total current liabilities

 

 

10,579

 

 

 

7,662

 

Deferred revenue, non-current portion

 

 

812

 

 

 

812

 

Operating lease liabilities, non-current portion

 

 

5,143

 

 

 

 

Term loan, non-current portion, net

 

 

19,838

 

 

 

20,533

 

Other long-term liabilities

 

 

721

 

 

 

992

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

19

 

 

 

16

 

Additional paid-in capital

 

 

505,863

 

 

 

488,608

 

Accumulated other comprehensive loss

 

 

(7

)

 

 

 

Accumulated deficit

 

 

(482,981

)

 

 

(468,624

)

Stockholders’ equity

 

 

22,894

 

 

 

20,000

 

Total liabilities and stockholders’ equity

 

$

59,987

 

 

$

49,999

 

 

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

3


DURECT CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Collaborative research and development and other revenue

 

$

1,639

 

 

$

645

 

 

$

3,139

 

 

$

1,741

 

Product revenue, net

 

 

2,346

 

 

 

2,768

 

 

 

4,977

 

 

 

5,160

 

Total revenues

 

 

3,985

 

 

 

3,413

 

 

 

8,116

 

 

 

6,901

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

879

 

 

 

1,084

 

 

 

2,015

 

 

 

2,258

 

Research and development

 

 

6,598

 

 

 

6,120

 

 

 

12,849

 

 

 

13,072

 

Selling, general and administrative

 

 

3,278

 

 

 

2,816

 

 

 

6,732

 

 

 

6,010

 

Total operating expenses

 

 

10,755

 

 

 

10,020

 

 

 

21,596

 

 

 

21,340

 

Loss from operations

 

 

(6,770

)

 

 

(6,607

)

 

 

(13,480

)

 

 

(14,439

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

177

 

 

 

240

 

 

 

386

 

 

 

398

 

Interest expense

 

 

(634

)

 

 

(644

)

 

 

(1,263

)

 

 

(1,267

)

Net other expense

 

 

(457

)

 

 

(404

)

 

 

(877

)

 

 

(869

)

Net loss

 

$

(7,227

)

 

$

(7,011

)

 

$

(14,357

)

 

$

(15,308

)

Net change in unrealized loss on available-for-sale securities, net

   of reclassification adjustments and taxes

 

 

(3

)

 

 

1

 

 

 

(7

)

 

 

1

 

Total comprehensive loss

 

$

(7,230

)

 

$

(7,010

)

 

$

(14,364

)

 

$

(15,307

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04

)

 

$

(0.04

)

 

$

(0.09

)

 

$

(0.10

)

Diluted

 

$

(0.04

)

 

$

(0.04

)

 

$

(0.09

)

 

$

(0.10

)

Weighted-average shares used in computing net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

164,359

 

 

 

161,621

 

 

 

163,219

 

 

 

157,612

 

Diluted

 

 

164,359

 

 

 

161,621

 

 

 

163,219

 

 

 

157,612

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4


DURECT CORPORATION

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

162,060

 

 

$

16

 

 

$

488,608

 

 

$

 

 

$

(468,624

)

 

$

20,000

 

Issuance of common stock upon equity financings, net of

   issuance costs of $129

 

 

243

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

61

 

Stock-based compensation expense from stock options and

   ESPP shares

 

 

 

 

 

 

 

 

437

 

 

 

 

 

 

 

 

 

437

 

Fully vested options issued to settle accrued liabilities

 

 

 

 

 

 

 

 

 

 

994

 

 

 

 

 

 

 

 

 

 

 

994

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,130

)

 

 

(7,130

)

Change in unrealized loss on available-for-sale securities,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Balance at March 31, 2019

 

 

162,303

 

 

$

16

 

 

$

490,100

 

 

$

(4

)

 

$

(475,754

)

 

$

14,358

 

Issuance of common stock upon equity financings, net of

   issuance costs of $127

 

 

29,571

 

 

 

3

 

 

 

15,316

 

 

 

 

 

 

 

 

 

15,319

 

Issuance of common stock upon ESPP purchases

 

 

57

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Stock-based compensation expense from stock options and

   ESPP shares

 

 

 

 

 

 

 

 

 

 

420

 

 

 

 

 

 

 

 

 

420

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,227

)

 

 

(7,227

)

Change in unrealized loss on available-for-sale securities,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Balance at June 30, 2019

 

 

191,931

 

 

$

19

 

 

$

505,863

 

 

$

(7

)

 

$

(482,981

)

 

$

22,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

150,837

 

 

$

15

 

 

$

465,246

 

 

$

(1

)

 

$

(443,772

)

 

$

21,488

 

Adjustment due to changes in accounting policies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

470

 

 

 

470

 

Issuance of common stock upon exercise of stock options

 

 

515

 

 

 

 

 

 

565

 

 

 

 

 

 

 

 

 

565

 

Issuance of common stock upon equity financings, net

   of issuance costs of $469

 

 

8,171

 

 

 

1

 

 

 

13,645

 

 

 

 

 

 

 

 

 

13,646

 

Stock-based compensation expense from stock options and

   ESPP shares

 

 

 

 

 

 

 

 

663

 

 

 

 

 

 

 

 

 

663

 

Fully vested options issued to settle accrued liabilities

 

 

 

 

 

 

 

 

 

 

1,860

 

 

 

 

 

 

 

 

 

 

 

1,860

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,297

)

 

 

(8,297

)

Balance at March 31, 2018

 

 

159,523

 

 

$

16

 

 

$

481,979

 

 

$

(1

)

 

$

(451,599

)

 

$

30,395

 

Issuance of common stock upon exercise of stock options

 

 

959

 

 

 

 

 

 

1,070

 

 

 

 

 

 

 

 

 

1,070

 

Issuance of common stock upon ESPP purchases

 

 

61

 

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

41

 

Issuance of common stock upon equity financings, net of

   issuance costs of $97

 

 

1,458

 

 

 

 

 

 

3,134

 

 

 

 

 

 

 

 

 

3,134

 

Stock-based compensation expense from stock options and

   ESPP shares

 

 

 

 

 

 

 

 

639

 

 

 

 

 

 

 

 

 

639

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,011

)

 

 

(7,011

)

Change in unrealized loss on available-for-sale securities,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Balance at June 30, 2018

 

 

162,001

 

 

$

16

 

 

$

486,863

 

 

$

 

 

$

(458,610

)

 

$

28,269

 

 

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

 

5


DURE CT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(14,357

)

 

$

(15,308

)

Adjustments to reconcile net loss to net cash used in by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

153

 

 

 

221

 

Stock-based compensation

 

 

860

 

 

 

1,300

 

Amortization of debt issuance cost

 

 

179

 

 

 

51

 

Net amortization on investments

 

 

24

 

 

 

41

 

Changes in operating lease liabilities

 

 

79

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(385

)

 

 

911

 

Inventories

 

 

(246

)

 

 

(98

)

Prepaid expenses and other assets

 

 

910

 

 

 

364

 

Accounts payable

 

 

423

 

 

 

(625

)

Accrued and other liabilities

 

 

896

 

 

 

1,122

 

Contract research liabilities

 

 

(201

)

 

 

(124

)

Deferred revenue

 

 

 

 

 

(479

)

Total adjustments

 

 

2,692

 

 

 

2,684

 

Net cash used in operating activities

 

 

(11,665

)

 

 

(12,624

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(81

)

 

 

(41

)

Purchases of available-for-sale securities

 

 

(49

)

 

 

(6,835

)

Proceeds from maturities of available-for-sale securities

 

 

1,693

 

 

 

9,118

 

Net cash provided by investing activities

 

 

1,563

 

 

 

2,242

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on equipment financing obligations

 

 

(5

)

 

 

(6

)

Payment of additional issuance cost for term loan

 

 

 

 

 

(105

)

Net proceeds from issuances of common stock

 

 

15,406

 

 

 

18,456

 

Net cash provided by financing activities

 

 

15,401

 

 

 

18,345

 

Net decrease in Cash, cash equivalents, and restricted cash

 

 

5,299

 

 

 

7,963

 

Cash, cash equivalents, and restricted cash, beginning of the period

 

 

31,794

 

 

 

29,525

 

Cash, cash equivalents, and restricted cash, end of the period (1)

 

$

37,093

 

 

$

37,488

 

Supplementary disclosure of non-cash financing information

 

 

 

 

 

 

 

 

Fully vested options issued to settle accrued liabilities

 

$

994

 

 

$

1,860

 

Operating lease right-of-use assets obtained in exchange for operating lease obligations (2)

 

$

7,329

 

 

$

 

 

 

 

 

 

 

 

 

 

(1) Includes restricted cash of $150,000 (in long term restricted investments) included in the condensed balance sheets at both June 30, 2019 and June 30, 2018.

 

 

 

 

 

 

 

 

(2) Amounts for the six months ended June 30, 2019 include the transition adjustment for the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“Topic 842”).

 

 

 

 

 

 

 

 

 

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

6


DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Operations

DURECT Corporation (the Company) was incorporated in the state of Delaware on February 6, 1998.  The Company is a biopharmaceutical company with research and development programs broadly falling into two categories: (i) new chemical entities derived from the Company’s Epigenetics Regulator Program, in which the Company attempts to discover and develop molecules which have not previously been approved and marketed as therapeutics, and (ii) proprietary pharmaceutical programs, in which the Company applies its formulation expertise and technologies largely to active pharmaceutical ingredients whose safety and efficacy have previously been established but which the Company aims to improve in some manner through a new formulation. The Company has several products under development by itself and with third party collaborators. The Company also manufactures and sells osmotic pumps used in laboratory research, and designs, develops and manufactures a wide range of standard and custom biodegradable polymers and excipients for pharmaceutical and medical device clients for use as raw materials in their products. In addition, the Company conducts research and development of pharmaceutical products in collaboration with third party pharmaceutical and biotechnology companies.

Basis of Presentation

These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and therefore do not include all the information and footnotes necessary for a complete presentation of the Company’s results of operations, financial position and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2019, the operating results and comprehensive loss for the three and six months ended June 30, 2019 and 2018, stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. The balance sheet as of December 31, 2018 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto, included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Liquidity and Need to Raise Additional Capital

As of June 30, 2019, the Company had an accumulated deficit of $483.0 million as well as negative cash flows from operating activities for the six months ended June 30, 2019.

The Company historically has had negative cash flows from operating activities and expects its negative cash flows to continue.  The Company will continue to require substantial funds to continue research and development, including clinical trials of its product candidates.  Management’s plans in order to meet its operating cash flow requirements include seeking additional collaborative agreements for certain of its programs and achieving milestone and other payments under its collaboration and licensing agreements as well as financing activities such as public offerings and private placements of its common stock, preferred stock offerings, issuances of debt and convertible debt instruments.

There are no assurances that such additional funding will be obtained and that the Company will succeed in its future operations. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company may be required to expense previously capitalized inventory costs upon a change in management’s judgment due to, among other potential factors, a denial or delay of approval of a customer’s product by the necessary regulatory bodies, or new information that suggests that the inventory will not be saleable.  If the Company is able to subsequently sell products made with raw materials that were previously written down, the Company will report an unusually high gross profit as there will be no associated cost of goods for these materials.

7


The Company’s inventories consist of the following (in thousands):

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Raw materials

 

$

274

 

 

$

223

 

Work in process

 

 

1,680

 

 

 

1,486

 

Finished goods

 

 

1,711

 

 

 

1,712

 

Total inventories

 

$

3,665

 

 

$

3,421

 

Leases

 

Effective January 1, 2019, the Company adopted Topic 842 using the modified retrospective transition method approach with a cumulative-effect adjustment as of January 1, 2019 in accordance with ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements. Results for the six months ended June 30, 2019 are presented under Topic 842. Other prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous lease guidance, ASC Topic 840: Leases (Topic 840). The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification of those leases in place as of January 1, 2019.

The adjustments due to the adoption of Topic 842 primarily related to the recognition of an operating lease right-of-use asset and operating lease liability for our leased properties.

The impact of the adoption of Topic 842 on the accompanying Condensed Balance Sheet as of January 1, 2019 was as follows (in thousands):

 

 

 

As of January 1, 2019

 

 

 

December 31,

2018

 

 

Adjustments

Due to the

Adoption of

Topic 842

 

 

January 1,

2019

 

Condensed Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

 

 

$

7,329

 

 

$

7,329

 

Operating lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities (1)

 

$

(92

)

 

$

92

 

 

$

 

Other long-term liabilities (1)

 

 

(270

)

 

 

270

 

 

 

 

Lease liabilities, current portion

 

 

 

 

 

(1,972

)

 

 

(1,972

)

Lease liabilities, non-current portion

 

 

 

 

 

(5,719

)

 

 

(5,719

)

 

 

$

(362

)

 

$

(7,329

)

 

$

(7,691

)

 

(1)

Includes deferred rent, current and long-term portions of operating lease liabilities which were recorded against the operating lease right-of-use asset upon adoption of Topic 842

 

There was no effect from the adoption of Topic 842 on the Company’s condensed statement of cash flows.

Revenue Recognition

The Company enters into license and collaboration agreements under which the Company may receive upfront license fees, research funding and contingent milestone payments and royalties. Effective January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. In accordance with ASC 606, the Company changed certain characteristics of its revenue recognition accounting policy as described below. ASC 606 was applied using the modified retrospective method, where the cumulative effect of the initial application was recognized as an adjustment to opening retained earnings at January 1, 2018. The Company recorded a net increase to opening retained earnings of $470,000 with an offset entry to a contra liability account as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact relating to the Company’s deferred collaborative research and development revenues. There was no impact to reported total assets, revenues and operating expenses for the three and six months ended June 30, 2019 as a result of applying Topic 606.  

Product Revenue, Net

The Company sells osmotic pumps used in laboratory research, and designs, develops and manufactures a wide range of standard and custom biodegradable polymers and excipients for pharmaceutical and medical device clients for use as raw materials in their products.

8


Revenues from product sales are recognized when the customer obtains co ntrol of the Company’s product, which occurs at a point in time, typically upon shipment to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that the Company would have recognized is one year or less.

Trade Discounts and Allowances: The Company provides certain customers with discounts that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.

Product Returns: Consistent with industry practice, the Company generally offers customers a limited right of return for products that have been purchased from the Company. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using its historical sales information. The Company expects product returns to be minimal.

Collaborative Research and Development Revenues

The Company enters into license agreements which are within the scope of Topic 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; reimbursement of development costs incurred by the Company under approved work plans; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products. Each of these payments results in collaborative research and development revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the standalone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The Company expects to recognize revenue for the variable consideration currently being constrained when it is probable that a significant revenue reversal will not occur.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone Payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaborative research and development revenues and net income (loss) in the period of adjustment.  

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options. The Company assesses if these options provide a material right to the customer and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any additional payments are recorded in collaborative research and development revenue when the customer obtains control of the goods, which is upon delivery.

Royalties and Earn-outs: For arrangements that include sales-based royalties or earn-outs, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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 significant royalty revenue resulting from the Company’s collaborative arrangements or any earn-out revenue from the Company’s patent purchase agreement with Indivior.

9


The Company receives payments from its customers based on development cost schedules established in each contract.  Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements.  Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not a ssess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Total revenue by geographic region for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

 

$

2,860

 

 

$

2,124

 

 

$

5,354

 

 

$

4,198

 

Europe

 

 

556

 

 

 

745

 

 

 

1,383

 

 

 

1,503

 

Japan

 

 

314

 

 

 

285

 

 

 

736

 

 

 

572

 

Other

 

 

255

 

 

 

259

 

 

 

643

 

 

 

628

 

Total

 

$

3,985

 

 

$

3,413

 

 

$

8,116

 

 

$

6,901

 

During the three and six months ended June 30, 2019 and 2018, the Company did not  recognize any revenue as a result of changes in the contract asset and the contract liability balances associated with the Company’s deferred research and development revenues for the Company’s collaboration agreements.

Comprehensive Loss

Components of other comprehensive loss are comprised entirely of unrealized gains and losses on the Company’s available-for-sale securities for all periods presented. Total comprehensive loss has been disclosed in the Company’s Statements of Comprehensive Loss.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding. Diluted net loss per share is computed using the weighted-average number of common shares outstanding and common stock equivalents (i.e., options to purchase common stock) outstanding during the period, if dilutive, using the treasury stock method for options.

The numerators and denominators in the calculation of basic and diluted net loss per share were as follows (in thousands except per share amounts):

 

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

Numerators:

 

 

 

 

 

 

 

 

Net loss

 

$

(14,357

)

 

$

(15,308

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares used to compute basic net loss per share

 

 

163,219

 

 

 

157,612

 

Dilutive common shares from stock options and ESPP

 

 

 

 

 

 

Weighted average shares used to compute diluted net loss per share

 

 

163,219

 

 

 

157,612

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

(0.10

)

Diluted

 

$

(0.09

)

 

$

(0.10

)

Options to purchase approximately 29.8 million and 30.0 million shares of common stock were excluded from the denominator in the calculation of diluted net loss per share for the three and six months ended June 30, 2019, respectively, as the effect would be anti-dilutive. Options to purchase approximately 13.4 million and 14.7 million shares of common stock were excluded from the denominator in the calculation of diluted net loss per share for the three and six months ended June 30, 2018, respectively, as the effect would be anti-dilutive.

10


Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . This ASU required the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to the capital lease assets and liabilities currently recorded on the Company’s consolidated balance sheets. Presentation of leases within the consolidated statements of operations and cash flows are substantially consistent with current accounting guidance. The ASU, which was effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, had a material impact on the Company’s consolidated balance sheets. The Company adopted the ASU effective January 1, 2019 using the modified retrospective transition method and did not restate comparative periods. The modified retrospective transition method requires the cumulative effect, if any, of initially applying the guidance to be recognized as an adjustment to the Company’s accumulated deficit as of that adoption date. The Company elected the package of practical expedients permitted under the transition guidance within the ASU, which allowed it to carry forward prior conclusions about lease identification, classification and initial direct costs for leases entered into prior to adoption of Topic 842. Additionally, the Company did not separate lease and non-lease components for all of our leases. For leases with a term of 12 months or less, the Company elected the short-term lease exemption, which allowed it to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. The Company recognized additional lease liabilities of approximately $7.7 million representing the present value of the remaining minimum lease payments at January 1, 2019 and corresponding right-of-use assets of approximately $7.3 million.

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (Topic 718) , which expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard was effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those years. The adoption of this standard did not have a material effect on the Company’s financial statements.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The FASB issued the update to provide amended guidance to “allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.” Additionally, under the new guidance an entity will be required to provide certain disclosures regarding stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and the guidance may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this standard did not have a material effect on the Company’s financial statements.

Recently Issued Accounting Standards

In November 2018, the Financial Accounting Standards Board (the FASB) issued ASU No. 2018-18,  Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18) . ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the counterparty is a customer for a distinct good or service (i.e. a unit of account). For units of account that are in the scope of Topic 606, all of the guidance in Topic 606 should be applied, including the guidance on recognition, measurement, presentation and disclosure. ASU 2018-18 also adds a reference in Topic 808 to the unit of account guidance in ASC 606 and requires that it be applied only to assess whether transactions in a collaborative arrangement are in the scope of Topic 606. ASU 2018-18 will preclude entities from presenting amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer as revenue from contracts with customers. ASU 2018-18 is effective for the Company for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of assessing the impact of ASU 2018-18 on its financial statements.

In August 2018, the FASB issued Accounting Standards Update (“ASU”)   No. 2018-13 , Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2019, including interim reporting periods within those years, with early adoption permitted. The Company does not expect the adoption of this standard to have a material effect on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04,  Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (ASU 2017-04) . ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its financial statements.

11


In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This sta ndard is effective for fiscal years beginning after December 15, 2019, including interim reporting periods within those years and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted.  The Company do es not expect the adoption of this standard to have a material effect on its financial statements.

Note 2. Strategic Agreements

The collaborative research and development and other revenues associated with the Company’s collaborators or counterparties were $1.6 million and $3.1 million for the three and six months ended June 30, 2019, respectively, compared to $645,000 and $1.7 million for the corresponding periods in 2018. These revenues were primarily related to revenue recognized associated with the Company’s feasibility agreements for all periods presented.

Patent Purchase Agreement with Indivior

On September 26, 2017, the Company entered into a Patent Purchase Agreement (the “Indivior Agreement”) with Indivior.  Pursuant to the Indivior Agreement, the Company assigned to Indivior certain patents that may provide further intellectual property protection for PERSERIS™ (risperidone), Indivior’s extended-release injectable suspension for the treatment of schizophrenia in adults.  In consideration for such assignment, Indivior made an upfront non-refundable payment to the Company of $12.5 million.  Indivior also agreed to make an additional $5.0 million payment to the Company contingent upon NDA approval of PERSERIS, as well as quarterly earn-out payments that are based on a single digit percentage of U.S. net sales for certain products covered by the assigned patent rights, including PERSERIS. The assigned patent rights include granted patents extending through at least 2026.  The Company also receives a non-exclusive right under the assigned patents to develop and commercialize certain risperidone-containing products and products that do not contain risperidone or buprenorphine.  The Indivior Agreement contains customary representations, warranties and indemnities of the parties. The Company received the payment of $12.5 million from Indivior in September 2017 and recognized the $12.5 million as revenue from sale of intellectual property rights in 2017 as the Company did not have any continuing obligations under the purchase agreement. On July 27, 2018, Indivior announced that the FDA had approved the NDA for PERSERIS thereby triggering the $5.0 million payment to the Company; this payment was received by the Company in August 2018.  The Company recognized the $5.0 million as milestone revenue during the twelve months ended December 31, 2018 as there is no further performance obligation associated with this milestone payment. Amounts recognized to date related to earn-out revenues from PERSERIS have been immaterial.

Agreement with Santen Pharmaceutical Co., Ltd.

On December 11, 2014, the Company and Santen Pharmaceutical Co., Ltd. (Santen) entered into a definitive agreement (the Santen Agreement). Pursuant to the Santen Agreement, the Company granted Santen an exclusive worldwide license to the Company’s proprietary SABER formulation platform and other intellectual property to develop and commercialize a sustained release product utilizing the Company’s SABER technology to deliver an ophthalmology drug. Santen controls and funds the development and commercialization program, and the parties established a joint management committee to oversee, review and coordinate the development activities of the parties under the Santen Agreement.

In connection with the Santen agreement, Santen agreed to pay the Company an upfront fee of $2.0 million in cash and to make contingent cash payments to the Company of up to $76.0 million upon the achievement of certain milestones, of which $13.0 million are development-based milestones and $63.0 million are commercialization-based milestones including milestones requiring the achievement of certain product sales targets (none of which has been achieved as of June 30, 2019). Santen will also pay for certain Company costs incurred in the development of the licensed product. If the product is commercialized, the Company would also receive a tiered royalty on annual net product sales ranging from single-digit to the low double digits, determined on a country-by-country basis. In January 2018, the Company was notified by Santen that due to a shift in near term priorities, Santen elected to reallocate research and development resources and put the Company’s program on pause until further notice. While the main program is on pause, the parties are working together on a limited set of research and development activities funded by Santen. As of June 30, 2019, the cumulative aggregate payments received by the Company under this agreement were $3.3 million.

Agreement with Sandoz AG

In May 2017, the Company and Sandoz AG (“Sandoz”) entered into a license agreement to develop and market POSIMIR (bupivacaine extended release solution) in the United States. Following expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), the agreement became effective in June 2017.

The cumulative aggregate payments received by the Company from Sandoz as of June 30, 2019 were $20.0 million under this agreement.

On January 2, 2019, the Company received written notice from Sandoz that Sandoz terminated this agreement effective January 27, 2019. As a result of this termination, Sandoz returned its exclusive commercialization rights to develop and market POSIMIR in the United States.  The parties are in dispute with regard to Sandoz’s obligation to pay a termination fee to the Company. The Company has initiated a formal dispute resolution process related to the termination fee.

12


Note 3. Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company follows a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. These levels of inputs are the following:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. Money market funds are classified as Level 1 financial assets. Certificates of deposit, commercial paper, corporate debt securities, and U.S. Government agency securities are classified as Level 2 financial assets. The fair value of the Level 2 assets is estimated using pricing models using current observable market information for similar securities. The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of commercial paper is based upon the time to maturity and discounted using the three-month treasury bill rate. The average remaining maturity of the Company’s Level 2 investments as of June 30, 2019 is less than twelve months and these investments are rated by S& P and Moody’s at AAA or AA- for securities and A1, A2, P1 or P2 for commercial paper.

The following is a summary of available-for-sale securities as of June 30, 2019 and December 31, 2018 (in thousands):