Quarterly Report (10-q)

Date : 11/05/2019 @ 8:37PM
Source : Edgar (US Regulatory)
Stock : Durect Corp (DRRX)
Quote : 1.94  0.01 (0.52%) @ 4:59AM
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Last Trade
Last $ 1.94 ◊ 0.00 (0.00%)

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 September 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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

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 October 30, 2019, there were 192,362,179 shares of the registrant’s Common Stock outstanding.

 

 

 

 


INDEX

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

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

3

 

 

 

 

Condensed Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018

4

 

 

 

 

Condensed Statements of Stockholders’ Equity for the three and nine months periods ended September 30, 2019 and 2018

   5

 

 

 

 

Condensed Statements of Cash Flows for the nine months ended September 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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

Item 3.

Defaults Upon Senior Securities

57

 

 

 

Item 4.

Mine Safety Disclosures

57

 

 

 

Item 5.

Other Information

57

 

 

 

Item 6.

Exhibits

57

 

 

 

Signatures

58

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

DURECT CORPORATION

CONDENSED BALANCE SHEETS

(in thousands)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

(Note 1)

 

A S S E T S

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,726

 

 

$

31,644

 

Short-term investments

 

 

17,235

 

 

 

2,671

 

Accounts receivable (net of allowances of $74 at September 30, 2019 and $102 at

   December 31, 2018)

 

 

12,193

 

 

 

1,757

 

Inventories, net

 

 

3,618

 

 

 

3,421

 

Prepaid expenses and other current assets

 

 

970

 

 

 

2,247

 

Total current assets

 

 

73,742

 

 

 

41,740

 

Property and equipment, net

 

 

462

 

 

 

605

 

Operating lease right-of-use assets

 

 

6,397

 

 

 

 

Goodwill

 

 

6,399

 

 

 

6,399

 

Long-term restricted investments

 

 

150

 

 

 

150

 

Other long-term assets

 

 

1,107

 

 

 

1,105

 

Total assets

 

$

88,257

 

 

$

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

 

$

1,501

 

 

$

1,589

 

Accrued liabilities

 

 

4,512

 

 

 

4,668

 

Contract research liabilities

 

 

2,089

 

 

 

1,405

 

Deferred revenue, current portion

 

 

27,582

 

 

 

 

Term loan, current portion, net

 

 

2,981

 

 

 

 

Operating lease liabilities, current portion

 

 

2,028

 

 

 

 

Total current liabilities

 

 

40,693

 

 

 

7,662

 

Deferred revenue, non-current portion

 

 

2,033

 

 

 

812

 

Operating lease liabilities, non-current portion

 

 

4,836

 

 

 

 

Term loan, non-current portion, net

 

 

17,970

 

 

 

20,533

 

Other long-term liabilities

 

 

719

 

 

 

992

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

19

 

 

 

16

 

Additional paid-in capital

 

 

506,956

 

 

 

488,608

 

Accumulated other comprehensive loss

 

 

2

 

 

 

 

Accumulated deficit

 

 

(484,971

)

 

 

(468,624

)

Stockholders’ equity

 

 

22,006

 

 

 

20,000

 

Total liabilities and stockholders’ equity

 

$

88,257

 

 

$

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

September 30,

 

 

Nine months ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Collaborative research and development and other revenue

 

$

7,741

 

 

$

5,691

 

 

$

10,880

 

 

$

7,432

 

Product revenue, net

 

 

3,022

 

 

 

2,345

 

 

 

7,999

 

 

 

7,505

 

Total revenues

 

 

10,763

 

 

 

8,036

 

 

 

18,879

 

 

 

14,937

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

731

 

 

 

912

 

 

 

2,746

 

 

 

3,170

 

Research and development

 

 

7,906

 

 

 

6,542

 

 

 

20,755

 

 

 

19,614

 

Selling, general and administrative

 

 

3,837

 

 

 

2,870

 

 

 

10,569

 

 

 

8,880

 

Total operating expenses

 

 

12,474

 

 

 

10,324

 

 

 

34,070

 

 

 

31,664

 

Loss from operations

 

 

(1,711

)

 

 

(2,288

)

 

 

(15,191

)

 

 

(16,727

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

350

 

 

 

234

 

 

 

736

 

 

 

632

 

Interest expense

 

 

(629

)

 

 

(661

)

 

 

(1,892

)

 

 

(1,928

)

Net other expense

 

 

(279

)

 

 

(427

)

 

 

(1,156

)

 

 

(1,296

)

Net loss

 

$

(1,990

)

 

$

(2,715

)

 

$

(16,347

)

 

$

(18,023

)

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

   of reclassification adjustments and taxes

 

 

9

 

 

 

 

 

 

2

 

 

 

1

 

Total comprehensive loss

 

$

(1,981

)

 

$

(2,715

)

 

$

(16,345

)

 

$

(18,022

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.02

)

 

$

(0.09

)

 

$

(0.11

)

Diluted

 

$

(0.01

)

 

$

(0.02

)

 

$

(0.09

)

 

$

(0.11

)

Weighted-average shares used in computing net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

192,039

 

 

 

162,002

 

 

 

172,939

 

 

 

159,091

 

Diluted

 

 

192,039

 

 

 

162,002

 

 

 

172,939

 

 

 

159,091

 

 

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

 

Issuance of common stock upon ESPP purchases

 

 

312

 

 

 

 

 

$

241

 

 

 

 

 

 

 

 

 

241

 

Stock-based compensation expense from stock options and

   ESPP shares

 

 

 

 

 

 

 

 

852

 

 

 

 

 

 

 

 

 

852

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,990

)

 

 

(1,990

)

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

   net of tax

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Balance at September 30, 2019

 

 

192,243

 

 

$

19

 

 

$

506,956

 

 

$

2

 

 

$

(484,971

)

 

$

22,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 and ESPP purchase

 

 

1,020

 

 

 

 

 

 

1,111

 

 

 

 

 

 

 

 

 

1,111

 

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

 

Stock-based compensation expense from stock options and

   ESPP shares

 

 

 

 

 

 

 

 

540

 

 

 

 

 

 

 

 

 

 

540

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,715

)

 

 

(2,715

)

Balance at September 30, 2018

 

 

162,001

 

 

$

16

 

 

$

487,403

 

 

$

 

 

$

(461,325

)

 

$

26,094

 

 

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

5


DURECT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine months ended

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(16,347

)

 

$

(18,023

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

224

 

 

 

162

 

Stock-based compensation

 

 

1,709

 

 

 

1,839

 

Amortization of debt issuance cost

 

 

271

 

 

 

228

 

Net amortization on investments

 

 

42

 

 

 

80

 

Changes in operating lease liabilities

 

 

105

 

 

 

70

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,436

)

 

 

770

 

Inventories

 

 

(198

)

 

 

(547

)

Prepaid expenses and other assets

 

 

1,275

 

 

 

101

 

Accounts payable

 

 

(88

)

 

 

(368

)

Accrued and other liabilities

 

 

1,080

 

 

 

1,975

 

Contract research liabilities

 

 

684

 

 

 

541

 

Deferred revenue

 

 

28,803

 

 

 

(479

)

Total adjustments

 

 

23,471

 

 

 

4,372

 

Net cash provided by (used in) operating activities

 

 

7,124

 

 

 

(13,651

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(81

)

 

 

(73

)

Purchases of available-for-sale securities

 

 

(17,306

)

 

 

(6,893

)

Proceeds from maturities of available-for-sale securities

 

 

2,702

 

 

 

11,118

 

Net cash (used in) provided by investing activities

 

 

(14,685

)

 

 

4,152

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on equipment financing obligations

 

 

(6

)

 

 

(10

)

Payment of additional issuance cost for term loan

 

 

 

 

 

(105

)

Net proceeds from issuances of common stock

 

 

15,649

 

 

 

18,456

 

Net cash provided by financing activities

 

 

15,643

 

 

 

18,341

 

Net decrease in Cash, cash equivalents, and restricted cash

 

 

8,082

 

 

 

8,842

 

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)

 

$

39,876

 

 

$

38,367

 

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 September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

(2) Amounts for the nine months ended September 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 September 30, 2019, the operating results and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 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 September 30, 2019, the Company had an accumulated deficit of $485.0 million as well as negative cash flows from operating activities for the nine months ended September 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):

 

 

 

September 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Raw materials

 

$

276

 

 

$

223

 

Work in process

 

 

1,362

 

 

 

1,486

 

Finished goods

 

 

1,980

 

 

 

1,712

 

Total inventories

 

$

3,618

 

 

$

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 nine months ended September 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 nine months ended September 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 control 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 and Other Revenue

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 material royalty revenue resulting from the Company’s collaborative arrangements or material 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 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 assess 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 nine months ended September 30, 2019 and 2018 are as follows (in thousands):

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

 

$

8,977

 

 

$

1,931

 

 

$

14,331

 

 

$

6,129

 

Europe

 

 

721

 

 

 

5,585

 

 

 

2,104

 

 

 

7,088

 

Japan

 

 

425

 

 

 

149

 

 

 

1,161

 

 

 

722

 

Other

 

 

640

 

 

 

371

 

 

 

1,283

 

 

 

998

 

Total