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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 March 31, 2022 

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  

 

 

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 May 3, 2022, there were 227,764,019 shares of the registrant’s common stock outstanding.

 

 

 

 


 

INDEX

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

5

 

 

 

 

Condensed Balance Sheets as of March 31, 2022 and December 31, 2021

5

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021

6

 

 

 

 

Condensed Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021

   7

 

 

 

 

Condensed Statements of Cash Flows for the three months ended March 31, 2022 and 2021

8

 

 

 

 

Notes to Condensed Financial Statements

9

 

 

 

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 6.

Exhibits

59

 

 

 

Signatures

60

 

 

 


2


 

Special Note Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Quarterly Report on Form 10-Q, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “may,” “will,” “could,” “potentially” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations and beliefs. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. Forward-looking statements made in this report include, but are not limited to, statements about:

 

the clinical trial plans and timelines for larsucosterol;

 

potential uses and benefits of larsucosterol to treat alcohol-associated hepatitis (also called “alcoholic hepatitis” or “AH”), non-alcoholic steatohepatitis, or other conditions;

 

the results and timing of clinical trials, the ability to enroll patients in clinical trials in a timely and cost-effective manner;

 

the likelihood of future clinical trial results of larsucosterol being positive and/or similar to results from previous trials, the possible commencement of future clinical trials, enrollment rates and timing of announcements of the results from our clinical trials;

 

the possibility of filing for marketing approval for larsucosterol for the treatment of AH if the AH to evaluate saFety and effIcacy of larsucosterol treatMent (“AHFIRM”) trial is successful and the likelihood of FDA or other regulatory bodies granting such marketing approval;

 

our intention to seek, and ability to enter into and maintain strategic alliances and collaborations;

 

the potential benefits and uses of our products, product candidates and technologies, including larsucosterol, POSIMIR, and our SABER and CLOUD technologies;

 

the potential milestone and royalty payments we may receive from Innocoll related to POSIMIR, earn-out payments we may receive from Indivior related to the commercialization of PERSERIS, and milestone, sub-license fees and royalty payments we may receive from Santen or Orient Pharma;

 

the progress of our third-party collaborations, including estimated milestones;

 

responsibilities of our third-party collaborators, including the responsibility to make cost reimbursement, milestone, royalty and other payments to us, and our expectations regarding our collaborators’ plans with respect to our products and product candidates and continued development of our products and product candidates;

 

our responsibilities to our third-party collaborators, including our responsibilities to conduct research and development, clinical trials and/or manufacture excipients, products or product candidates;

 

market opportunities for product candidates in our product development pipeline;

 

potential regulatory filings for or approval of larsucosterol or any of our or any third parties’ other product candidates;

 

the progress and results of our research and development programs and our evaluation of additional development programs;

 

requirements for us to purchase pre-clinical, clinical trial and commercial supplies of product candidates and/or products, as well as raw materials or active pharmaceutical ingredients from third parties, and the ability of third parties to provide us with our requirements for such supplies and raw materials;

 

conditions for obtaining regulatory approval of our product candidates;

 

submission and timing of applications for regulatory approval and timing of responses to our regulatory submissions;

 

the impact of FDA, EMA and other government regulation on our business;

 

our ability to obtain, assert and protect patents and other intellectual property rights, including intellectual property licensed to our collaborators, as well as avoiding the intellectual property rights of others;

 

products and companies that will compete with our products and the product candidates we develop and/or license to third-party collaborators;

3


 

the possibility we may commercialize our own products and build up our commercial, sales and marketing capabilities and other required infrastructure;

 

the possibility that we may develop additional manufacturing capabilities;

 

our employees, including the number of employees and the continued services of key management, technical and scientific personnel;

 

our future performance, including our anticipation that we will not derive meaningful revenues from our products and product candidates in development for at least the next twelve months, potential for future inventory write-offs and our expectations regarding our ability to achieve profitability;

 

sufficiency of our cash resources, anticipated capital requirements and capital expenditures, our ability to comply with covenants of our term loan, and our need or desire for additional financing, including potential sales under our shelf registration statement;

 

our expectations regarding research and development expenses, and selling, general and administrative expenses;

 

the composition of future revenues; and

 

accounting policies and estimates.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward looking statements and the potential risks and uncertainties that may impact upon their accuracy, see the “Risk Factors” section and “Overview” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements reflect our view only as of the date of this report. We undertake no obligations to update any forward-looking statements. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.

 

4


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

DURECT CORPORATION

CONDENSED BALANCE SHEETS

(in thousands)

(unaudited)

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

A S S E T S

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,440

 

 

$

49,844

 

Short-term investments

 

 

14,761

 

 

 

19,966

 

Accounts receivable, net

 

 

960

 

 

 

6,477

 

Inventories, net

 

 

2,076

 

 

 

1,870

 

Prepaid expenses and other current assets

 

 

3,398

 

 

 

3,580

 

Total current assets

 

 

70,635

 

 

 

81,737

 

Property and equipment, net

 

 

226

 

 

 

227

 

Operating lease right-of-use assets

 

 

3,090

 

 

 

3,446

 

Goodwill

 

 

6,169

 

 

 

6,169

 

Long-term restricted investments

 

 

150

 

 

 

150

 

Other long-term assets

 

 

261

 

 

 

261

 

Total assets

 

$

80,531

 

 

$

91,990

 

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

 

$

2,269

 

 

$

1,311

 

Accrued liabilities

 

 

4,892

 

 

 

6,799

 

Deferred revenue, current portion

 

 

 

 

 

98

 

Operating lease liabilities, current portion

 

 

1,862

 

 

 

1,848

 

Total current liabilities

 

 

9,023

 

 

 

10,056

 

Deferred revenue, non-current portion

 

 

812

 

 

 

812

 

Operating lease liabilities, non-current portion

 

 

1,442

 

 

 

1,824

 

Term loan, non-current portion, net

 

 

20,765

 

 

 

20,632

 

Other long-term liabilities

 

 

882

 

 

 

884

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

23

 

 

 

23

 

Additional paid-in capital

 

 

584,504

 

 

 

583,818

 

Accumulated other comprehensive loss

 

 

(29

)

 

 

(10

)

Accumulated deficit

 

 

(536,891

)

 

 

(526,049

)

Stockholders’ equity

 

 

47,607

 

 

 

57,782

 

Total liabilities and stockholders’ equity

 

$

80,531

 

 

$

91,990

 

 

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

5


DURECT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

Collaborative research and development and other revenue

 

$

495

 

 

$

574

 

Product revenue, net

 

 

1,420

 

 

 

1,638

 

Total revenues

 

 

1,915

 

 

 

2,212

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

335

 

 

 

352

 

Research and development

 

 

8,211

 

 

 

7,975

 

Selling, general and administrative

 

 

3,735

 

 

 

3,531

 

Total operating expenses

 

 

12,281

 

 

 

11,858

 

Loss from operations

 

 

(10,366

)

 

 

(9,646

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest and other income

 

 

54

 

 

 

37

 

Interest expense

 

 

(530

)

 

 

(525

)

Net other expense

 

 

(476

)

 

 

(488

)

Net loss

 

 

(10,842

)

 

 

(10,134

)

Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes

 

 

(19

)

 

 

(9

)

Total comprehensive loss

 

$

(10,861

)

 

$

(10,143

)

Net loss per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

 

$

(0.05

)

Diluted

 

$

(0.05

)

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing net loss per share

 

 

 

 

 

 

 

 

Basic

 

 

227,688

 

 

 

217,537

 

Diluted

 

 

227,688

 

 

 

217,537

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

6


 

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

 

 

loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

227,680

 

 

$

23

 

 

$

583,818

 

 

$

(10

)

 

$

(526,049

)

 

$

57,782

 

Issuance of common stock upon exercise of stock options

 

 

14

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Stock-based compensation expense from stock options and ESPP shares

 

 

 

 

 

 

 

 

678

 

 

 

 

 

 

 

 

 

678

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,842

)

 

 

(10,842

)

Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Balance at March 31, 2022

 

 

227,694

 

 

$

23

 

 

$

584,504

 

 

$

(29

)

 

$

(536,891

)

 

$

47,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

203,533

 

 

$

20

 

 

$

529,884

 

 

$

(5

)

 

$

(489,784

)

 

$

40,115

 

Issuance of common stock upon exercise of stock options

 

 

2,502

 

 

 

1

 

 

 

3,262

 

 

 

 

 

 

 

 

 

3,263

 

Issuance of common stock upon equity financings, net of issuance costs of $269

 

 

21,315

 

 

 

2

 

 

 

47,784

 

 

 

 

 

 

 

 

 

47,786

 

Stock-based compensation expense from stock options and ESPP shares

 

 

 

 

 

 

 

 

702

 

 

 

 

 

 

 

 

 

702

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,134

)

 

 

(10,134

)

Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

(9

)

Balance at March 31, 2021

 

 

227,350

 

 

$

23

 

 

$

581,632

 

 

$

(14

)

 

$

(499,918

)

 

$

81,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

7


DURECT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(10,842

)

 

$

(10,134

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

34

 

 

 

30

 

Stock-based compensation

 

 

678

 

 

 

702

 

Amortization of debt issuance cost

 

 

119

 

 

 

111

 

Net amortization on investments

 

 

6

 

 

 

(44

)

Changes in operating lease liabilities

 

 

(12

)

 

 

1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,517

 

 

 

(53

)

Inventories

 

 

(206

)

 

 

(91

)

Prepaid expenses and other assets

 

 

182

 

 

 

(235

)

Accounts payable

 

 

958

 

 

 

472

 

Accrued liabilities

 

 

(1,895

)

 

 

(1,841

)

Deferred revenue

 

 

(98

)

 

 

373

 

Total adjustments

 

 

5,283

 

 

 

(575

)

Net cash used in operating activities

 

 

(5,559

)

 

 

(10,709

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(33

)

 

 

(3

)

Purchases of available-for-sale securities

 

 

 

 

 

(29,698

)

Proceeds from maturities of available-for-sale securities

 

 

5,180

 

 

 

10,616

 

Net proceeds from sale of LACTEL product line

 

 

 

 

 

14,979

 

Net cash provided by (used in) investing activities

 

 

5,147

 

 

 

(4,106

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on equipment financing obligations

 

 

 

 

 

(1

)

Net proceeds from issuances of common stock

 

 

8

 

 

 

51,049

 

Net cash provided by financing activities

 

 

8

 

 

 

51,048

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(404

)

 

 

36,233

 

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

 

 

49,994

 

 

 

21,462

 

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

 

$

49,590

 

 

$

57,695

 

 

 

 

 

 

 

 

 

 

(1) Includes restricted cash of $150,000 (in long term restricted investments) included in the condensed balance sheets at March 31, 2022 and December 31, 2021.

 

 

 

 

 

 

 

 

 

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

8


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 our 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 product candidates under development by itself and with third party collaborators. The Company also manufactures and sells osmotic pumps used in laboratory research, and manufactures certain excipients for certain 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 condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “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 condensed 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 March 31, 2022, the operating results and comprehensive loss, and stockholders’ equity for the three months ended March 31, 2022 and 2021, and cash flows for the three months ended March 31, 2022 and 2021. The balance sheet as of December 31, 2021 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, 2021 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.

     Reclassifications

Certain prior period amounts in the balance sheets have been reclassified to conform to current period presentation. The Company reclassified $397,000 and $97,000 related to contract research liabilities to accrued liabilities at March 31, 2022 and December 31, 2021, respectively. Such reclassification did not impact the Company’s net loss or financial position.

 

Liquidity and Need to Raise Additional Capital

As of March 31, 2022, the Company had an accumulated deficit of $536.9 million as well as negative cash flows from operating activities.

The Company generally 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.  In order to meet its operating cash flow requirements beyond the next 12 months from the date the financial statements are filed, management’s plans may include seeking additional collaborative agreements for certain of the Company’s programs, receiving funds from collaboration and licensing agreements as well as pursuing 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 or that the Company will succeed in its future operations. If the Company cannot successfully raise additional capital when needed and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected.

The Company believes its existing cash, cash equivalents, and investments are sufficient to fund its operating cash flow requirements for a period greater than 12 months from the date of issuance of these financial statements.

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 capitalizes inventories produced in preparation for product launches after receiving regulatory approval on a product. The Company

9


may be required to expense previously capitalized inventory costs upon a change in management’s judgment due to 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 or little associated cost of goods for these materials.

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

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

Raw materials

 

$

133

 

 

$

143

 

Work in process

 

 

606

 

 

 

712

 

Finished goods

 

 

1,337

 

 

 

1,015

 

Total inventories

 

$

2,076

 

 

$

1,870

 

Revenue Recognition

Product Revenue, Net

The Company sells osmotic pumps used in laboratory research and manufactures certain excipients for pharmaceutical clients for use as raw materials in their products.

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: The Company generally offers customers a limited right of return for products that have been purchased. The Company estimates the amount of its product sales that are probable of being 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 primarily 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, under which it licenses certain rights to its product candidates or products 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, intellectual property and commercial milestone payments; payments for manufacturing supply services the Company provides itself or 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 other 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. For arrangements that are determined to include multiple performance obligations, the Company must develop assumptions that require judgment to determine the estimated stand-alone selling price for each performance obligation identified. These assumptions 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 the transaction price associated with the license as revenues when the license is transferred to the customer and the customer is able to use and benefit from the license. For performance obligations comprised of 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 Company applies an appropriate method of measuring progress for purposes of recognizing related revenues. For performance obligations recognized over time, the Company evaluates the measure of progress each reporting period and recognizes revenues on a cumulative catch-up basis as collaborative research and development revenues and net income (loss).

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

10


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.

Manufacturing Supply Services: Arrangements that include a promise for future supply of raw materials or 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 and allocated a portion of the transaction price based on the estimated standalone selling price of the material right. If the Company is entitled to additional payments when the customer exercises these options, the deferred transaction price and any additional payments are recorded in collaborative research and development revenue when the customer obtains control of the goods.

Royalties and Earn-outs: For arrangements that include sales-based royalties or earn-outs, including milestone payments based on first commercial sale or 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 material royalty revenue resulting from the Company’s collaborative arrangements or material earn-out revenues from any of the Company’s patent purchase agreements.

Research and development services: Revenue from research and development services that are determined to represent a distinct performance obligation with the Company’s third-party collaborators is recognized over time as the related research and development services are performed using an appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and recognizes revenue on a cumulative catch-up basis, as collaborative research and development revenues and net income (loss). Research and development expenses under the collaborative research and development agreements generally approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not expend the required level of effort during a specific period in comparison to funds received under the respective agreement.

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 months ended March 31, 2022 and 2021 are as follows (in thousands):

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

United States

 

$

1,207

 

 

$

1,248

 

Europe

 

 

338

 

 

 

301

 

Japan

 

 

255

 

 

 

480

 

Other

 

 

115

 

 

 

183

 

Total

 

$

1,915

 

 

$

2,212

 

 

Prepaid and Accrued Contract Research Expenses

The Company incurs significant costs associated with third party consultants and organizations for pre-clinical studies, clinical trials, contract research and manufacturing, validation, testing, regulatory advice and other research and development-related services. The Company is required to estimate periodically the cost of services rendered but unbilled based on management’s estimates of project status. If these good faith estimates are inaccurate, actual expenses incurred could materially differ from these estimates.

    Research and development expenses

Research and development expenses are primarily comprised of salaries and benefits associated with research and development personnel, overhead and facility costs, preclinical and non-clinical development costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. Research and development costs are expensed as incurred. Research and development costs paid to third parties under sponsored research agreements are recognized as the related services are performed. In addition, reimbursements of research and development expenses incurred by the Company’s partners are recorded as collaborative research and development revenue.

11


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 Operations and 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):

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

Numerators:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,842

)

 

$

(10,134

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares used to compute basic net loss per share

 

 

227,688

 

 

 

217,537

 

Dilutive common shares from stock options and ESPP

 

 

 

 

 

 

Weighted average shares used to compute diluted net loss per share

 

 

227,688

 

 

 

217,537

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

 

$

(0.05

)

Diluted

 

$

(0.05

)

 

$

(0.05

)

Options to purchase approximately 25.5 million and 4.8 million shares of common stock were excluded from the denominator in the calculation of diluted net loss per share for the three months ended March 31, 2022 and March 31, 2021, respectively, as the effect would be antidilutive.

Recent Accounting Pronouncements   

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 standard is effective for fiscal years beginning after December 15, 2022 for small reporting companies, 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 does not expect the adoption of this standard to have a material effect on its financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In response to concerns about structural risks of the cessation of London Interbank Offered Rate (LIBOR), the amendments in this ASU provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this ASU are elective and are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does 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 $495,000 and $

12


574,000 for the three months ended March 31, 2022 and 2021, respectively. These amounts includes: (a) amounts related to earn-out revenue from Indivior UK Limited (Indivior) with respect to PERSERIS net sales; (b) feasibility programs; (c) research and development activities funded by Santen Pharmaceutical Co. Ltd. (Santen); and (d) royalty revenue from OP Pharma with respect to Methydur net sales. Since 2018, the parties have been working together on a limited set of research and development activities funded by Santen.

 

Agreement with Innocoll

On December 21, 2021, the Company entered into a license agreement with Innocoll Pharmaceuticals Limited (“Innocoll”).

Pursuant to the Innocoll Agreement, the Company has granted Innocoll an exclusive, royalty-bearing, sublicensable right and license to develop, manufacture and commercialize in the United States, POSIMIR®, the Company’s FDA-approved post-surgical pain product, with respect to all uses and applications in humans. The Innocoll Agreement provides for the assignment of the Company’s supply agreement with its contract manufacturing organization to Innocoll and also provides Innocoll with the right, within the United States, to expand the approved indications of POSIMIR. The Company retains, outside the United States, all of the global rights to POSIMIR.

Upon execution of the Innocoll Agreement, Innocoll agreed to pay the Company an initial nonrefundable, upfront fee of $4.0

million as well as a fee in the amount of $1.3 million primarily to cover the manufacturing supplies and excipients and certain equipment transferred to Innocoll pursuant to the terms of the Innocoll Agreement, and certain recently incurred DURECT expenses the parties negotiated for Innocoll to reimburse. The Company will also receive $2.0 million upon the first commercial sale of POSIMIR in the United States. The Company is eligible to receive additional milestone payments of up to $130.0 million in the aggregate, depending on the achievement of certain regulatory, commercial, and intellectual property milestones with respect to POSIMIR. In addition, upon commercialization, the Company will earn low to mid double-digit royalties from net sales of POSIMIR in the United States.

The Innocoll Agreement includes customary representations and warranties on behalf of the Company and Innocoll, including representations as to the licensed intellectual property, regulatory matters and compliance with applicable laws. The Innocoll Agreement also provides for certain mutual indemnities for breaches of representations, warranties and covenants.

The Company also evaluated Innocoll’s future purchases of an excipient from the Company and concluded that these purchases are option rights, and are at market rates, and do not constitute a material right performance obligation. As such, these future purchases have been excluded from the allocation of transaction price and the Company will account for them as separate contracts when and if Innocoll elects to issue purchase orders for the excipient.

During December 2021, an upfront fee of $4.0 million as well as a fee in the amount of $1.2 million to cover reimbursed expenses, the manufacturing supplies and excipients transferred to Innocoll pursuant to the terms of the Innocoll Agreement was recognized as revenue when the performance obligations were satisfied in December 2021 and $0.1 million was recorded as a net reduction in equipment in December 2021. At December 31, 2021, the Company included $5.3 million due from Innocoll in accounts receivable on its balance sheet; these funds were received in January 2022. No revenues were recognized under the agreement with Innocoll during the three months ended March 31, 2022.

Patent Purchase Agreement with Indivior

 

In September 2017, we entered into an agreement with Indivior (the “Indivior Agreement”), under which we assigned to Indivior certain patents that may provide further intellectual property protection for PERSERIS, Indivior’s extended-release injectable suspension for the treatment of schizophrenia in adults.  In consideration for such assignment, Indivior made non-refundable upfront and milestone payments to DURECT totaling $17.5 million.  Additionally, under the terms of the agreement with Indivior, DURECT receives quarterly earn-out payments into 2026 that are based on a single digit percentage of U.S. net sales of PERSERIS.   Indivior commercially launched PERSERIS in the U.S. in February 2019. The Indivior Agreement contains customary representations, warranties and indemnities of the parties. Amounts recognized in the three months ended March 31, 2022 and 2021 related to earn-out revenues from PERSERIS have been immaterial and are included in collaborative research and development and other revenue.

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 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 have been achieved as of March 31, 2022). 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-

13


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 March 31, 2022, the cumulative aggregate payments received by the Company under this agreement were $3.3 million.

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, municipal bonds, 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 March 31, 2022 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 March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

March 31,

2022

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair

Value

 

Money market funds

 

$

1,594

 

 

$

 

 

$

 

 

$

1,594

 

Certificates of deposit

 

 

150

 

 

 

 

 

 

 

 

 

150

 

Commercial paper

 

 

57,669

 

 

 

1

 

 

 

(30

)

 

 

57,640

 

 

 

$

59,413

 

 

$

1

 

 

$

(30

)

 

$

59,384

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,473

 

 

$

1

 

 

$

(1

)

 

$

44,473

 

Short-term investments

 

 

14,790

 

 

 

 

 

 

(29

)

 

 

14,761

 

Long-term restricted investments

 

 

150

 

 

 

 

 

 

 

 

 

150

 

 

 

$

59,413

 

 

$

1

 

 

$

(30

)

 

$

59,384

 

14


 

 

 

 

December 31,

2021

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Estimated

Fair

Value

 

Money market funds

 

$

2,089

 

 

$

 

 

$

 

 

$

2,089

 

Certificates of deposit

 

 

150

 

 

 

 

 

 

 

 

 

150

 

Commercial paper

 

 

62,505

 

 

 

 

 

 

(10

)

 

 

62,495

 

Corporate debt

 

 

1,293

 

 

 

 

 

 

 

 

 

1,293

 

 

 

$

66,037

 

 

$

 

 

$

(10

)

 

$

66,027

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,913

 

 

$

 

 

$

(2

)

 

$

45,911

 

Short-term investments

 

 

19,974

 

 

 

 

 

 

(8

)

 

 

19,966

 

Long-term restricted investments

 

 

150

 

 

 

 

 

 

 

 

 

150

 

 

 

$

66,037

 

 

$

 

 

$

(10

)

 

$

66,027

 

 

The following is a summary of the cost and estimated fair value of available-for-sale securities at March 31, 2022, by contractual maturity (in thousands):

 

 

 

March 31,

2022

 

 

 

Amortized

Cost

 

 

Estimated

Fair

Value

 

Mature in one year or less

 

$

57,669

 

 

$

57,640

 

Mature after one year through five years

 

 

150

 

 

 

150

 

 

 

$

57,819

 

 

$

57,790

 

 

There were no securities that have had an unrealized loss for more than 12 months as of March 31, 2022.

As of March 31, 2022, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

 

Note 4. Accrued Liabilities

Accrued liabilities as of March 31, 2022 and December 31, 2021 were comprised as follows (in thousands):

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

Accrued compensation and benefits

 

$

2,323

 

 

$

4,099

 

Accrued contract research and manufacturing costs

 

 

822

 

 

 

757

 

Accrued clinical costs

 

 

397

 

 

 

97

 

Others

 

 

1,350

 

 

 

1,846

 

Total

 

$

4,892

 

 

$

6,799

 

15


 

 

Note 5. Stock-Based Compensation

As of March 31, 2022, the Company has two stock-based compensation plans. The stock-based compensation cost that has been included in the statements of comprehensive loss is shown as below (in thousands):

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

Cost of product revenues

 

$

5

 

 

$

5

 

Research and development

 

 

330

 

 

 

315

 

Selling, general and administrative

 

 

343

 

 

 

382

 

Total stock-based compensation

 

$

678

 

 

$

702

 

 

As of March 31, 2022 and December 31, 2021, $19,000 and $17,000 of stock-based compensation cost was capitalized in inventory on the Company’s balance sheets, respectively.

The Company uses the Black-Scholes option pricing model to value its stock options. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. The Company considered its historical volatility in developing its estimate of expected volatility.

The Company used the following assumptions to estimate the fair value of stock options granted and shares purchased under its employee stock purchase plan for the three months ended March 31, 2022 and 2021:

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

Stock Options

 

 

 

 

 

 

 

 

Risk-free rate

 

1.8-2.4%

 

 

0.8-1.2%

 

Expected dividend yield

 

 

 

 

 

 

Expected life of option (in years)

 

7.3

 

 

7.3

 

Volatility

 

83-84%

 

 

74-86%

 

 

 

 

Three months ended

March 31,

 

 

 

2022

 

 

2021

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

Risk-free rate

 

0.04%

 

 

0.1%

 

Expected dividend yield

 

 

 

 

 

 

Expected life of option (in years)

 

0.5

 

 

0.5

 

Volatility

 

56%

 

 

78%

 

 

Note 6. Term Loan   

In July 2016, the Company entered into a $20.0 million secured single-draw term loan with Oxford Finance LLC (“Oxford Finance”). The Company and Oxford Finance entered into five subsequent amendments to the Loan Agreement in February 2018, November 2018, December 2019, March 2021 and May 2021. For amendments 1-3 and 5, the Company paid Oxford Finance loan modification fees of $100,000, $900,000, $825,000 and $712,500, respectively. As amended, the Loan Agreement provides for interest only payments through June 1, 2023, followed by consecutive monthly payments of principal and interest in arrears starting on June 1, 2023 and continuing through the maturity date of the term loan of September 1, 2025. The Loan Agreement provides for a floating interest rate (7.95% initially and 7.95% as of March 31, 2022) based on an index rate plus a spread. In addition, a payment equal to 10% of the principal amount of the term loan is due when the term loan becomes due or upon the prepayment of the facility. If the Company elects to prepay the loan, there is also a prepayment fee of between 0.75% and 2.5% of the principal amount of the term loan depending on the timing of prepayment. The $150,000 facility fee that was paid at the original closing, the loan modification fees and other debt offering/issuance costs have been recorded as debt discount on the Company’s balance sheet and together with the final $2.0 million payment are being amortized to interest expense using the effective interest method over the revised term of the loan.

The term loan is secured by substantially all of the assets of the Company, except that the collateral does not include any intellectual property (including licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The 2016 Loan Agreement contains customary representations, warranties and covenants by the Company, which covenants limit the Company’s ability to convey, sell, lease, transfer, assign or otherwise dispose of certain assets of the Company; engage in any

16


business other than the businesses currently engaged in by the Company or reasonably related thereto; liquidate or dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; and make payments on any subordinated debt.

The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, the Company’s failure to fulfill certain obligations of the Company under the Loan Agreement and the occurrence of a material adverse change which is defined as a material adverse change in the Company’s business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of lender’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, the lender would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement, which could harm the Company’s financial condition. The conditionally exercisable call option related to the event of default is considered to be an embedded derivative which is required to be bifurcated and accounted for as a separate financial instrument. In the periods presented, the value of the embedded derivative is not material, but could become material in future periods if an event of default became more probable than is currently estimated.

The fair value of the term loan approximates the carrying value. Future maturities and interest payments due under the term loan as of March 31, 2022, are as follows (in thousands):

 

Nine months ended December 31, 2022

 

$

1,215

 

2023

 

 

7,191

 

2024

 

 

9,408

 

2025

 

 

7,886