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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 June 30, 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 August 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 June 30, 2022 and December 31, 2021

5

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021

6

 

 

 

 

Condensed Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021

   7

 

 

 

 

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

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 6.

Exhibits

58

 

 

 

Signatures

59

 

 

 


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 the U.S. Food and Drug Administration (“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 UK Limited (“Indivior”) related to the commercialization of PERSERIS, and milestone, sub-license fees and royalty payments we may receive from Santen Pharmaceutical Co. Ltd. (“Santen”) or Orient Pharma Co., Ltd. (“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, European Medicines Agency (“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)

 

 

 

June 30,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

A S S E T S

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,135

 

 

$

49,844

 

Short-term investments

 

 

6,977

 

 

 

19,966

 

Accounts receivable, net

 

 

1,204

 

 

 

6,477

 

Inventories, net

 

 

2,133

 

 

 

1,870

 

Prepaid expenses and other current assets

 

 

3,006

 

 

 

3,580

 

Total current assets

 

 

60,455

 

 

 

81,737

 

Property and equipment, net

 

 

222

 

 

 

227

 

Operating lease right-of-use assets

 

 

2,722

 

 

 

3,446

 

Goodwill

 

 

6,169

 

 

 

6,169

 

Long-term restricted investments

 

 

150

 

 

 

150

 

Other long-term assets

 

 

261

 

 

 

261

 

Total assets

 

$

69,979

 

 

$

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

 

$

3,230

 

 

$

1,311

 

Accrued liabilities

 

 

4,537

 

 

 

6,799

 

Deferred revenue, current portion

 

 

 

 

 

98

 

Term loan, current portion, net

 

 

950

 

 

 

 

Operating lease liabilities, current portion

 

 

1,876

 

 

 

1,848

 

Total current liabilities

 

 

10,593

 

 

 

10,056

 

Deferred revenue, non-current portion

 

 

812

 

 

 

812

 

Operating lease liabilities, non-current portion

 

 

1,039

 

 

 

1,824

 

Term loan, non-current portion, net

 

 

19,949

 

 

 

20,632

 

Other long-term liabilities

 

 

882

 

 

 

884

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

23

 

 

 

23

 

Additional paid-in capital

 

 

585,148

 

 

 

583,818

 

Accumulated other comprehensive loss

 

 

(25

)

 

 

(10

)

Accumulated deficit

 

 

(548,442

)

 

 

(526,049

)

Stockholders’ equity

 

 

36,704

 

 

 

57,782

 

Total liabilities and stockholders’ equity

 

$

69,979

 

 

$

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

June 30,

 

 

Six months ended

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Collaborative research and development and other revenue

 

$

606

 

 

$

735

 

 

$

1,101

 

 

$

1,309

 

Product revenue, net

 

 

1,470

 

 

 

1,568

 

 

 

2,890

 

 

 

3,206

 

Total revenues

 

 

2,076

 

 

 

2,303

 

 

 

3,991

 

 

 

4,515

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

393

 

 

 

359

 

 

 

728

 

 

 

711

 

Research and development

 

 

8,817

 

 

 

7,433

 

 

 

17,028

 

 

 

15,408

 

Selling, general and administrative

 

 

3,952

 

 

 

3,168

 

 

 

7,687

 

 

 

6,699

 

Total operating expenses

 

 

13,162

 

 

 

10,960

 

 

 

25,443

 

 

 

22,818

 

Loss from operations

 

 

(11,086

)

 

 

(8,657

)

 

 

(21,452

)

 

 

(18,303

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

127

 

 

 

39

 

 

 

181

 

 

 

76

 

Interest and other expenses

 

 

(592

)

 

 

(528

)

 

 

(1,122

)

 

 

(1,053

)

Net other expense

 

 

(465

)

 

 

(489

)

 

 

(941

)

 

 

(977

)

Net loss

 

 

(11,551

)

 

 

(9,146

)

 

 

(22,393

)

 

 

(19,280

)

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

 

 

4

 

 

 

13

 

 

 

(15

)

 

 

4

 

Total comprehensive loss

 

$

(11,547

)

 

$

(9,133

)

 

$

(22,408

)

 

$

(19,276

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

 

$

(0.04

)

 

$

(0.10

)

 

$

(0.09

)

Diluted

 

$

(0.05

)

 

$

(0.04

)

 

$

(0.10

)

 

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

227,742

 

 

 

227,428

 

 

 

227,715

 

 

 

222,510

 

Diluted

 

 

227,742

 

 

 

227,428

 

 

 

227,715

 

 

 

222,510

 

 

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

 

Issuance of common stock upon exercise of stock options

 

 

70

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Stock-based compensation expense from stock options and ESPP shares

 

 

 

 

 

 

 

 

617

 

 

 

 

 

 

 

 

 

617

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,551

)

 

 

(11,551

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Balance at June 30, 2022

 

 

227,764

 

 

$

23

 

 

$

585,148

 

 

$

(25

)

 

$

(548,442

)

 

$

36,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Issuance of common stock upon equity financings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock options, ESPP purchases and other

 

 

146

 

 

 

 

 

 

163

 

 

 

 

 

 

 

 

 

163

 

Stock-based compensation expense from stock options and ESPP shares

 

 

 

 

 

 

 

 

710

 

 

 

 

 

 

 

 

 

710

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,146

)

 

 

(9,146

)

Unrealized gain on available-for-sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Balance at June 30, 2021

 

 

227,496

 

 

$

23

 

 

$

582,505

 

 

$

(1

)

 

$

(509,064

)

 

$

73,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

7


DURECT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six months ended

June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(22,393

)

 

$

(19,280

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

69

 

 

 

60

 

Stock-based compensation

 

 

1,296

 

 

 

1,412

 

Amortization of debt issuance cost

 

 

238

 

 

 

209

 

Net amortization on investments

 

 

13

 

 

 

(77

)

Changes in operating lease liabilities

 

 

(33

)

 

 

(5

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,273

 

 

 

124

 

Inventories

 

 

(264

)

 

 

(55

)

Prepaid expenses and other assets

 

 

574

 

 

 

353

 

Accounts payable

 

 

1,919

 

 

 

(592

)

Accrued liabilities

 

 

(2,234

)

 

 

(995

)

Deferred revenue

 

 

(98

)

 

 

5

 

Total adjustments

 

 

6,753

 

 

 

439

 

Net cash used in operating activities

 

 

(15,640

)

 

 

(18,841

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(64

)

 

 

(20

)

Purchases of available-for-sale securities

 

 

 

 

 

(42,323

)

Proceeds from maturities of available-for-sale securities

 

 

12,961

 

 

 

30,468

 

Net proceeds from sale of LACTEL product line

 

 

 

 

 

14,979

 

Net cash provided by investing activities

 

 

12,897

 

 

 

3,104

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on equipment financing obligations

 

 

(1

)

 

 

(1

)

Payment for long-term debt amendment fee

 

 

 

 

 

(713

)

Net proceeds from issuances of common stock

 

 

35

 

 

 

51,212

 

Net cash provided by financing activities

 

 

34

 

 

 

50,498

 

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

 

 

(2,709

)

 

 

34,761

 

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)

 

$

47,285

 

 

$

56,223

 

 

 

 

 

 

 

 

 

 

(1) Includes restricted cash of $150,000 (in long term restricted investments) included in the condensed balance sheets at June 30, 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 June 30, 2022, the operating results and comprehensive loss, and stockholders’ equity for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 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.

Liquidity and Need to Raise Additional Capital

As of June 30, 2022, the Company had an accumulated deficit of $548.4 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 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.

9


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

 

 

 

June 30,

2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

Raw materials

 

$

143

 

 

$

143

 

Work in process

 

 

872

 

 

 

712

 

Finished goods

 

 

1,118

 

 

 

1,015

 

Total inventories

 

$

2,133

 

 

$

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 its 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 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

10


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 based on customers’ locations for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands):

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

United States

 

$

1,398

 

 

$

1,684

 

 

$

2,605

 

 

$

2,932

 

Europe

 

 

414

 

 

 

165

 

 

 

752

 

 

 

645