UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
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.) |
10240 Bubb Road
Cupertino, California 95014
(Address of principal executive offices, including zip code)
(408) 777-1417
(Registrant’s telephone number, including area code)
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 x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x NO ¨
As of April 30, 2004, there were 51,252,545 shares of the registrant’s Common Stock outstanding.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Product revenue, net |
$ | 1,365 | $ | 1,507 | ||||
| Collaborative research and development and other revenue |
2,020 | 1,074 | ||||||
| Total revenues |
3,385 | 2,581 | ||||||
| Operating expenses: |
||||||||
| Cost of revenues |
565 | 595 | ||||||
| Research and development |
5,409 | 5,572 | ||||||
| Selling, general and administrative |
2,224 | 2,243 | ||||||
| Amortization of intangible assets |
335 | 335 | ||||||
| Stock-based compensation(1) |
35 | (154 | ) | |||||
| Total operating expenses |
8,568 | 8,591 | ||||||
| Loss from operations |
(5,183 | ) | (6,010 | ) | ||||
| Other income (expense): |
||||||||
| Interest income |
304 | 241 | ||||||
| Interest expense |
(1,111 | ) | (124 | ) | ||||
| Net other income (expense) |
(807 | ) | 117 | |||||
| Net loss |
$ | (5,990 | ) | $ | (5,893 | ) | ||
| Net loss per common share, basic and diluted |
$ | (0.12 | ) | $ | (0.12 | ) | ||
| Shares used in computing basic and diluted net loss per share |
51,124 | 50,123 | ||||||
(1) Stock-based compensation related to the following: |
||||||||
| Cost of revenues |
$ | 3 | $ | 8 | ||||
| Research and development |
27 | (236 | ) | |||||
| Selling, general and administrative |
5 | 74 | ||||||
| $ | 35 | $ | (154 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | (Note 1) | |||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 21,667 | $ | 21,203 | ||||
| Short-term investments |
36,268 | 39,511 | ||||||
| Accounts receivable, net of allowances of $120 and $141, respectively |
2,626 | 1,968 | ||||||
| Inventories |
2,056 | 1,902 | ||||||
| Prepaid expenses and other current assets |
1,399 | 1,480 | ||||||
| Total current assets |
64,016 | 66,064 | ||||||
| Property and equipment, net |
8,792 | 9,316 | ||||||
| Goodwill |
6,399 | 6,399 | ||||||
| Intangible assets, net |
2,659 | 2,994 | ||||||
| Long-term investments |
19,374 | 21,334 | ||||||
| Restricted investments |
2,975 | 3,119 | ||||||
| Other long-term assets |
3,036 | 3,181 | ||||||
| Total assets |
$ | 107,251 | $ | 112,407 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 593 | $ | 616 | ||||
| Accrued liabilities |
2,322 | 2,618 | ||||||
| Contract research liability |
906 | 987 | ||||||
| Accrued liabilities to related party |
11 | 17 | ||||||
| Interest payable on convertible notes |
1,104 | 167 | ||||||
| Deferred revenue |
283 | 146 | ||||||
| Term loan, current portion |
283 | 283 | ||||||
| Bonds payable, current portion |
180 | 180 | ||||||
| Total current liabilities |
5,682 | 5,014 | ||||||
| Term loan, noncurrent portion |
236 | 307 | ||||||
| Bonds payable, noncurrent portion |
1,065 | 1,065 | ||||||
| Convertible subordinated notes |
60,000 | 60,000 | ||||||
| Other long-term liabilities |
913 | 906 | ||||||
| Commitments |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.0001 par value: 110,000 shares authorized at March 31, 2004 and December 31, 2003 respectively; 51,200 and 51,163 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
5 | 5 | ||||||
| Additional paid-in capital |
195,032 | 194,968 | ||||||
| Notes receivable from stockholders |
(25 | ) | (50 | ) | ||||
| Deferred compensation |
(18 | ) | (59 | ) | ||||
| Deferred royalties and commercial rights |
(13,480 | ) | (13,480 | ) | ||||
| Accumulated other comprehensive income (loss) |
85 | (15 | ) | |||||
| Accumulated deficit |
(142,244 | ) | (136,254 | ) | ||||
| Stockholders’ equity |
39,355 | 45,115 | ||||||
| Total liabilities and stockholders’ equity |
$ | 107,251 | $ | 112,407 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | (5,990 | ) | $ | (5,893 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation |
823 | 849 | ||||||
| Amortization |
335 | 335 | ||||||
| Noncash charges related to stock-based compensation |
35 | (154 | ) | |||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
(658 | ) | (463 | ) | ||||
| Inventories |
(154 | ) | 38 | |||||
| Prepaid expenses and other assets |
226 | (23 | ) | |||||
| Accounts payable |
(23 | ) | 134 | |||||
| Accrued liabilities and other long-term liabilities |
(295 | ) | 52 | |||||
| Contract research liability |
(81 | ) | 147 | |||||
| Interest payable on convertible notes |
937 | — | ||||||
| Deferred revenue |
137 | (268 | ) | |||||
| Total adjustments |
1,282 | 647 | ||||||
| Net cash and cash equivalents used in operating activities |
(4,708 | ) | (5,246 | ) | ||||
| Cash flows from investing activities |
||||||||
| Purchases of equipment |
(299 | ) | (61 | ) | ||||
| Purchases of available for sale securities |
(18,568 | ) | (8,349 | ) | ||||
| Proceeds from maturities of available for sale securities |
24,015 | 15,507 | ||||||
| Net cash and cash equivalents provided by investing activities |
5,148 | 7,097 | ||||||
| Cash flows from financing activities |
||||||||
| Payments on equipment financing obligations |
— | (661 | ) | |||||
| Payments on term loan |
(71 | ) | — | |||||
| Net proceeds from term loan |
— | 850 | ||||||
| Net proceeds from issuances of common stock through exercise of options and warrants |
71 | 15 | ||||||
| Net proceeds from notes receivable from stockholders |
24 | 67 | ||||||
| Net cash and cash equivalents provided by financing activities |
24 | 271 | ||||||
| Net increase in cash and cash equivalents |
464 | 2,122 | ||||||
| Cash and cash equivalents, beginning of the period |
21,203 | 14,089 | ||||||
| Cash and cash equivalents, end of the period |
$ | 21,667 | $ | 16,211 | ||||
| Supplemental disclosure of cash flow information |
||||||||
| Cash paid during the period for interest |
$ | 7 | $ | 105 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
DURECT Corporation (the Company) was incorporated in the state of Delaware on February 6, 1998. The Company is a pharmaceutical company developing therapies for the treatment of chronic diseases and conditions with its proprietary drug formulations and delivery platform technologies. The Company’s lead product, the CHRONOGESIC® (sufentanil) Pain Therapy System, is intended for the treatment of chronic pain. The Company has several products under development in the areas of pain, cardiovascular diseases and central nervous system disorders. The Company also manufactures and sells osmotic pumps used in laboratory research. In addition, the Company conducts research and development of pharmaceutical products with third party pharmaceutical and biotechnology company partners.
Absorbable Polymers International Corporation, formally known as Birmingham Polymers, Inc., a wholly owned subsidiary of the Company, develops and manufactures biodegradable polymers for third party pharmaceutical and biotechnology companies for use in their products.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, 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 accounting principles generally accepted in the United States. The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at March 31, 2004, the operating results for the three months ended March 31, 2004 and 2003, and cash flows for the three months ended March 31, 2004 and 2003. The condensed consolidated balance sheet as of December 31, 2003 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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 filed with the Securities and Exchange Commission.
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.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.
Inventories consisted of the following (in thousands):
| March 31, 2004 |
December 31, 2003 | |||||
| (unaudited) | ||||||
| Raw materials |
$ | 202 | $ | 212 | ||
| Work in process |
507 | 542 | ||||
| Finished goods |
1,347 | |||||