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, 2005
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 25, 2005, there were 51,932,587 shares of the registrant’s Common Stock outstanding.
| Page | ||||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. |
Financial Statements | 3 | ||
|
Condensed Consolidated Statements of Operations For the three months ended March 31, 2005 and 2004 (unaudited) |
3 | |||
|
Condensed Consolidated Balance Sheets As of March 31, 2005 (unaudited) and December 31, 2004 |
4 | |||
|
Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2005 and 2004 (unaudited) |
5 | |||
| Notes to Condensed Consolidated Financial Statements (unaudited) | 6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 34 | ||
| Item 4. |
Controls and Procedures | 35 | ||
| PART II. OTHER INFORMATION | ||||
| Item 1. |
Legal Proceedings | 35 | ||
| Item 2. |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 35 | ||
| Item 3. |
Defaults Upon Senior Securities | 35 | ||
| Item 4. |
Submission of Matters to a Vote of Security Holders | 36 | ||
| Item 5. |
Other Information | 36 | ||
| Item 6. |
Exhibits | 37 | ||
| (a) Exhibits | 37 | |||
| 38 | ||||
| Certifications |
||||
2
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three months ended March 31, |
||||||||
| 2005 |
2004 |
|||||||
| Product revenue, net |
$ | 1,757 | $ | 1,365 | ||||
| Collaborative research and development and other revenue |
3,597 | 2,020 | ||||||
| Total revenues |
5,354 | 3,385 | ||||||
| Operating expenses: |
||||||||
| Cost of revenues |
671 | 565 | ||||||
| Research and development |
6,618 | 5,409 | ||||||
| Selling, general and administrative |
2,504 | 2,224 | ||||||
| Amortization of intangible assets |
303 | 335 | ||||||
| Stock-based compensation(1) |
50 | 35 | ||||||
| Total operating expenses |
10,146 | 8,568 | ||||||
| Loss from operations |
(4,792 | ) | (5,183 | ) | ||||
| Other income (expense): |
||||||||
| Interest and other income |
485 | 304 | ||||||
| Interest expense |
(1,120 | ) | (1,111 | ) | ||||
| Net other expense |
(635 | ) | (807 | ) | ||||
| Net loss |
$ | (5,427 | ) | $ | (5,990 | ) | ||
| Net loss per common share, basic and diluted |
$ | (0.10 | ) | $ | (0.12 | ) | ||
| Shares used in computing basic and diluted net loss per share |
51,887 | 51,124 | ||||||
(1) Stock-based compensation related to the following:
|
| |||||||
| Cost of revenues |
$ | — | $ | 3 | ||||
| Research and development |
46 | 27 | ||||||
| Selling, general and administrative |
4 | 5 | ||||||
| $ | 50 | $ | 35 | |||||
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, 2005 |
December 31, 2004 |
|||||||
| (unaudited) | (Note 1) | |||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 18,472 | $ | 20,032 | ||||
| Short-term investments |
20,065 | 21,765 | ||||||
| Accounts receivable, net of allowances of $262 and $208, respectively |
13,958 | 2,481 | ||||||
| Inventories |
1,906 | 1,929 | ||||||
| Prepaid expenses and other current assets |
1,417 | 1,364 | ||||||
| Total current assets |
55,818 | 47,571 | ||||||
| Property and equipment, net |
7,213 | 7,112 | ||||||
| Goodwill |
6,399 | 6,399 | ||||||
| Intangible assets, net |
1,441 | 1,745 | ||||||
| Long-term investments |
14,454 | 17,218 | ||||||
| Restricted investments |
2,808 | 2,798 | ||||||
| Other long-term assets |
2,469 | 2,625 | ||||||
| Total assets |
$ | 90,602 | $ | 85,468 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 1,298 | $ | 1,658 | ||||
| Accrued liabilities |
2,265 | 2,549 | ||||||
| Contract research liability |
1,066 | 554 | ||||||
| Interest payable on convertible notes |
1,104 | 167 | ||||||
| Deferred revenue, current portion |
2,665 | 78 | ||||||
| Term loan, current portion |
245 | 293 | ||||||
| Bonds payable, current portion |
190 | 190 | ||||||
| Total current liabilities |
8,833 | 5,489 | ||||||
| Term loan, noncurrent portion |
34 | 60 | ||||||
| Bonds payable, noncurrent portion |
875 | 875 | ||||||
| Convertible subordinated notes |
60,000 | 60,000 | ||||||
| Deferred revenue, noncurrent portion |
7,219 | — | ||||||
| Other long-term liabilities |
645 | 654 | ||||||
| Commitments |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.0001 par value: 110,000 shares authorized at March 31, 2005 and December 31, 2004 respectively; 51,924 and 51,870 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively |
5 | 5 | ||||||
| Additional paid-in capital |
196,198 | 196,065 | ||||||
| Note receivable from stockholder |
(37 | ) | (37 | ) | ||||
| Deferred compensation |
(2 | ) | (4 | ) | ||||
| Deferred royalties and commercial rights |
(13,480 | ) | (13,480 | ) | ||||
| Accumulated other comprehensive loss |
(370 | ) | (268 | ) | ||||
| Accumulated deficit |
(169,318 | ) | (163,891 | ) | ||||
| Stockholders’ equity |
12,996 | 18,390 | ||||||
| Total liabilities and stockholders’ equity |
$ | 90,602 | $ | 85,468 | ||||
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, |
||||||||
| 2005 |
2004 |
|||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | (5,427 | ) | $ | (5,990 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation |
576 | 823 | ||||||
| Amortization |
303 | 335 | ||||||
| Noncash charges related to stock-based compensation |
50 | 35 | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
(11,477 | ) | (658 | ) | ||||
| Inventories |
23 | (154 | ) | |||||
| Prepaid expenses and other assets |
104 | 226 | ||||||
| Accounts payable |
(360 | ) | (23 | ) | ||||
| Accrued liabilities and other long-term liabilities |
(293 | ) | (295 | ) | ||||
| Contract research liability |
512 | (81 | ) | |||||
| Interest payable on convertible notes |
937 | 937 | ||||||
| Deferred revenue |
9,806 | 137 | ||||||
| Total adjustments |
181 | 1,282 | ||||||
| Net cash and cash equivalents used in operating activities |
(5,246 | ) | (4,708 | ) | ||||
| Cash flows from investing activities |
||||||||
| Purchases of equipment |
(677 | ) | (299 | ) | ||||
| Purchases of available for sale securities |
(3,689 | ) | (18,568 | ) | ||||
| Proceeds from maturities of available for sale securities |
8,041 | 24,015 | ||||||
| Net cash and cash equivalents provided by investing activities |
3,675 | 5,148 | ||||||
| Cash flows from financing activities |
||||||||
| Payments on term loan and equipment financing obligations |
(74 | ) | (71 | ) | ||||
| Net proceeds from issuances of common stock through exercise of options and warrants |
85 | 71 | ||||||
| Net proceeds from notes receivable from stockholders |
— | 24 | ||||||
| Net cash and cash equivalents provided by financing activities |
11 | 24 | ||||||
| Net increase (decrease) in cash and cash equivalents |
(1,560 | ) | 464 | |||||
| Cash and cash equivalents, beginning of the period |
20,032 | 21,203 | ||||||
| Cash and cash equivalents, end of the period |
$ | 18,472 | $ | 21,667 | ||||
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 an emerging specialty pharmaceuticals systems company focused on the development of pharmaceutical systems based on its proprietary drug delivery technology platforms. The Company has several product candidates under development by itself and with third-party collaborators in the areas of pain and other chronic diseases and disorders. The Company also manufactures and sells osmotic pumps used in laboratory research. In addition, the Company conducts research and development of pharmaceutical product candidates with third-party pharmaceutical and biotechnology company partners.
The Company also designs, develops and manufactures a wide range of standard and custom biodegradable polymers for pharmaceutical and medical device clients for use as raw materials in their products. Until December 31, 2004, this business was conducted by the Company’s wholly owned subsidiary, Absorbable Polymers International Corporation (API), formerly known as Birmingham Polymers Inc., an Alabama corporation. API was merged with and into the Company on December 31, 2004.
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, 2005, the operating results for the three months ended March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. The condensed consolidated balance sheet as of December 31, 2004 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, 2005 |
December 31, 2004 | |||||
| (unaudited) | ||||||
| Raw materials |
$ | 172 | $ | 175 | ||
| Work in process |
499 | 452 | ||||
| Finished goods |
1,235 | 1,302 | ||||
| Total inventories |
$ | 1,906 | $ | 1,929 | ||
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions and related interpretations of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and has elected to follow the “disclosure only” alternative prescribed by Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under APB 25, stock-based compensation is based on the
6
DURECT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price. Unearned compensation is amortized using the graded vesting method and expensed over the vesting period of the respective options.
At March 31, 2005, the Company has five stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement princip