DURECT CORP [DRRX] Filings

10-Q 1 drrx-20240930.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

☐ 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)

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 check mark whether the registrant is 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 November 11, 2024, there were 31,041,981 shares of the registrant’s common stock outstanding.

INDEX


		Page

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	5

	Condensed Unaudited Balance Sheets as of September 30, 2024 and December 31, 2023	5

	Condensed Unaudited Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2024 and 2023	6

	Condensed Unaudited Statements of Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023	7

	Condensed Unaudited Statements of Cash Flows for the nine months ended September 30, 2024 and 2023	8

	Notes to Condensed Unaudited Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4.	Controls and Procedures	31

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 5.	Other Information	34

Item 6.	Exhibits	35

Signatures		36

Special Note Regarding Forward-Looking Statements

This Quarterly Report on 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 or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “may,” “will,” “could,” “potentially,” “possibility,” and similar expressions are forward-looking statements. Such forward-looking statements contained herein 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:

•

potential uses and benefits of larsucosterol to treat alcohol-associated hepatitis (“AH”), metabolic dysfunction-associated steatohepatitis (“MASH”), or other conditions;

•

the potential benefits of Breakthrough Therapy Designation;

•

the results and timing of clinical trials, including clinical trial plans and timelines for larsucosterol;

•

the likelihood of future clinical trial results of larsucosterol being positive with statistical significance and/or similar to results from previous trials, the possible commencement of future clinical trials;

•

our communication with the U.S. Food and Drug Administration (“FDA”) regarding the trial design for a Phase 3 clinical trial for larsucosterol in AH and our ability to confirm the efficacy and safety of larsucosterol in AH patients to support a New Drug Application filing with the FDA;

•

our plans and ability to obtain sufficient capital resources to initiate a Phase 3 clinical trial of larsucosterol in AH and present topline results within two years of initiation;

•

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

•

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

•

the potential milestone, sub-license fees and royalty payments we may receive from Orient Pharma Co., Ltd.;

•

market opportunities for product candidates in our product development pipeline;

•

potential regulatory filings for or approval of larsucosterol;

•

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 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;

•

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, our need or desire for additional financing, including potential sales under our shelf registration statement and our ability to continue to operate as a going concern;

•

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 “Overview” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations herein and Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024 and any additional risk factors that may be described herein or in our subsequent filings with the SEC “Risk Factors” section. 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 SEC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DURECT CORPORATION

CONDENSED BALANCE SHEETS

(in thousands)

(unaudited)


	September 30, 2024			December 31, 2023
A S S E T S
Current assets:
Cash and cash equivalents	$	9,086		$	28,400
Short-term investments		1,290			1,280
Accounts receivable, net		1,016			1,261
Inventories, net		2,376			2,219
Prepaid expenses and other current assets		657			1,511
Total current assets		14,425			34,671
Property and equipment, net		52			91
Operating lease right-of-use assets		3,142			3,980
Goodwill		6,169			6,169
Long-term restricted investments		150			150
Other long-term assets		128			128
Total assets	$	24,066		$	45,189
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	$	498		$	1,777
Accrued liabilities		4,798			5,966
Term loan, current portion, net		10,466			16,663
Operating lease liabilities, current portion		1,308			1,381
Warrant liabilities		3,137			1,224
Total current liabilities		20,207			27,011
Operating lease liabilities, non-current portion		1,966			2,702
Other long-term liabilities		676			693
Commitments and contingencies
Stockholders’ equity:
Common stock		23			23
Additional paid-in capital		605,828			603,780
Accumulated other comprehensive loss		—			(14	)
Accumulated deficit		(604,634	)		(589,006	)
Stockholders’ equity		1,217			14,783
Total liabilities and stockholders’ equity	$	24,066		$	45,189

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

DURECT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2024			2023			2024			2023
Collaborative research and development and other revenue	$	369		$	506		$	1,471		$	1,657
Product revenue, net		1,558			1,238			4,454			4,222
Total revenues		1,927			1,744			5,925			5,879
Operating expenses:
Cost of product revenues		513			312			1,158			1,059
Research and development		2,164			7,199			8,530			23,738
Selling, general and administrative		3,217			3,790			9,325			11,712
Total operating expenses		5,894			11,301			19,013			36,509
Loss from operations		(3,967	)		(9,557	)		(13,088	)		(30,630	)
Other income (expense):
Interest and other income		163			653			711			1,681
Interest and other expenses		(364	)		(700	)		(1,338	)		(2,175	)
Change in fair value of warrant liabilities		(117	)		7,016			(1,913	)		8,601
Issuance cost for warrants		—			(427	)		—			(1,627	)
Loss on issuance of warrants		—			—			—			(2,033	)
Other income (expense), net		(318	)		6,542			(2,540	)		4,447
Net loss		(4,285	)		(3,015	)		(15,628	)		(26,183	)
Net change in unrealized gain (loss) on available-for-sale securities, net of reclassification adjustments and taxes		7			(6	)		14			1
Total comprehensive loss	$	(4,278	)	$	(3,021	)	$	(15,614	)	$	(26,182	)

Net loss per share
Basic	$	(0.14	)	$	(0.11	)	$	(0.51	)	$	(1.04	)
Diluted	$	(0.14	)	$	(0.14	)	$	(0.51	)	$	(1.07	)

Weighted-average shares used in computing net loss per share
Basic		31,039			27,211			30,906			25,175
Diluted		31,039			27,511			30,906			25,433

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

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, 2023		30,334	$	23	$	603,780	$	(14	)	$	(589,006	)	$	14,783
Issuance of common stock pursuant to the 2021 Sales Agreement, net of issuance costs of $13		702		—		648		—			—			648
Stock-based compensation expense from stock options and ESPP shares		—		—		508		—			—			508
Net loss		—		—		—		—			(7,643	)		(7,643	)
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes		—		—		—		4			—			4
Balance at March 31, 2024		31,036	$	23	$	604,936	$	(10	)	$	(596,649	)	$	8,300
Issuance of common stock upon exercise of stock options and from the ESPP		3		—		3		—			—			3
Stock-based compensation expense from stock options and ESPP shares		—		—		431		—			—			431
Net loss		—		—		—		—			(3,700	)		(3,700	)
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes		—		—		—		3			—			3
Balance at June 30, 2024		31,039	$	23	$	605,370	$	(7	)	$	(600,349	)	$	5,037
Stock-based compensation expense from stock options and ESPP shares		—		—		458								458
Net loss		—		—							(4,285	)		(4,285	)
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes		—		—				7						7
Balance at September 30, 2024		31,039	$	23	$	605,828	$	—		$	(604,634	)	$	1,217

Balance at December 31, 2022		22,785	$	23	$	586,357	$	(13	)	$	(561,382	)	$	24,985
Issuance of common stock in the February 2023 registered direct offering		1,700		—		—		—			—			—
Stock-based compensation expense from stock options and ESPP shares		—		—		2,338		—			—			2,338
Net loss		—		—		—		—			(11,987	)		(11,987	)
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes		—		—		—		6			—			6
Balance at March 31, 2023		24,485	$	23	$	588,695	$	(7	)	$	(573,369	)	$	15,342
Issuance of common stock pursuant to the 2021 Sales Agreement, net of issuance costs of $13		118		—		658		—			—			658
Issuance of common stock upon exercise of stock options and from the ESPP		6		—		23		—			—			23
Stock-based compensation expense from stock options and ESPP shares		—		—		657		—			—			657
Net loss		—		—		—		—			(11,181	)		(11,181	)
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes								1			—			1
Balance at June 30, 2023		24,609	$	23	$	590,033	$	(6	)	$	(584,550	)	$	5,500
Issuance of common stock in the July 2023 registered direct offering, net of issuance costs of $673		2,991		—		8,540		—			—			8,540
Issuance of common stock upon warrant exercises		924		—		2,726								2,726
Stock-based compensation expense from stock options and ESPP shares		—		—		661		—			—			661
Net loss		—		—		—		—			(3,015	)		(3,015	)
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes		—		—		—		(6	)		—			(6	)
Balance at September 30, 2023		28,524	$	23	$	601,960	$	(12	)	$	(587,565	)	$	14,406

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

DURECT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine months ended September 30,
	2024			2023
Cash flows from operating activities
Net loss	$	(15,628	)	$	(26,183	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and accretion		72			154
Stock-based compensation		1,401			1,923
Change in fair value of warrant liabilities		1,913			(8,601	)
Loss on issuance of warrants		—			2,033
Issuance cost for warrants		—			427
Other		205			469
Changes in assets and liabilities:
Accounts receivable		245			2,540
Inventories		(160	)		(409	)
Prepaid expenses and other assets		854			1,000
Accounts payable		(1,279	)		(1,792	)
Accrued liabilities		(1,193	)		2,172
Deferred revenue		—			178
Total adjustments		2,058			94
Net cash used in operating activities		(13,570	)		(26,089	)
Cash flows from investing activities
Purchases of property and equipment		—			(52	)
Purchases of available-for-sale securities		(2,166	)		(80	)
Proceeds from maturities of short-term investments		2,200			—
Net cash provided by (used in) investing activities		34			(132	)
Cash flows from financing activities
Payments on equipment financing obligations		—			(1	)
Payments on term loan principal		(6,429	)		(2,857	)
Net proceeds from issuances of common stock pursuant to the 2021 Sales Agreement		648			658
Net proceeds from issuance of common stock upon exercise of stock options and from the ESPP		3			23
Proceeds from issuances of warrants and common stock		—			10,000
Net proceeds from issuances of warrants and common stock in the July 2023 registered direct offering		—			13,900
Net cash (used in) provided by financing activities		(5,778	)		21,723
Net decrease in cash, cash equivalents, and restricted cash		(19,314	)		(4,498	)
Cash, cash equivalents, and restricted cash, beginning of the period (1)		28,550			43,633
Cash, cash equivalents, and restricted cash, end of the period (1)	$	9,236		$	39,135

(1) Includes restricted cash of $150,000 included in long-term restricted investments on the condensed balance sheets at September 30, 2024, December 31, 2023 and September 30, 2023, respectively.

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

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 advancing novel and potentially lifesaving investigational therapies derived from its endogenous epigenetic regulator program. Larsucosterol, the Company's lead drug candidate, binds to and inhibits the activity of DNA methyltransferases ("DNMTs"), epigenetic enzymes which are elevated and associated with hypermethylation found in alcohol-associated hepatitis ("AH") patients. Larsucosterol is in clinical development for the potential treatment of AH, for which the U.S. Food and Drug Administration (“FDA”) has granted Fast Track Designation and Breakthrough Therapy Designation; metabolic dysfunction-associated steatohepatitis (“MASH”), previously known as non-alcoholic steatohepatitis or NASH has also been explored. In addition, POSIMIR® (bupivacaine solution) for infiltration use, a non-opioid analgesic utilizing the innovative SABER® platform technology, is FDA-approved and has been exclusively licensed to Innocoll Pharmaceuticals for commercialization in the United States. 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.

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 September 30, 2024, the operating results and comprehensive loss, and stockholders’ equity for the three and nine months ended September 30, 2024 and 2023, and cash flows for the nine months ended September 30, 2024 and 2023. The balance sheet as of December 31, 2023 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, 2023 filed with the SEC.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Liquidity and Need to Raise Additional Capital

As of September 30, 2024, the Company had an accumulated deficit of $604.6 million as well as negative cash flows from operating activities. Presently, the Company does not have sufficient cash resources to meet its plans for the next twelve months following the issuance of these financial statements. The Company will continue to require substantial funds to continue research and development, including clinical trials of its product candidates. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. Management’s plans in order to meet its operating cash flow requirements include seeking additional collaborative agreements for certain of its programs as well as financing activities such as public offerings and private placements of its common stock, preferred stock offerings, issuances of debt and convertible debt instruments.

There are no assurances that such additional funding will be obtained and that the Company will succeed in its future operations. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations. As further described in Note 6, the Company classified the remaining balance of its term loan as a current liability on the Company’s balance sheets as of September 30, 2024 and December 31, 2023. These financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event the Company can no longer continue as a going concern.

Inventories, net

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.

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


	September 30, 2024		December 31, 2023
Raw materials	$	137	$	165
Work in process		1,236		1,164
Finished goods		1,003		890
Total inventories	$	2,376	$	2,219

Leases

ASC 842 requires the Company to recognize an operating lease right-of-use asset and corresponding operating lease liability for the Company’s leased properties. The Company’s operating lease right-of-use assets and liabilities are recognized under ASC 842 based on the present value of lease payments over the remaining lease term at the lease commencement date. In determining the net present value of lease payments, we estimate the incremental borrowing rate based on the information available, including remaining lease term. As of September 30, 2024, the weighted-average remaining lease term was 2.86 years for the Company’s leased properties.

Revenue Recognition

Product Revenue, Net

The Company manufactures and sells ALZET osmotic pumps used in laboratory research, and manufactures and sells certain excipients used by pharmaceutical companies as raw materials in certain of their products, including POSIMIR, a marketed animal health product and Methydur.

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 and earn-out revenues, 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 revenues from the transaction price allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For 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 from the allocated transaction price. 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.

Milestone Payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.

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 or earn-out 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 agreements.

Research and development services: Revenue from research and development services that are determined to represent a distinct performance obligation related to services performed under the collaborative arrangements 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 revenue. 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 nine months ended September 30, 2024 and 2023 are as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
United States	$	1,209	$	883	$	3,364	$	3,304
Europe		428		525		1,615		1,569
Japan		155		124		442		406
Other		135		212		504		600
Total	$	1,927	$	1,744	$	5,925	$	5,879

Prepaid and Accrued Clinical Costs

The Company incurs significant costs associated with third party consultants and organizations for pre-clinical studies, clinical trials, contract research, 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. Estimates are determined each reporting period by reviewing the terms and conditions of the underlying contracts, reviewing open purchase orders and by having detailed discussions with internal clinical personnel and third-party service providers as to the nature and status of the services performed in relation to amounts billed. The costs for unbilled services are estimated by applying the rates and fees applicable in the underlying contracts. If these good faith estimates are inaccurate, actual expenses incurred could materially differ from these estimates.

Prepaid and Accrued Manufacturing Costs

The Company incurs significant costs associated with third party consultants and organizations for manufacturing, validation, testing 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. Estimates are determined each reporting period by reviewing the terms and conditions of the underlying contracts, reviewing open purchase orders and by having detailed discussions with internal personnel and third-party service providers as to the nature and status of the services performed in relation to amounts billed. The costs for unbilled services are estimated by applying the rates and fees applicable in the underlying contracts. 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, research and development expenses incurred that are reimbursed by the Company’s partners are recorded as collaborative research and development revenue.

Selling, general and administrative Expenses

Selling, general and administrative expenses are primarily comprised of salaries, benefits, stock-based compensation and other costs associated with finance, accounting, legal, business development, sales and marketing and other administrative personnel, overhead and facility costs, and other general and administrative costs.

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 Condensed Unaudited Statements of Operations and Comprehensive Loss.

Common Stock Warrants

The Company accounts for its common stock warrants in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 480 and ASC 815, the Company accounts for common stock warrants and pre-funded warrants as current liabilities if the warrant fails the equity classification criteria. Common stock warrants and pre-funded warrants classified as liabilities are initially recorded at fair value on the grant date and remeasured at each balance sheet date with the offsetting adjustments recorded in change in fair value of warrant liabilities within the statements of operations.

The Company values its pre-funded warrants and common stock warrants classified as liabilities using the Black-Scholes option pricing model or other acceptable valuation models, including the Monte-Carlo simulation model.

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 during the period. 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 September 30,						Nine months ended September 30,
	2024			2023			2024			2023
Basic loss per share computation:
Net loss	$	(4,285	)	$	(3,015	)	$	(15,628	)	$	(26,183	)
Weighted average number of shares outstanding - basic		31,039			27,211			30,906			25,175
Net loss per share - basic	$	(0.14	)	$	(0.11	)	$	(0.51	)	$	(1.04	)

Diluted loss per share computation:
Net loss	$	(4,285	)	$	(3,015	)	$	(15,628	)	$	(26,183	)
Change in fair value of pre-funded warrant liabilities		—			738			—			996
Net loss adjusted for change in fair value of warrant liabilities	$	(4,285	)	$	(3,753	)	$	(15,628	)	$	(27,179	)

Weighted average shares used to compute basic net loss per share		31,039			27,211			30,906			25,175
Dilutive effect of pre-funded warrants		—			300			—			258
Weighted average shares used to compute diluted net loss per share		31,039			27,511			30,906			25,433
Net loss per share - diluted	$	(0.14	)	$	(0.14	)	$	(0.51	)	$	(1.07	)

Options to purchase approximately 3.7 million and 3.8 million shares of common stock were excluded from the denominator in the calculation of diluted net loss share for the three and nine months ended September 30, 2024, respectively, as the effect would be anti-dilutive. Options to purchase approximately 3.5 million and 3.4 million shares of common stock were excluded from the denominator in the calculation of diluted net loss per share for the three and nine months ended September 30, 2023, respectively, as the effect would be anti-dilutive.

Both the pre-funded warrants and the common warrants to purchase shares of common stock entitle the holders thereof to participate in dividends and other distributions of assets by the Company to its holders of common shares, but are not required to absorb losses incurred. As a result, all warrants were excluded from basic net loss per share calculations during the three and nine months ended September 30, 2024 and 2023, respectively. For diluted net loss per share purposes, warrants are included in the number of shares outstanding if the effect is dilutive. The dilutive effect of pre-funded warrants was 300,000 shares and 258,242 shares for the three and nine months ended September 30, 2023, respectively. Additional common warrants to purchase 3.6 million shares were excluded from the denominator in the calculation of diluted net loss share for the three and nine months ended September 30, 2024, as the effect would be anti-dilutive. Additional common warrants to purchase 4.0 million and 2.4 million shares were excluded from the denominator in the calculation of diluted net loss per share for the three and nine months ended September 30, 2023, respectively, as the effect would be anti-dilutive.

Recent Accounting Pronouncements

In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). The amendments in ASU 2023-07 are intended to improve reportable segment disclosure, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The Company is evaluating the impact of this guidance on its financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09). ASU 2023-09 requires enhanced annual disclosures regarding the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 and may be adopted on a prospective or retrospective basis. Early adoption is permitted. The Company is evaluating the impact of this guidance on its financial statements and related disclosures.

Note 2. Strategic Agreements

The collaborative research and development and other revenues associated with the Company’s collaborators or counterparties were $369,000 and $1.5 million for the three and nine months ended September 30, 2024, respectively, compared with $506,000 and $1.7 million for the corresponding periods in 2023. The collaborative research and development and other revenue included (a)

amounts related to earn-out revenue from Indivior UK Limited (“Indivior”) with respect to PERSERIS net sales; (b) feasibility programs and research and development activities funded by our collaborators and (c) royalty revenue from Orient Pharma Co., Ltd. (“Orient Pharma”) with respect to Methydur net sales.

Agreement with Innocoll

On Decemb