Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2024 and 2023 should be read in conjunction with our financial statements, including the Notes thereto, and “Risk Factors” section included elsewhere in this Annual Report on Form 10-K. References to the “Company,” “DURECT,” “we,” “us” and “our” refer to DURECT Corporation.
Unless otherwise noted, this Management’s Discussion and Analysis of Financial Condition and Results of Operations relates solely to our continuing operations and does not include the operations of our ALZET product line. See “ALZET Commercial Product Line” in Part I, Item 1, above and Note 11. Discontinued Operations of our financial statements in this Annual Report on Form 10-K for additional information.
Special Note Regarding Forward-Looking Statements
This Form 10-K 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 Annual Report on Form 10-K 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 and Fast Track 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 communications 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;
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 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 Annual Report on Form 10-K. 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 as well as the “Overview” and "Results of Operations" sections of this Management’s Discussion and Analysis of Financial Condition. 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 (“SEC”).
This discussion and analysis generally addresses 2024 and 2023 items and year-over-year comparisons between 2024 and 2023. Discussions of 2022 items and year-over-year comparisons between 2023 and 2022 that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 28, 2024, which is available free of charge on the SEC’s website at www.sec.gov and the investor relations section of our website at www.durect.com/investors/sec-filings/. These website addresses are intended to be inactive, textual references only. None of the materials on, or accessible through, these websites are part of this report or are incorporated by reference herein.
Overview
We are a biopharmaceutical company advancing novel and potentially lifesaving investigational therapies derived from our Epigenetic Regulator Program. Larsucosterol, a new chemical entity in clinical development, is the lead candidate in our Epigenetic Regulator Program. An endogenous, orally bioavailable small molecule, larsucosterol has been shown in both in vitro and in vivo studies to play an important regulatory role in lipid metabolism, stress and inflammatory responses, and cell death and survival. We are developing larsucosterol for alcohol-associated hepatitis (“AH”), a life-threatening acute liver condition with no approved therapeutics and 28-Day and 90-Day historical mortality rates of 20%-26% and 29%-31%, respectively. After completing a Phase 2a trial in which 100% of AH patients treated with larsucosterol survived the 28-Day study period, we conducted a double-blind, placebo-controlled Phase 2b clinical trial called AHFIRM (trial in AH to evaluate saFety and effIcacy of laRsucosterol treatMent). Through our AHFIRM trial, we evaluated larsucosterol’s potential to reduce mortality or liver transplantation compared to a placebo with or without steroids at the investigators’ discretion. In total, we enrolled 307 patients at leading hospitals in the U.S., Australia, E.U. and U.K. In November 2023, we announced topline data from the AHFIRM trial that showed a compelling efficacy signal in favor of larsucosterol in the key secondary endpoint of mortality at 90 days. Both the 30 mg and 90 mg larsucosterol doses demonstrated clinically meaningful trends in reduction of mortality at 90 days with mortality reductions of 41% (p=0.068) in the 30 mg arm and 35% (p=0.124) in the 90 mg arm compared with placebo. The numerical improvement in the primary endpoint of mortality or liver transplant at 90 days did not achieve statistical significance for either dose of larsucosterol. Both doses of larsucosterol in AHFIRM showed a more pronounced reduction in mortality in patients enrolled in the U.S., representing 76% of patients enrolled in the trial. The reductions in mortality at 90 days were 57% (p=0.014) in the 30 mg arm and 58% (p=0.008) in the 90 mg arm compared with placebo in the U.S. Larsucosterol was safe and well tolerated. There were fewer treatment-emergent adverse events (“TEAEs”) in the larsucosterol arms compared with placebo. In May 2024, we announced that the FDA granted Breakthrough Therapy Designation ("BTD") to larsucosterol for the treatment of AH. In July 2024, we held a Type B meeting with the FDA to discuss the design of our planned Phase 3 clinical trial of larsucosterol in AH that, if successful, could support a potential New Drug Application filing. In September 2024, we provided details on the design of our upcoming registrational Phase 3 trial which will evaluate larsucosterol for the treatment of patients with severe AH. The proposed Phase 3 trial design incorporates feedback from the Type B meeting held with the FDA under the BTD. It is designed as a randomized, double-blind, placebo-controlled, multi-center study conducted in the U.S., which will evaluate the safety and efficacy of larsucosterol for the treatment of patients with severe AH. The primary outcome measure will be a 90-day survival endpoint. The Phase 3 trial is planned to enroll approximately 200 patients randomized in a 1:1 ratio across two arms: (1) larsucosterol (30 mg) or (2) placebo, which will be added to the current standard of care, with or without methylprednisolone capsules in the placebo patients at the investigators’ discretion. Patients enrolled in the trial will be monitored for an additional 90 days to collect additional safety and outcomes data. Our plan is to initiate a Phase 3 clinical trial of larsucosterol in AH, subject to obtaining sufficient funding, and present topline results within two years of initiation. We have also investigated larsucosterol in patients with metabolic dysfunction-associated steatohepatitis (“MASH”), previously known as non-alcoholic steatohepatitis or NASH with encouraging results in a Phase 1b clinical trial and may consider further development of larsucosterol for this and other indications.
NOTE: POSIMIR ® is a trademark of Innocoll Pharmaceuticals, Ltd. in the U.S. and a trademark of DURECT Corporation outside of the U.S. SABER ® and ORADUR are trademarks of DURECT Corporation. Other trademarks referred to belong to their respective owners. Full prescribing information for POSIMIR, including BOXED WARNING and Medication Guide can be found at www.posimir.com. Full prescribing information for PERSERIS, including BOXED WARNING and Medication Guide can be found at www.perseris.com.
In addition to our Epigenetic Regulator Program, we developed a novel and proprietary post-surgical pain product called POSIMIR ® that utilizes our innovative SABER ® platform technology to enable continuous sustained delivery of bupivacaine, a non-opioid local analgesic, over three days in adults. In February 2021, POSIMIR received FDA approval for post-surgical pain reduction for up to 72 hours following arthroscopic subacromial decompression. In December 2021, we entered into a license agreement (as amended, the “Innocoll Agreement”) with Innocoll Pharmaceuticals Limited (“Innocoll”), pursuant to which we granted to Innocoll an exclusive, royalty-bearing, sublicensable right and license to develop, manufacture and commercialize POSIMIR in the United States. On November 8, 2024, we received notice that Innocoll is terminating the Innocoll Agreement, effective May 6, 2025. Innocoll has committed to transfer all data and know-how related to POSIMIR to us, and we are evaluating next steps with respect to the commercialization of POSIMIR. We do not expect that this termination will have a material impact on our financial statements.
As a result of the assignment of certain patent rights, we have in the past received single digit sales-based earn-out payments from U.S. net sales of Indivior UK Limited (“Indivior”)’s PERSERIS ® (risperidone) drug for schizophrenia and single-digit royalties from net sales of Orient Pharma Co., Ltd. (“Orient Pharma”)’s Methydur Sustained Release Capsules (“Methydur”) for the treatment of attention deficit hyperactivity disorder (“ADHD”) in Taiwan. In July 2024, Indivior announced discontinuation of sales and marketing for PERSERIS due to the highly competitive market and impending changes that are expected to intensify payor management in the treatment category in which PERSERIS participates. We do not expect that this discontinuation will have a material impact on our financial statements.
Collaborative Research and Development and Other Revenue
Collaborative research and development and other revenue consists of four broad categories: (a) the recognition of upfront license payments over the period of our continuing involvement with third parties, (b) the reimbursement of qualified research expenses by third parties, (c) milestone payments in connection with our collaborative agreements and (d) royalties and earn-out payments from our agreements with third parties. During the last two years, we generated collaborative research and development revenues from collaborative agreements with Innocoll and others.
Product Revenue
We currently generate product revenue from the sale of certain key excipients used by pharmaceutical companies as raw materials in certain of their products, including Methydur and a marketed animal health product.
Because we consider our core business to be developing and commercializing pharmaceuticals, we do not intend to significantly increase our investments in or efforts to sell or market any of our existing product lines. However, we expect that we will continue to make efforts to increase our revenues related to collaborative research and development by entering into new collaborations.
Operating Results
Since our inception in 1998, we have generally had a history of operating losses. At December 31, 2024, we had an accumulated deficit of $597.3 million. Our net losses were $8.3 million and $27.6 million for the years ended December 31, 2024 and 2023, respectively. These losses have resulted primarily from costs incurred to research and develop our product candidates and, to a lesser extent, from selling, general and administrative costs associated with our operations and product sales. We expect our
research and development expenses and our selling, general and administrative expenses to decrease in 2025 compared to 2024. We expect to incur continuing losses and negative cash flows from operations for the foreseeable future. As disclosed in the “Liquidity and Capital Resources” section, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least 12 months from the date of issuance of these financial statements.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We believe that the most significant accounting estimates and assumptions relate to revenue recognition, prepaid and accrued clinical costs, prepaid and accrued manufacturing costs, and valuation of warrant liabilities. We base our estimates on historical experience, current circumstances and various other assumptions that our management believes to be reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the critical accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
Revenue Recognition
Product Revenue, Net
We manufacture and sell certain excipients used by pharmaceutical companies as raw materials in certain of their products, including Methydur and a marketed animal health product. Prior to the sale of the ALZET product line in November 2024, we also manufactured and sold ALZET miniature osmotic pumps used in laboratory research.
Revenue from product sales is recognized when the customer obtains control of our product, which occurs at a point in time, typically upon shipment to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.
Trade Discounts and Allowances: We provide certain customers with discounts that are explicitly stated in our contracts and are recorded as a reduction of revenues in the period the related product revenue is recognized.
Product Returns: Consistent with industry practice, we generally offer customers a limited right of return for products that have been purchased from us. We estimate the amount of our product sales that are probable of being returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities primarily using our own historical sales information. We expect product returns to be minimal.
Collaborative Research and Development and Other Revenue
Royalties and Earn-outs: For our 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, we recognize 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).
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 our third-party collaborators is recognized over time as the related research and development services are performed. We evaluate the measure of progress each reporting period and recognize revenue on a cumulative catch-up basis, as collaborative research and development revenue. We perform analytical services for counterparties and recognize revenue upon completion of these services. 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 we do not expend the required level of effort during a specific period in comparison to funds received under the respective agreement.
We receive payments from our 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 we performs our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do 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.
Prepaid and Accrued Clinical Costs
We incur 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. We are 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 our estimates.
Common Stock Warrants
We review the terms of debt instruments, equity instruments, and other financing arrangements to determine whether there are embedded derivative features, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Additionally, in connection with the issuance of financing instruments, we may issue freestanding options and warrants.
We account for our 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, we account 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.
We value our 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.
Results of Operations
Comparison of years ended December 31, 2024 and 2023
Revenue
Collaborative research and development and other revenue
We recognize revenue from collaborative research and development activities and service contracts. Collaborative research and development and other revenue primarily represents reimbursement of qualified expenses related to collaborative agreements with various third parties to research, develop and commercialize potential products using our drug delivery technologies, and revenue from the recognition of upfront fees and milestone payments in connection with our collaborative or license agreements.
We expect our collaborative research and development and other revenue to fluctuate in future periods pending our efforts to enter into potential new collaborations, our existing third-party collaborators’ commitment to and progress in the research and development programs, and any royalty or earn-out revenue recognized from collaborators or counterparties.
The collaborative research and development and other revenue associated with our major collaborators or counterparties were $1.9 million and $2.3 million in 2024 and 2023, respectively. The collaborative research and development and other revenue included (a) amounts related to earn-out revenue from Indivior with respect to PERSERIS net sales, (b) feasibility programs and research and development activities funded by our collaborators or counterparties, (c) royalty revenue from Orient Pharma with respect to Methydur net sales and (d) royalty revenue from Innocoll with respect to POSIMIR net sales. The decrease in collaborative research and development and other revenue in 2024 compared with 2023 was primarily due to lower earn-out revenue from Indivior and lower revenue recognized from feasibility agreements with other companies.
Product revenue, net
As previously announced, in November 2024, we completed the sale of our ALZET product line to Lafayette Instruments Co. Revenue recognized from the ALZET product line, related cost of product revenues, associated selling, general and administrative expenses have been reclassified to discontinued operations for all periods presented.
A portion of our revenues is derived from product sales, which include certain excipients used by pharmaceutical companies as raw materials in certain of their products, including Methydur and a marketed animal health product. Net product revenues were $135,000 and $313,000 in 2024 and 2023, respectively.
The decrease in product revenues in 2024 was primarily attributable to lower product revenue related to the sale of excipients that are included in Methydur compared to 2023.
Operating Expenses
Cost of product revenues
Cost of product revenues includes the cost of product revenue from certain excipients that are included in Methydur and a marketed animal health product. Cost of product revenues was $78,000 and $268,000 in 2024 and 2023, respectively.
The decrease in cost of product revenues in 2024 was primarily attributable to lower cost of goods sold related to certain excipients that are included in Methydur compared with 2023.
Stock-based compensation expense recognized related to cost of product revenues was zero in both 2024 and 2023.
As of December 31, 2024, we had no manufacturing employees compared with 9 as of December 31, 2023.
Research and development
Research and development expenses are primarily comprised of salaries, benefits, stock-based compensation and other compensation costs 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 expenses were $10.4 million and $29.4 million in 2024 and 2023, respectively. Stock-based compensation expense recognized related to research and development personnel was $747,000 and $1.2 million in 2024 and 2023, respectively.
Research and development expenses decreased by approximately $18.9 million in 2024 compared to 2023. The decrease in 2024 was primarily attributable to lower research and development costs associated with larsucosterol, the depot injectable programs and other research programs compared to 2023, as more fully discussed below. We expect our research and development expenses to decrease in 2025 compared to 2024.
Research and development expenses associated with our major development programs were as follows (in thousands):
Year Ended December 31,
Larsucosterol
Depot injectable programs
Other
Total research and development expenses
Larsucosterol
Our research and development expenses for larsucosterol decreased to $10.2 million in 2024 from $26.2 million in 2023, primarily due to lower clinical trial related expenses as we completed the AHFIRM trial, and experienced lower contract manufacturing expenses and lower employee-related costs for this drug candidate compared with 2023.
Depot injectable programs
Our research and development expenses for depot injectable programs decreased to $2,000 in 2024 from $320,000 in 2023 primarily due to lower employee-related costs and lower outside expenses for these programs.
Other DURECT research programs
Our research and development expenses for all other research programs decreased to $167,000 in 2024 from $2.8 million in 2023, primarily due to lower employee-related costs and lower outside expenses associated with these programs compared with 2023.
As of December 31, 2024 and 2023, we had 17 and 27 research and development employees, respectively.
Our research and development programs may span as many as ten years or more, and estimation of completion dates or costs to complete are highly speculative and subjective due to numerous risks and uncertainties associated with developing pharmaceutical products, including significant and changing government regulation, uncertainties of future preclinical and clinical study results, uncertainties with our collaborators’ commitment to and progress in the programs and uncertainties associated with process development and manufacturing as well as sales and marketing. In addition, with respect to our development programs subject to third-party collaborations, the timing and expenditures to complete the programs are subject to the control of our collaborators. Therefore, we cannot reasonably estimate the
timing and costs of the efforts necessary to complete the research and development programs. For additional information regarding these risks and uncertainties, see “Risk Factors” above.
Selling, general and administrative
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. Selling, general and administrative expenses were $10.5 million and $12.7 million in 2024 and 2023, respectively. Selling, general and administrative expenses decreased by $2.2 million in 2024 compared to 2023, primarily due to lower employee expenses as well as lower consulting, patents and audit related expenses in 2024 compared with 2023. Stock-based compensation recognized related to selling, general and administrative personnel was $1.2 million and $1.4 million in 2024 and 2023, respectively. We expect our selling, general and administrative expenses to decrease in 2025 compared to 2024 due to lower audit expenses and lower employee expenses in 2025.
As of December 31, 2024 and 2023, we had 14 and 23 selling, general and administrative personnel, respectively.
Other Income (Expense)
Interest and other income
Interest and other income were $821,000 and $2.1 million in both 2024 and 2023, respectively. Interest and other income in 2024 was lower than 2023 primarily as a result of lower cash and investments balances in 2024 compared with 2023.
Change in fair value of warrant liabilities
The change in fair value of warrant liabilities was a loss of $323,000 and a gain of $13.6 million during the years ended December 31, 2024 and 2023, respectively.
The change in fair value of warrant liabilities during the year ended December 31, 2024 was comprised of a non-cash loss of $323,000 for the common warrants issued in February 2023 and July 2023.
The change in fair value of warrant liabilities during the year ended December 31, 2023 was comprised of a non-cash gain of $1.6 million for the pre-funded warrants issued in February 2023, a non-cash gain of $7.2 million for the common warrants issued in February 2023 and a non-cash gain of $4.9 million for the common warrants issued in July 2023.
Issuance cost for warrants
The issuance cost for warrants was zero and $1.6 million during the years ended December 31, 2024 and 2023, respectively. The issuance cost for warrants during the year ended December 31, 2023 was comprised of $1.2 million for the warrants issued in February 2023 and $427,000 for the common warrants issued in July 2023.
Loss on issuance of warrants
Loss on issuance of warrants was zero and $2.0 million during the years ended December 31, 2024 and 2023, respectively. The loss on issuance of warrants during the year ended December 31, 2023 was comprised of $2.0 million for the warrants issued in February 2023.
Income Taxes
As of December 31, 2024, we had net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $303.9 million, of which approximately $197.0 million will expire in the years 2025 through 2037, and approximately $106.9 million will not expire under current tax laws. As of December 31, 2024, we had federal research and development tax credits of approximately $17.0 million, which expire at various dates beginning in 2025 through 2043, if not utilized. As of December 31, 2023, we had NOL carryforwards for state income tax purposes of approximately $270.4 million, which expire
in the years 2025 through 2043, and state research and development tax credits of approximately $17.8 million, which do not expire under current tax laws. Utilization of the NOLs may be subject to a substantial annual limitation due to federal and state ownership change limitations. The annual limitation may result in the expiration of NOLs and credits before utilization.
As of December 31, 2024 and 2023, we had net deferred tax assets of $116.8 million and $124.5 million, respectively. Deferred tax assets reflect the net tax effects of NOLs and credit carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.
Because realization of such tax benefits is uncertain, we provided a 100% valuation allowance as of December 31, 2024 and 2023. Utilization of the NOL and R&D credits carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credits carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change is defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes (such as research and development credit carryforwards) to offset its post-change taxable income or taxes may be limited. Since our formation, we have raised capital through the issuance of capital stock on several occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. We issued $60.0 million of convertible notes in 2003 and subsequently all of these notes had been converted as of December 31, 2008 into approximately 1.9 million shares of our common stock. We also issued approximately 440,000 shares of our common stock to an institutional investor in connection with an equity financing in September 2009. In December 2012, November 2013, April 2016, June 2019 and February 2021, we completed underwritten public offerings in which we sold an aggregate of approximately 1.4 million, 820,000, 1.4 million, 2.9 million and 2.0 million shares, respectively, of our common stock pursuant to effective registration statements. In 2016, 2017, 2018, 2019, 2020, 2021, 2022 and 2023, we issued approximately 520,000, 890,000, 960,000, 230,000, 530,000, 95,000, 3,000 and 1.6 million shares, respectively, of our common stock in the open market through Controlled Equity Offering sales agreements with Cantor Fitzgerald pursuant to effective registration statements. In 2023, we completed two registered direct offerings by selling an aggregate of approximately 4.7 million shares of common stock and accompanying warrants to purchase an aggregate of approximately 5.3 million shares of common stock. These transactions may also have resulted in a change of control as defined by Section 382 or could result in a change of control in the future upon the subsequent disposition of the shares.
We have not currently completed a study to assess whether a change in control has occurred or whether there have been multiple changes of control since our formation due to the significant complexity and cost associated with such a study and the fact that there could be additional changes in the future. If we have experienced a change of control at any time since our formation, utilization of our NOL or R&D credits carryforwards would be subject to an annual limitation under Sections 382 and 383 which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of our NOL or R&D credits carryforwards before utilization. Tax years 2000 to 2024 remain subject to future examination by the major tax jurisdictions in which we are subject to tax.
Liquidity and Capital Resources
Since our inception in 1998, we have generally had a history of operating losses and we expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. These losses have resulted primarily from costs incurred to research and develop our product candidates and, to a lesser extent, from selling, general and administrative costs associated with our operations and product sales. We had cash, cash equivalents and investments totaling $12.0 million at December 31, 2024, which includes $150,000 of interest-bearing marketable securities classified as restricted investments on our balance sheet as of December 31, 2024 as compared to cash, cash equivalents and investments totaling $29.8 million at December 31, 2023. At December 31, 2024, we had an accumulated deficit of $597.3 million.
Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers.
As discussed below, we do not have sufficient cash resources to fund our planned operations, existing debt and contractual commitments and planned capital expenditures. Our auditors have issued a going concern opinion as of, and for the year ended, December 31, 2024. Unless we secure funding from collaborations, additional equity or debt financing, of which there can be no assurance, we may not be able to continue operations.
Cash Flows
We used $19.1 million and $34.4 million of cash in operating activities in the years ended December 31, 2024 and 2023, respectively. The decrease in cash used in operating activities in 2024 was primarily due to lower costs incurred to research and develop our product candidates and, to a lesser extent, from selling, general and administrative costs associated with our operations and product sales, partially offset by lower payments from our collaborators compared with 2023. The cash used in operating activities was primarily to fund operations as well as our working capital requirements, partially offset by the changes in accounts receivable, accounts payable and accrued liabilities.
We received $18.0 million cash from investing activities in the year ended December 31, 2024 and used $1.2 million of cash in investing activities in the year ended December 31, 2023, respectively. The increase in cash generated from investing activities in 2024 was primarily due to net proceeds from the sale of the ALZET product line and a decrease in purchases of available-for-sale securities, partially offset by a decrease in proceeds from maturities of available-for-sale securities in 2024 compared with 2023.
We used $16.3 million cash in financing activities in the year ended December 31, 2024 and generated $20.5 million of cash from financing activities in the year ended December 31, 2023, respectively. The increase in cash used in financing activities in the year ended December 31, 2024 was primarily used to make higher principal payments and a final payment on the term loan with Oxford Finance LLC ("Oxford Finance") as we fully paid off the term loan in 2024. Cash provided by financing activities in 2023 was primarily due to cash proceeds received from the registered direct offerings that were completed in February 2023 and in July 2023 and from the sale of our common stock in the open market pursuant to a sales agreement dated July 30, 2021 with Cantor Fitzgerald & Co. (the “2021 Sales Agreement”), partially offset by principal payments on the term loan with Oxford Finance.
Shelf Registration Statement
In July 2021, we filed a shelf registration statement on Form S-3 with the SEC (the “2021 Registration Statement”) (File No. 333-258333), which upon being declared effective in August 2021, allowed us to offer up to $250.0 million of securities from time to time in one or more public offerings, inclusive of up to $75.0 million of shares of our common stock which we could sell, subject to certain limitations, pursuant to the 2021 Sales Agreement. The 2021 Registration Statement expired on August 16, 2024.
In 2023, we raised net proceeds (net of commissions) of approximately $1.6 million from the sale of our common stock in the open market under the 2021 Sales Agreement. In 2024, we raised net proceeds (net of commissions) of approximately $648,000 from the sale of our common stock in the open market under the 2021 Sales Agreement.
On August 14, 2024, we filed a shelf registration statement on Form S-3 with the SEC (the “2024 Registration Statement”) (File No. 333-281550), which upon being declared effective on August 23, 2024, allowed us to offer up to $250.0 million of securities from time to time in one or more public offerings. Due to the SEC’s “baby shelf” rules, which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period, we are currently only able to issue a limited number of shares under our 2024 Registration Statement, which aggregate to no more than one-third of our public float.
As of March 25, 2025, we had up to $250.0 million of our securities available for sale under the 2024 Registration Statement. However, due to the SEC’s “baby shelf” rules discussed above, only up to approximately $8.7 million of our securities are currently available for sale under the 2024 Registration Statement.
Any material sales in the public market of our common stock, under the 2024 Registration Statement, could adversely affect prevailing market prices for our common stock.
Term Loan
In July 2016, we entered into a Loan and Security Agreement (as amended, the "Loan Agreement") with Oxford Finance. In the event of default by us under the 2016 Loan Agreement, the lender would have been entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which we may have been required to repay all amounts then outstanding under the Loan Agreement. As a result, the term loan was reclassified to current liabilities from non-current liabilities on our balance sheet as of December 31, 2023 due to recurring losses, liquidity concerns and a subjective acceleration clause in the Loan Agreement. In November 2024, we completed the sale of our ALZET product line to Lafayette Instrument Co. ("LIC"), a portfolio company of Branford Castle Partners II, L.P., a North-American focused private equity firm. Under the terms of the agreement, LIC paid DURECT $17.5 million in exchange for certain assets and liabilities associated with the ALZET product line. Simultaneous with this transaction, we paid off all remaining obligations under the term loan agreement with Oxford Finance.
Going Concern
As of December 31, 2024, we had approximately $12.0 million in cash, cash equivalents and investments compared to cash, cash equivalents, and investments of $29.8 million at December 31, 2023. In 2024, we completed the sale of our ALZET product line, paid off all remaining obligations under the term loan agreement with Oxford Finance and raised net proceeds (net of commissions) of approximately $648,000 from the sale of our common stock in the open market under the 2021 Sales Agreement.
In 2023, we received approximately $22.7 million in net proceeds (net of placement agent fees and other offering expenses) from two registered direct offerings and we raised net proceeds (net of commissions) of approximately $1.6 million from the sale of our common stock in the open market under the 2021 Sales Agreement.
In accordance with ASU No. 2014-15 Presentation of Financial Statements – Going Concern (subtopic 205-40), our management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Based on our evaluation, substantial doubt exists regarding our ability to continue as a going concern for a period of one year from the issuance of our financial statements.
Cash used in our operating activities is heavily influenced by the timing and structure of new corporate collaborations. While one feature of our business strategy is seeking new corporate collaborations, assuming no new collaborations and no milestone payments, we anticipate that cash used in operating activities will decrease in the near term. In aggregate, we are required to make future payments pursuant to our existing contractual obligations as follows (in thousands):
Contractual Obligations
2026 and thereafter
Total
Operating lease obligations
Total contractual cash obligations
Presently, we do not have sufficient cash resources to fund our planned operations, existing debt and contractual commitments and planned capital expenditures through at least the next 12 months from issuance of these financial statements. We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We expect to incur continuing losses and negative cash flows from operations for the foreseeable future.
We may decide to raise additional capital through a variety of sources in the short-term and in the long-term, including but not limited to:
the public equity markets;
private equity financings;
collaborative arrangements;
asset sales; and/or
public or private debt.
There can be no assurance that we will enter into additional collaborative agreements or maintain existing collaborative agreements, will earn collaborative revenues or that additional capital will be available on favorable terms to the Company, if at all. If adequate funds are not available, we may be required to significantly reduce or re-focus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders (assuming convertible debt securities were converted into shares). These factors raise substantial doubt regarding our ability to continue as a going concern. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and strategic development plan for future growth. If we cannot successfully raise additional capital and
implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and adversely affected, and we may have to cease operations.
As a result, our independent registered public accounting firm included an explanatory paragraph regarding our ability to continue as a going concern in its report on our financial statements as of, and for the year ended, December 31, 2024.
Recent Accounting Pronouncements
See Note 1 “Summary of Significant Accounting Policies” – “Recent Accounting Pronouncements”, to our financial statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference.
Item 7A. Quantitati ve and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 7A.
Item 8. Financial Statement s and Supplementary Data.
DURECT CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page No.
Report of Independent Registered Public Accounting Firm (PCAOB ID: 100 )
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42 )
Balance Sheets
Statements of Operations and Comprehensive Loss
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
DURECT Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheet of DURECT Corporation (the “Company”) as of December 31, 2024, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of the February 2023 Common Warrants
Critical Audit Matter Description
As described in Notes 3 and 9 of the financial statements, in February 2023, the Company issued common warrants to purchase an aggregate of 2,000,000 shares of Common Stock, in a registered direct offering (the "February Offering"). At the date of issuance and as of December 31, 2024, the Company accounted for the common warrants as current liabilities on the balance sheet and are adjusted to estimated fair value at each reporting period. The common warrants are valued using a Monte-Carlo valuation model due to the presence of an alternative cashless settlement feature in the financing agreement that provides the warrant holders with an alternative settlement feature to receive a fixed percentage of the shares underlying the warrants for no consideration. Because this feature allows for the warrant holders to use an alternative mechanism to exercise their warrants in a manner that would yield different values, a Monte-Carlo valuation model was determined to be appropriate.
The valuation of the common warrants related to the February Offering requires a high degree of judgment and is subject to change based on various quantitative and qualitative factors. A high degree of auditor judgment and an increased extent of effort were required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the valuation of the transaction due to the use of complex valuation models to estimate the value of the common warrants, which included the need to involve our valuation specialists. Therefore, we identified the Company’s valuation of the common warrants related to the February Offering as a critical audit matter.
How We Addressed the Matter in Our Audit
We obtained an understanding of and evaluated the design of controls relating to the Company’s valuation of the common warrants related to the February Offering. We evaluated the significant accounting policies relating to the Company’s analyses, as well as management’s application of the policies, for appropriateness and reasonableness.
To test the accounting for the common warrants in the February Offering, we performed audit procedures that included, among other things, obtaining an understanding of the Company’s process to account for the issuance of the common warrants, inspecting the warrant agreements, evaluating the reasonableness of management’s assumptions used as inputs within the valuation model and testing the accuracy of the underlying data used in the valuation models by tracing the key inputs to relevant terms contained in the warrant agreements. We also involved a valuation specialist to assist in evaluating the valuation methodologies and significant assumptions used in the valuation model, as well as testing the mathematical accuracy of the calculations.
Accounting and disclosure of Business Disposal and Discontinued Operations
Critical Audit Matter Description
As described in Note 11 of the financial statements, on November 22, 2024 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “APA”) with Alzet, LLC, a subsidiary of Lafayette Instrument Co. (the “Purchaser”). Under the terms of the APA, the Company agreed to sell to the Purchaser substantially all of the assets, and certain specified liabilities, related to the ALZET product line (the “Sale”). Pursuant to the terms of the APA, the Purchaser paid the Company $17,500,000 subject to certain adjustments, including for net working capital, and agreed to assume certain liabilities with respect to the transferred assets.
The accounting and disclosure of business disposals and discontinued operations is especially challenging and requires extensive effort to audit the subjective and complex judgments associated with those matters, including determination of whether the disposal was an asset or a business, determination of the allocation of goodwill that was disposed of in connection with the Sale and whether the disposal would be disclosed as a discontinued operation.
How We Addressed the Matter in Our Audit
We obtained an understanding of and evaluated the design of controls relating to the Company's accounting for significant unusual transactions and the presentation of discontinued operations. We assessed and evaluated management’s judgments in determining whether the disposed assets met the definition of a business or asset disposal. We assessed and evaluated management’s judgments in determining whether the Sale met the discontinued operations classification criteria and tested the gain recognized on the Sale through procedures performed, including, but not limited to, inspection of relevant supporting documentation and assessment of the accounting implications of the terms therein, tested the goodwill amount allocated to the Sale, tested the mathematical accuracy of the calculations, and inquired of management regarding specific assumptions made. We tested the recognition and classifications of the Company’s segregation of assets, liabilities and the results of operations that are classified as discontinued operations by inspecting the Company’s accounting data and related adjustments. We tested the accuracy and completeness of the Company’s disclosures as they relate to discontinued operations.
/s/ WithumSmith+Brown, PC
We have served as the Company’s auditor since 2024.
San Francisco, California
March 27, 2025
PCAOB ID No. 100
Report of Ernst & Young LLP, Independent Registered Publi c Accounting Firm
To the Stockholders and the Board of Directors of DURECT Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheet of DURECT Corporation (the Company) as of December 31, 2023, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with U.S. generally accepted accounting principles .
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has an accumulated deficit as well as negative cash flows from operating activities and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We served as the Company’s auditor from 1998 to 2024.
San Francisco, California
March 28, 2024
except for Note 11, as to which the date is
March 27, 2025
DURECT CORPORATION
BALANCE SHEETS
(in thousands, except per share amounts)
December 31,
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable (net of allowances of $ 0 at December 31, 2024
and $ 20 at December 31, 2023)
Inventories, net
Prepaid expenses and other current assets
Discontinued operations - current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Long-term restricted investments
Other long-term assets
Discontinued operations - non-current assets
Total assets
Current liabilities:
Accounts payable
Accrued liabilities
Term loan, current portion, net
Operating lease liabilities, current portion
Warrant liabilities
Discontinued operations - current liabilities
Total current liabilities
Operating lease liabilities, non-current portion
Other long-term liabilities
Discontinued operations - non-current liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $ 0.0001 par value: 10,000 shares authorized; none issued
and outstanding
Common stock, $ 0.0001 par value: 350,000 and 150,000 shares authorized at December 31, 2024 and 2023, respectively; 31,042 and 30,334 shares issued and outstanding at December 31, 2024 and 2023, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these financial statements.
DURECT CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
Year ended December 31,
Collaborative research and development and other revenue
Product revenue, net
Total revenues
Operating expenses:
Cost of product revenues
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest and other income
Change in fair value of warrant liabilities
Issuance cost for warrants
Loss on issuance of warrants
Other income, net
Loss from continuing operations
Income from discontinued operations (Note 11)
Net loss
Net change in unrealized loss on available-for-sale securities, net of reclassification adjustments and taxes
Total comprehensive loss
Net loss per share, basic
Loss from continuing operations
Income from discontinued operations
Net loss per common share
Net loss per share, diluted
Loss from continuing operations
Income from discontinued operations
Net loss per common share
Weighted-average shares used in computing net loss per share
Basic
Diluted
The accompanying notes are an integral part of these financial statements.
DURECT CORPORATION
STATEMENTS OF STOC KHOLDERS’ EQUITY
(in thousands)
Common Stock
Additional
Paid-In
Accumulated
Other
Comprehensive
Accumulated
Total
Stockholders’
Shares
Amount
Capital
Income (loss)
Deficit
Equity
Balance at December 31, 2022
Issuance of common stock upon exercise of stock options and purchases of ESPP shares
Issuance of common stock in the February 2023 registered direct offering
Issuance of common stock in the July 2023 registered direct offering, net of issuance costs of $ 673
Issuance of common stock pursuant to the 2021 Sales Agreement, net of issuance costs of $ 32
Issuance of common stock upon warrant exercises
Stock-based compensation expense from stock options and ESPP shares
Net loss
Change in unrealized loss on available-for-sale securities, net of tax
Balance at December 31, 2023
Issuance of common stock pursuant to the 2021 Sales Agreement, net of issuance costs of $ 13
Issuance of common stock upon exercise of stock options and from the ESPP
Stock-based compensation expense from stock options and ESPP shares
Net loss
Change in unrealized gain on available-for-sale securities, net of tax
Balance at December 31, 2024
The accompanying notes are an integral part of these financial statements.
DURECT CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of ALZET product line
Loss on extinguishment of debt
Depreciation and accretion
Stock-based compensation
Change in fair value of warrant liabilities
Loss on issuance of warrants
Issuance cost for warrants
Other
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Total adjustments
Net cash used in operating activities
Cash flows from investing activities
Purchases of property and equipment
Proceeds from sales of fixed assets
Purchases of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Proceeds from sale of ALZET product line
Net cash provided by (used in) investing activities
Cash flows from financing activities
Payments on equipment financing obligations
Payments on term loan principal
Payment of final payment on term loan
Net proceeds from issuances of common stock pursuant to the 2021 Sales Agreement
Net proceeds from issuances of common stock upon exercise of
stock options, and purchases of ESPP shares
Proceeds from issuances of warrants and common stock in the February 2023 registered direct offering
Net proceeds from issuances of warrants and common stock in the July 2023 registered direct offering
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash, cash equivalents, and restricted cash, beginning of the
period (1)
Cash, cash equivalents, and restricted cash, end of the period (1)
Supplemental disclosure of cash flow information
Cash paid for interest
Includes restricted cash of $ 150,000 (presented as long-term restricted investments) on the balance sheets at each of December 31, 2024 and 2023.
The accompanying notes are an integral part of these financial statements.
DURECT CORPORATION
NOTES T O FINANCIAL STATEMENTS
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 committed to transforming the treatment of acute organ injury and chronic liver diseases by advancing novel and potentially lifesaving therapies based on 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 FDA has granted a Fast Track Designation and Breakthrough Therapy Designation; metabolic dysfunction-associated steatohepatitis (“MASH”), also known as non-alcoholic steatohepatitis or NASH is also being explored. The Company also manufactures and sells certain excipients for certain clients for use as raw materials in their products.
Basis of Presentation and Use of Estimates
The Company’s financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of the accompanying financial statements conforms to U.S. GAAP, which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, the period of performance, identification of performance obligations and evaluation of milestones with respect to our collaborations, the amounts of revenues, recoverability of inventory, certain accrued liabilities including accrued clinical costs, asset retirement obligations, and valuation of warrant liabilities. The Company bases its estimates on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Liquidity and Need to Raise Additional Capital
As of December 31, 2024, the Company had an accumulated deficit of $ 597.3 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 8, the Company classified the remaining balance of its term loan as a current liability on the Company’s balance sheet as of December 31, 2023 due to the timing of repayment obligations and due to recurring losses, liquidity concerns and a subjective acceleration clause in the Company’s Loan Agreement.
In 2024, the Company completed the sale of its ALZET product line to Lafayette Instrument Co. ("LIC"), a portfolio company of Branford Castle Partners II, L.P., a North-American focused private equity firm. Under the terms of the agreement, LIC paid the Company $ 17.5 million in exchange for certain assets and liabilities associated with the ALZET product line. Simultaneous with this transaction, the Company paid off all remaining obligations under the term loan agreement with Oxford Finance LLC.
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.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. Investments with original maturities of greater than 90 days from the date of purchase but less than one year from the balance sheet date are classified as short-term investments, while investments with maturities in one year or beyond one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of its cash equivalents and investment securities at the time of purchase and re-evaluates such determination as of each balance sheet date. Management has classified the Company’s cash equivalents and investments as available-for-sale securities in the accompanying financial statements. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive loss. Realized gains and losses are included in interest income. There were no material realized gains or losses in the periods presented. The cost of securities sold is based on the specific identification method.
The Company invests in debt instruments of government agencies, corporations, and money market funds with high credit ratings. The Company has established guidelines regarding diversification of its investments and their maturities with the objectives of maintaining safety and liquidity, while maximizing yield.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of interest-bearing investments and trade receivables. The Company maintains cash, cash equivalents and investments with various major financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions. In addition, the Company performs periodic evaluations of the relative credit quality of its investments.
The Company’s trade receivables derive largely from pharmaceutical clients. The Company provides credit in the normal course of business to its customers and collateral for these receivables is generally not required. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The Company maintains reserves for estimated credit losses and, to date, such losses have been immaterial in all periods presented.
Customer and Product Line Concentrations (excluding the ALZET product line)
Indivior accounted for 78 % and 65 % of the Company's total revenue for 2024 and 2023, respectively.
Total revenue by geographic region for the years 2024 and 2023 are as follows (in thousands):
Year ended December 31,
Europe
United States
Others
Total
Revenue by geography is determined by the location of the customer.
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 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):
December 31,
Raw materials
Finished goods
Total inventories
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years . Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets, or the terms of the related leases, whichever are shorter.
Goodwill
Goodwill is periodically assessed and evaluated for impairment. The Company operates in one operating segment and also has only one reporting unit, which is the research, development and manufacturing of pharmaceutical products. The Company assesses the impairment of goodwill at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To date, the Company has not recorded any impairment charge related to goodwill.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, intangible assets, and other long-term assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.
If an indicator of impairment is present for any long-lived asset, the Company is required to determine whether the undiscounted future cash flows from the long-lived asset is less than its carrying amount. If so, impairment, if any, is calculated as the amount by which the long-lived asset's carrying value exceeds its estimated fair value. Through December 31, 2024, there have been no material impairment losses.
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 December 31, 2024, the weighted-average remaining lease term was 2.14 years for the Company’s leased properties.
Stock-Based Compensation
The Company accounts for share-based payments using a fair-value based method for costs related to all share-based payments, including stock options and stock issued under the Company’s employee stock purchase plan (ESPP). The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company recognizes compensation costs on a straight-line basis over the requisite service period and accounts for forfeitures as they occur. See Note 9 for further information regarding stock-based compensation.
Revenue Recognition
Product Revenue, Net
The Company manufactures and sells certain excipients used by pharmaceutical companies as raw materials in certain of their products, including Methydur and a marketed animal health product. Prior to the sale of the ALZET product line in November 2024, the Company also manufactured and sold ALZET miniature osmotic pumps used in laboratory research.
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
Royalties and Earn-outs: For the Company's 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).
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. 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. The Company performs analytical services for counterparties and recognizes revenue upon completion of these services. 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.
Prepaid and Accrued Clinica l 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.
Comprehensive Loss
Components of other comprehensive loss are comprised entirely of unrealized gains and losses on the Company’s available-for-sale securities for all periods presented. Total comprehensive loss has been disclosed in the Company’s Statements of Operations and Comprehensive Loss.
Segment Reporting
The Company operates in one operating segment, which is the research, development and manufacturing of pharmaceutical products.
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
The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. Certain warrants participate in distributions of the Company. The net loss attributable to common stockholders is not allocated to the warrant holders as the holders of warrants do not have a contractual obligation to share in losses. Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding and common stock equivalents (i.e., options and warrants 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):
Year Ended December 31,
Basic loss per share computation:
Net loss
Weighted average number of shares outstanding - basic
Net loss per share - basic
Diluted loss per share computation:
Net loss
Change in fair value of pre-funded warrant liabilities
Change in fair value of common warrant liabilities
Net loss adjusted for change in fair value of warrant liabilities
Weighted average shares used to compute basic net loss per share
Dilutive effect of pre-funded warrants
Dilutive effect of common warrants
Weighted average shares used to compute diluted net loss per share
Net loss per share - diluted
The computation of diluted net loss per share for 2024 and 2023 excludes the impact of options to purchase 4.0 million and 3.4 million shares of common stock outstanding for the year ended December 31, 2024 and 2023, respectively, as such impact 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 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 zero and 168,000 shares during 2024 and 2023, respectively. Additional common warrants to purchase 3.6 million and 2.6 million shares were excluded from the denominator in the calculation of diluted net loss per share in 2024 and 2023, respectively, as the effect would be anti-dilutive.
Shipping and Handling
Costs related to shipping and handling are included in cost of revenues for all periods presented.
Discontinued Operations
In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component/s of an entity meets the criteria in paragraph 205-20-45-10. At the same time, the results of all discontinued operations, less applicable income taxes, shall be reported as components of net loss separate from the net loss of continuing operations.
The Company disposed of its ALZET product line, a component of its business, in November 2024 and met the definition of a discontinued operation as of December 31, 2024. Accordingly, the Company has classified the results of the ALZET product line as discontinued operations in its statements of operations and comprehensive loss for all periods presented. All assets and liabilities associated with the ALZET product line were classified as assets and liabilities of discontinued operations in the balance sheets for the periods presented. All amounts included in the notes to the financial statements relate to continuing operations unless otherwise noted. For additional information, see Note 11, “Discontinued Operations” to the financial statements in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires all public entities, including public entities with a single reportable segment, to provide in interim and annual periods one or more measures of segment profit or loss used by the chief operating decision maker to allocate resources and assess performance. Additionally, the standard requires disclosures of significant segment expenses and other segment items as well as incremental qualitative disclosures. The Company adopted ASU 2023-07 effective December 31, 2024, on a retrospective basis. The adoption of 2023-07 did not change the way that the Company identifies its reportable segments and, as a result, did not have a material impact on the Company’s segment-related disclosures. Refer to Note 12 for further information on the Company's reportable segment.
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.
In August 2020, FASB issued Accounting Standards Update ("ASU") 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) — Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU- 2020-06"), which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher stockholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. This ASU may be applied on a full retrospective of modified retrospective basis. For smaller reporting companies, this ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company early adopted this standard on January 1, 2023 and the adoption did not have any effect on the financial statements as the Company did not have any such outstanding instruments as of January 1, 2023.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This standard is effective for fiscal years beginning after December 15, 2022 for small reporting companies, including interim reporting periods within those years and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted. The Company adopted the standard on January 1, 2023 and the adoption did not have a material effect on the financial statements.
Strategic Agreements
The collaborative research and development and other revenue associated with the Company’s major collaborators or counterparties were $ 1.9 million and $ 2.3 million in 2024 and 2023, respectively. 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 or counterparties, (c) royalty revenue from Orient Pharma Co., Ltd. (“Orient Pharma”) with respect to Methydur net sales and (d) royalty revenue from Innocoll Pharmaceuticals Limited (“Innocoll”) with respect to POSIMIR net sales.
Agreement with Innocoll
On December 21, 2021, the Company entered into a license agreement (as amended, the “Innocoll Agreement”) with Innocoll. Pursuant to the Innocoll Agreement, the Company granted Innocoll an exclusive, royalty-bearing, sublicensable right and license to develop, manufacture and commercialize in the United States, POSIMIR®, the Company’s FDA-approved post-surgical pain product, with respect to all uses and applications in humans. None of the additional milestones under the agreement have been met. On November 8, 2024, the Company received notice that Innocoll is terminating the Innocoll Agreement, effective May 6, 2025. Innocoll has committed to transfer all data and know-how related to POSIMIR to the Company, and the Company is evaluating next steps with respect to the commercialization of POSIMIR. We do not expect that this termination will have a material impact on our financial statements.
Patent Purchase Agreement with Indivior
In September 2017, we entered into an agreement with Indivior (the “Indivior Agreement”), under which we assigned to Indivior certain patents that may provide further intellectual property protection for PERSERIS, Indivior’s extended-release injectable suspension for the treatment of schizophrenia in adults. In consideration for such assignment, Indivior made non-refundable upfront and milestone payments to DURECT totaling $ 17.5 million. Additionally, under the terms of the agreement with Indivior, the
Company receives quarterly earn-out payments into 2026 that are based on a single digit percentage of U.S. net sales of PERSERIS. Indivior commercially launched PERSERIS in the U.S. in February 2019. The Indivior Agreement contains customary representations, warranties and indemnities of the parties. Amounts recognized during the twelve months ended December 31, 2024 and 2023 related to earn-out revenues from PERSERIS were $ 1.6 million and $ 1.7 million, respectively, and were included in collaborative research and development and other revenue. In July 2024, Indivior announced discontinuation of sales and marketing for PERSERIS due to the highly competitive market and impending changes that are expected to intensify payor management in the treatment category in which PERSERIS participates.
Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company follows a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. These levels of inputs are the following:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following table sets forth the fair value of the Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2024 (in thousands):
Level 1
Level 2
Level 3
Total
Money market funds
Certificates of deposit
Commercial paper
Total
The following table sets forth the fair value of our financial assets that were measured at fair value on a recurring basis as of December 31, 2023 (in thousands):
Level 1
Level 2
Level 3
Total
Money market funds
Certificates of deposit
Commercial paper
Total
The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. Money market funds are classified as Level 1 financial assets. Certificates of deposit and commercial paper are classified as Level 2 financial assets. The fair value of the Level 2 assets is estimated using pricing models using current observable market information for similar securities. The Company’s Level 2 investments may include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of commercial paper is based upon the time to maturity and discounted using the three-month treasury bill rate. The average remaining maturity of the Company’s Level 2 investments as of December 31, 2023 is less than twelve months and these investments are rated by S&P and Moody’s at AAA or AA- for securities and A1, A2, P1 or P2 for commercial paper.
The following is a summary of available-for-sale securities as of December 31, 2024 and 2023 (in thousands):
December 31, 2024
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair
Value
Money market funds
Certificates of deposit
Commercial paper
Reported as:
Cash and cash equivalents
Short-term investments
Long-term restricted investments
December 31, 2023
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair
Value
Money market funds
Certificates of deposit
Commercial paper
Reported as:
Cash and cash equivalents
Short-term investments
Long-term restricted investments
The following is a summary of the cost and estimated fair value of available-for-sale securities at December 31, 2024, by contractual maturity (in thousands):
December 31, 2024
Amortized
Cost
Estimated
Fair
Value
Mature in one year or less
Mature after one year through five years
There were no securities that have had an unrealized loss for more than 12 months as of December 31, 2024.
As of December 31, 2024, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.
Warrant Liabilities
The following table summarizes the activity of the Company’s Level 3 warrant liabilities as of December 31, 2024 and 2023 (in thousands):
Year ended December 31,
Fair value at beginning of year - February 2023 issuance (Pre-funded warrants)
Initial fair value at the original issuance date
Change in fair value during the year
Fair value of liability classified warrants exercised
Fair value at end of year - February 2023 issuance (Pre-funded warrants)
Fair value at beginning of year - February 2023 issuance (Common warrants)
Initial fair value at the original issuance date
Change in fair value during the year
Fair value of liability classified warrants exercised
Fair value at end of year - February 2023 issuance (Common warrants)
Fair value at end of year - February 2023 issuance
Fair value at beginning of year - July 2023 issuance
Initial fair value at the original issuance date
Change in fair value during the year
Fair value of liability classified warrants exercised
Fair value at end of year - July 2023 issuance
Total fair value at end of year
February 2023 Warrants
In February 2023, the Company issued pre-funded warrants to purchase an aggregate of 300,000 shares of common stock and common warrants to purchase an aggregate of 2,000,000 shares of common stock in a registered direct offering.
Pre-Funded Warrants
The pre-funded warrants were accounted for as current liabilities on the balance sheets and were adjusted to estimated fair value at period end through “other income (expense)” on the statements of operations. The estimated fair value of the outstanding pre-funded warrants was $ 1.7 million and zero as of February 8, 2023 (i.e., the issuance date) and December 31, 2023, respectively. In November 2023, all 300,000 shares of the pre-funded warrants were exercised in accordance with the financing agreement, resulting in an issuance of 300,000 shares of common stock to the holder. The Company calculated the
estimated fair value of the pre-funded warrants using a Black-Scholes option pricing model with the following key assumptions:
February 8, 2023 (issuance)
Common stock price
Exercise price per share
Volatility
Risk-free interest rate
Contractual term (in years)
Expected dividend yield
Common Warrants
The common warrants are accounted for as current liabilities on the balance sheets and are adjusted to estimated fair value at period end through “other income (expense)” on the statements of operations. The estimated fair value of the outstanding common warrants was $ 10.3 million, $ 312,000 and $ 414,000 as of February 8, 2023 (i.e., the issuance date), December 31, 2023 and December 31, 2024, respectively. In September 2023, 1,400,000 shares of the common warrants were exercised through the alternative cashless exercise provision in accordance with the financing agreement, resulting in a net issuance of 924,000 shares to the holder. The aggregate number of shares of our common stock issuable in such alternative cashless exercise equals the product of (x) 17 the aggregate number of shares of our common stock that would be issuable upon exercise of the common warrant in accordance with the terms of such common warrant if such exercise were by means of a cash exercise rather than a cashless exercise and (y) 0.66 . The Company calculated the estimated fair value of the common warrants using a Monte-Carlo simulation model with the following key as sumptions. The Company took the likelihood of achieving certain events and related impact on the Company's common stock price into account, as appropriate.
The exercise price for the outstanding common warrants was adjust ed down from $ 5.00 per share to $ 0.51 per share as of December 31, 2023 as a result of an anti-dilution provision in the common warrants issued in the February 2023 financing that was triggered by the sale of our common stock in the open market in November 2023. There were 600,000 shares of outstanding common warrants as of December 31, 2024.
February 8, 2023 (issuance)
December 31, 2023
December 31, 2024
Common stock price
Exercise price per share
Volatility
Risk-free interest rate
Contractual term (in years)
Expected dividend yield
July 2023 warrants
In July 2023, the Company issued common warrants to purchase an aggregate of 2,991,027 shares of common stock in a registered direct offering.
The common warrants are accounted for as current liabilities on the balance sheets and are adjusted to estimated fair value at period end through “other income (expense)” on the statements of operations. The estimated fair value of the outstanding common warrants was $ 5.8 million, $ 912,000 and $ 1.1 million as of July 21, 2023 (i.e., the issuance date), December 31, 2023 and December 31, 2024,
respectively. The Company calculated the estimated fair value of the common warrants using a Black-Scholes option pricing model with the following key assumptions:
July 21, 2023 (issuance)
December 31, 2023
December 31, 2024
Common stock price
Exercise price per share
Volatility
Risk-free interest rate
Contractual term (in years)
Expected dividend yield
There were no exercises of the common warrants issued in the July 2023 registered direct offering.
Property and Equipment, Net
Property and equipment consist of the following (in thousands):
December 31,
Equipment
Leasehold improvements
Less accumulated depreciation and amortization
Property and equipment, net
Depreciation expense was $ 49,000 and $ 148,000 in 2024 and 2023, respectively.
As of December 31, 2024 and 2023, the Company recorded $ 384,000 and $ 375,000 , respectively, as a liability which was included in accrued liabilities and other long-term liabilities on its balance sheets for asset retirement obligations associated with the estimated restoration cost for its leased buildings.
Restricted Investments
As of December 31, 2024 and 2023, the Company had $ 150,000 recorded as restricted investments, which primarily served as collateral for letters of credit securing a leased facility in California.
Commitments
Operating Leases
The Company has lease arrangements for its facilities in California as follows.
Location
Approximate
Square Feet
Operation
Expiration
Cupertino, CA
Office, Laboratory and Manufacturing
Lease expires 2027 (with an option to renew for an additional five years )
Under these leases, the Company is required to pay certain maintenance expenses in addition to monthly rent. Rent expense is recognized on a straight-line basis over the lease term for leases that have scheduled rental payment increases. Rent expense under all operating leases was $ 1.5 million and $ 2.0 million for the years ended December 31, 2024 and 2023. In determining the net present value of lease payments, the Company used its incremental borrowing ra te of 11.5 % based on the information available, including remaining lease term, at the adoption date of ASC 842. As of December 31, 2024 and 2023, the weighted-average remaining lease term was 2.14 years and 3.48 years, respectively, for the Company’s leased properties.
Future minimum payments under these noncancelable leases are as follows (in thousands):
Year ending December 31,
Operating
Leases
Less present value adjustment
Operating lease liabilities recognized
Accrued Liabilities
Accrued liabilities as of December 31, 2024 and 2023 were comprised as follows (in thousands):
December 31,
Accrued compensation and benefits
Accrued clinical costs
Accrued contract research and manufacturing cost
Others
Total
Term Loan
In July 2016, the Company entered into a $ 20.0 million secured single-draw term loan (as amended, the “Loan Agreement”) with Oxford Finance LLC (“Oxford Finance”). The Company and Oxford Finance entered into five subsequent amendments to the Loan Agreement in February 2018, November 2018, December 2019, March 2021 and May 2021. For amendments 1-3 and 5, the Company paid Oxford Finance loan modification fees of $ 100,000 , $ 900,000 , $ 825,000 and $ 712,500 , respectively. As amended, the Loan Agreement provided for interest only payments through June 1, 2023, followed by consecutive monthly payments of principal and interest in arrears starting on June 1, 2023 and continuing through the maturity date of the term loan of September 1, 2025 . The Loan Agreement provided for a floating interest rate ( 7.95 % initially and 12.75 % as of December 31, 2023) based on an index rate plus a spread . In addition, a payment equal to 10 % of the principal amount of the term loan was due when the term loan became due or upon the prepayment of the facility. If the Company elected to prepay the loan, there was also a prepayment fee of between 0.75 % and 2.5 % of the principal amount of the term loan depending on the timing of prepayment. The $ 150,000 facility fee that was paid at the original closing, the loan modification fees and other debt offering/issuance costs had been recorded as debt discount on the Company’s balance sheets and together with the final $ 2.0 million payment were being amortized to interest expense using the effective interest method over the revised term of the loan. The Company made principal payments of $ 5.0 million in 2023.
The term loan was secured by substantially all of the assets of the Company, except that the collateral did not include any intellectual property (including licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The Loan Agreement contained customary representations, warranties and covenants by the Company, which covenants limited the Company’s ability to convey, sell, lease, transfer, assign or otherwise dispose of certain assets of the Company; engage in any business other than the businesses currently engaged in by the Company or reasonably related thereto; liquidate or dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; and make payments on any subordinated debt.
The Loan Agreement also contained customary indemnification obligations and customary events of default, including, among other things, the Company’s failure to fulfill certain obligations of the Company under the Loan Agreement and the occurrence of a material adverse change which was defined as a material adverse change in the Company’s business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of lender’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, the lender would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement, which could harm the Company’s financial condition. The conditionally exercisable call option related to the event of default was considered to be an embedded derivative which is required to be bifurcated and accounted for as a separate financial instrument. In the periods presented, the value of the embedded derivative was not material, but could become material in future periods if an event of default became more probable than is currently estimated.
As of December 31, 2023, the Company was in compliance with all material covenants under the Loan Agreement and there had been no material adverse change. In accordance with ASC 470-10-45-2, the term loan was classified as a current liability on the Company’s balance sheet as of December 31, 2023 due to the timing of repayment obligations and due to recurring losses, liquidity concerns and a subjective acceleration clause in the Company’s Loan Agreement.
In 2024, the Company completed the sale of our ALZET product line to Lafayette Instrument Co. (LIC), a portfolio company of Branford Castle Partners II, L.P., a North-American focused private equity firm. Under the terms of the agreement, LIC paid DURECT $ 17.5 million in exchange for certain assets and liabilities associated with the ALZET product line. Simultaneous with this transaction, the Company paid off all remaining obligations under the term loan agreement with Oxford Finance LLC.
Stockholders’ Equity
Common Stock
In July 2021, the Company filed a shelf registration statement on Form S-3 with the SEC (the “2021 Registration Statement”) (File No. 333-258333), which upon being declared effective in August 2021, allows the Company to offer up to $ 250.0 million of securities from time to time in one or more public offerings, inclusive of up to $ 75.0 million of shares of the Company’s common stock which the Company may sell, subject to certain limitations, pursuant to a sales agreement dated July 30, 2021 with Cantor Fitzgerald & Co. (the “2021 Sales Agreement”). The 2021 Registration Statement expired on August 16, 2024.
On December 5, 2022, the Company effected a 1-for-10 reverse stock split of its outstanding common stock . The reverse stock split also affected our outstanding stock options, purchase rights and equity incentive plans and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately.
On August 14, 2024, the Company filed a shelf registration statement on Form S-3 with the SEC (the “2024 Registration Statement”) (File No. 333-281550), which upon being declared effective on August 23, 2024, allowed the Company to offer up to $ 250.0 million of securities from time to time in one or more public offerings. In addition, due to the SEC’s “baby shelf” rules, which prohibit companies with a public float of less than $ 75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period, the Company are currently only able to issue a limited number of shares under our 2024 Registration Statement, which aggregate to no more than one-third of our public float.
Registered Direct Offerings
February 2023 Financing
On February 3, 2023 , the Company entered into a securities purchase agreement with two institutional investors relating to the purchase and sale of an aggregate of (i) 1,700,000 shares of its common stock, par value $ 0.0001 per share, (ii) pre-funded warrants to purchase 300,000 shares of common stock, and (iii) accompanying common warrants, to purchase an aggregate of 2,000,000 shares of Common Stock, in a registered direct offering (the "February Offering"). The issuance date of the common stock, the pre-funded warrants and the accompanying common warrants was February 8, 2023. The aggregate net proceeds to the Company from the February Offering were approximately $ 8.8 million after deducting $ 1.2 million in placement agent fees and other offering expenses, which were allocated to warrant liabilities and included in loss on issuance of warrants on the statement of operations for the twelve months ended December 31, 2023.
The pre-funded warrants were exercisable immediately following the closing date of the February Offering and have an unlimited term and an initial exercise price of $ 0.00001 per share. The common warrants were immediately exercisable and have a five-year term and an initial exercise price of $ 5.00 per share, which was lowered to $ 4.89 per share as a result of an anti-dilution provision in the common warrants issued in the February Offering that was triggered by the July Offering (as defined below) and then lowered to $ 0.51 that was triggered by the sale of our common stock in the open market in November 2023 . The combined offering price was $ 5.00 per share and accompanying common warrant, or in the case of pre-funded warrants, $ 4.99999 per pre-funded warrant and accompanying common warrant. A holder (together with its affiliates) may not exercise any portion of a pre-funded warrant or common warrant to the extent that the holder would own more than 4.99 % (or, at the election of the holder 9.99 %) of the Company’s outstanding common stock immediately after exercise.
The Company accounts for the pre-funded warrants and the common warrants as current liabilities based upon the guidance of ASC 480 and ASC 815. The Company evaluated the common and pre-funded warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity (“ASC 815-40”) and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the pre-funded warrants could be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of the Company’s common stock. Because a change of 50% or more of the Company’s common stock may not result in a change in control of the Company, the Company believes that the scope exception related to the occurrence of a fundamental transaction in ASC 815-40 is not met. The common warrants have the same characteristics as the pre-funded warrants related to the occurrence of a fundamental transaction, therefore the common warrants are also precluded from equity classification. In addition, the holder of the common warrants is permitted to receive the highest volume weighted average price ("VWAP") from the date of announcement of the fundamental transaction through the date the holder provides notice of repurchase, as a way to protect the holder against reductions in the stock price in a fundamental transaction, while allowing the holder to keep the benefits of an upside, which precludes the common warrants from being considered indexed to the Company’s stock. Since the common and pre-funded warrants meet the definition of derivatives under ASC 815, the Company records these warrants as current liabilities on the balance sheets at fair value, with subsequent changes in their respective fair values recognized in the statements of operations and comprehensive loss at each reporting date.
Estimating fair values of liability-classified financial instruments requires the development of estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because liability-classified financial instruments are initially and subsequently carried at fair value, the Company’s financial results
will reflect the volatility in these estimate and assumption changes. Changes in estimated fair value are recognized as a component of other income (expense) in the statements of operations.
At the date of issuance, the Company valued the common warrants using a Monte-Carlo valuation model due to the presence of an alternative cashless settlement feature in the financing agreement that provides the warrant holders with an alternative settlement feature to receive a fixed percentage of the shares underlying the warrants for no consideration. Because this feature allows for the warrant holders to use an alternative mechanism to exercise their warrants in a manner that would yield different values, a Monte-Carlo valuation model was determined to be appropriate. The Monte-Carlo valuation resulted in an estimated fair value of the common warrants at issuance of $ 10.3 million. The pre-funded warrants were valued using the Black-Scholes option valuation model which is a common valuation method that is generally used for valuing warrants that are for the exercise of a fixed number of shares at a fixed exercise price per share. The Black-Scholes method was determined to be appropriate for the pre-funded warrants given the lack of alternative mechanisms to settle the warrants in a manner that would yield different values, such as an alternative cashless settlement feature. The Black-Scholes valuation resulted in an estimated fair value of the pre-funded warrants at issuance of $ 1.7 million.
Since the estimated fair value of the warrants at issuance was greater than the gross proceeds of $ 10.0 million received, the Company recorded approximately $ 2.0 million (i.e., the difference of the estimated fair values of the warrants and the gross proceeds received) as a loss on issuance of warrants on the statements of operations at issuance.
In September 2023, 1,400,000 shares of the common warrants were exercised in connection with the alternative cashless exercise of the warrants, the Company issued 924,000 shares to the holder. The Company recorded a gain of $ 3.4 million resulting from the exercise of the warrants in the accompanying statements of operations for the twelve months ended December 31, 2023 and recorded $ 2.8 million in additional-paid-in capital upon the issuance of the shares on the balance sheet as of December 31, 2023.
In November 2023, 300,000 shares of the pre-funded warrants were exercised in connection with the cashless exercise of the warrants, the Company issued 300,000 shares to the holder. The Company recorded a gain of $ 561,000 resulting from the exercise of the pre-funded warrants in the accompanying statements of operations for the year ended December 31, 2023 and recorded $ 186,000 in additional-paid-in capital upon the issuance of the shares on the balance sheet as of December 31, 2023.
As of December 31, 2024 and 2023, common warrants to purchase 600,000 shares of the Company's common stock were outstanding.
At December 31, 2024, the Company updated the estimated fair value of the outstanding common warrants using a Monte-Carlo valuation model resulting in an estimated fair value of $ 414,000 , an increase of $ 102,000 for these common warrants compared with December 31, 2023. At December 31, 2023, the Company updated the estimated fair value of the outstanding common warrants using a Monte-Carlo valuation model resulting in an estimated fair value of $ 312,000 , a decrease of $ 2.8 million for these common warrants on the issuance date.
As of December 31, 2024 and 2023, there were no pre-funded warrants outstanding.
The total loss of $ 102,000 resulting from the change in the estimated fair value of the liabilities for the common warrants was recorded as a change in the estimated fair value of warrant liabilities in the accompanying statements of operations for the year ended December 31, 2024. The total gain of $ 7.2 million and $ 1.6 million resulting from the change in the estimated fair value of the liabilities for the common warrants and pre-funded warrants, respectively, was recorded as a change in the estimated fair value of warrant liabilities in the accompanying statements of operations for the year ended December 31, 2023.
The common warrant liability will be adjusted to estimated fair value at each balance sheet date until the warrants are settled. Changes in the estimated fair value of the warrant liabilities are recognized as a component of other income (expense), net in the statements of operations and comprehensive loss.
July 2023 Financing
On July 19, 2023 , the Company entered into a securities purchase agreement with several institutional investors relating to the purchase and sale of an aggregate of (i) 2,991,027 shares of its common stock, par value $ 0.0001 per share, and (ii) accompanying common warrants to purchase an aggregate of 2,991,027 shares of common stock, in a registered direct offering (the “July Offering”). The issuance date of the common stock and the accompanying common warrants was July 21, 2023 . The aggregate net proceeds to the Company from the July Offering were approximately $ 13.9 million after deducting $ 1.1 million in placement agent fees and other offering expenses.
The common warrants were immediately exercisable and have a five-year term and an initial exercise price of $ 4.89 per share. The combined offering price was $ 5.015 per share and accompanying common warrant. A holder (together with its affiliates) may not exercise any portion of the common warrants to the extent that the holder would own more than 4.99 % (or, at the election of the holder 9.99 %) of the Company’s outstanding common stock immediately after exercise.
The common stock and common warrants are separate freestanding instruments. The estimated fair value of the common stock issued in the July Offering as of the date of issuance (i.e., July 21, 2023) was $ 9.1 million, which was the number of shares of 2,991,027 multiplied by the price per share as of the date of issuance of $ 3.05 per share. The common stock issued in the July Offering was classified as equity on the Company’s balance sheets. The Company allocated the offering expenses related to the July 2023 offering of $ 1.1 million based on the relative fair values of common stock and common warrants issued. The Company recognized an expense for the amount allocated to the common warrants of $ 427,000 (included within other expense, net) upon the closing of the offering in the year ended December 31, 2023. The Company recorded the amount allocated to the common stock of $ 673,000 as a reduction in additional paid-in capital on its balance sheets as of December 31, 2023.
The Company accounted for the common warrants issued in the July Offering as current liabilities based upon the guidance of ASC 815. The Company evaluated the common warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity (“ASC 815-40”) and concluded that they do not meet the criteria to be classified in stockholders’ equity. Upon a fundamental transaction, holders of the common warrants are permitted to settle warrants for a value determined using the Black-Scholes formula that incorporates a leveraged common stock price. Specifically, for purposes of the calculation, the stock price is determined as the higher of the VWAP measured over the period from the date of announcement of the fundamental transaction through the date the holder provides notice of repurchase, and the value received by common stockholders in such fundamental transaction. This in effect protects the holder against reductions in the stock price that may result from a fundamental transaction, while allowing the holder to keep the benefits of an upside. This feature precludes the common warrants from being considered indexed to the Company’s stock.
Since the common warrants meet the definition of derivatives under ASC 815, the Company recorded these warrants as current liabilities on the balance sheets at the estimated fair value, with subsequent changes in their respective estimated fair values recognized in the statements of operations and comprehensive loss at each reporting date.
Estimating fair values of liability-classified financial instruments requires the development of estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because liability-classified financial instruments are initially and subsequently carried at fair value, the Company’s financial results
will reflect the volatility in these estimate and assumption changes. Changes in fair value are recognized as a component of other income (expense) in the statements of operations.
The Company valued the common warrants issued in the July Offering using the Black-Scholes option valuation model. The Black-Scholes method was determined to be appropriate given the lack of alternative mechanisms to settle the warrants in a manner that would yield different values, such as an alternative cashless settlement feature. The fair value of these warrants as of the issuance date, as of December 31, 2023 and December 31, 2024 were $ 5.8 million, $ 912,000 and $ 1.1 million, respectively. The loss of $ 221,000 resulting from the change in the fair value of the liability for these warrants was recorded as a change in estimated fair value of warrant liabilities in the accompanying statements of operations for the twelve months ended December 31, 2024.The gain of $ 4.9 million resulting from the change in the fair value of the liability for these warrants was recorded as a change in estimated fair value of warrant liabilities in the accompanying statements of operations for the twelve months ended December 31, 2023.
The common warrant liability will be adjusted to estimated fair value at each balance sheet date until the warrants are settled. Changes in the estimated fair value of the warrant liabilities are recognized as a component of other income (expense), net in the statements of operations and comprehensive loss.
As of December 31, 2024, no ne of the warrants issued in the July Offering have been exercised. Common warrants to purchase 2,991,027 shares of the Company's common stock were outstanding with an exercise price of $ 4.89 per share.
ATM Financings
During the twelve months ended December 31, 2024, the Company raised net proceeds (net of commissions) of approximately $ 648,000 from the sale of 702,090 shares of the Company’s common stock in the open market at a weighted average price of $ 0.94 per share pursuant to the 2021 Registration Statement and the 2021 Sales Agreement.
During the twelve months ended December 31, 2023, there were no sales of the Company's common stock in the open market.
As of March 25, 2025, the Company had up to $ 250.0 million of the Company’s securities available for sale under the 2024 Registration Statement. However, due to the SEC’s “baby shelf” rules discussed above, only up to approximately $ 8.7 million of our securities are available for sale under the 2024 Registration Statement.
Description of Stock-Based Compensation Plans
2000 Stock Plan (Incentive Stock Plan)
In January 2000, the Company’s Board of Directors and stockholders adopted the DURECT Corporation 2000 Stock Plan, under which incentive stock options and non-statutory stock options and stock purchase rights may be granted to employees, consultants and non-employee directors. The 2000 Stock Plan was amended by written consent of the Board of Directors in March 2000 and written consent of the stockholders in August 2000.
In April 2005, the Board of Directors approved certain amendments to the 2000 Stock Plan. At the Company’s annual stockholders meeting in June 2005, the stockholders approved the amendments of the 2000 Stock Plan to: (i) expand the types of awards that the Company may grant to eligible service providers under the Stock Plan to include restricted stock units, stock appreciation rights and other similar types of awards (including other awards under which recipients are not required to pay any purchase or exercise price) as well as cash awards; and (ii) include certain performance criteria that may be applied to awards granted under the Stock Plan.
At the Company’s annual stockholders meeting in June 2010, the stockholders approved amendments of the 2000 Stock Plan to: (i) provide that the number of shares that remain available for issuance will be reduced by two shares for each share issued pursuant to an award (other than an option or stock appreciation right) granted on or after the date of the 2010 Annual Meeting; (ii) expand the types of transactions that might be considered repricings and option exchanges for which stockholder approval is required; (iii) provide that shares tendered or withheld in payment of the exercise price of an option or withheld to satisfy a withholding obligation, and all shares with respect to which a stock appreciation right is exercised, will not again be available for issuance under the Stock Plan; (iv) require that options and stock appreciation rights have an exercise price or base appreciation amount that is at least fair market value on the grant date, except in connection with certain corporate transactions, and that stock appreciation rights may not have longer than a 10 -year term; (v) add new performance goals that may be used to provide “performance-based compensation” under the 2000 Stock Plan; (vi) extend the term of the 2000 Stock Plan to the date that is ten ( 10 ) years following the stockholders meeting; and (vii) expand the treatment of outstanding awards in connection with certain changes of control of the Company to cover mergers in which the consideration payable to stockholders is not solely securities of the successor corporation.
At the Company’s annual stockholders meeting in June 2011, June 2014, June 2016 and June 2018, the stockholders approved amendments of the 2000 Stock Plan to increase the number of shares of the Company’s common stock available for issuance by 550,000 shares, 400,000 shares, 500,000 shares, and 750,000 shares, respectively, each of which had previously been approved by the Board of Directors.
At the Company’s annual stockholders meeting in June 2019, the stockholders approved an amendment of the 2000 Stock Plan to extend the term of the 2000 Stock Plan to the date that is ten ( 10 ) years following the stockholders meeting.
In April 2013, the Board of Directors approved certain amendments to the 2000 Stock Plan to: (i) increase the number of stock options granted to a non-employee director on the date which such person first becomes a director from 3,000 to 7,000 shares of common stock; each option shall have a ten-year term, become exercisable in installments of one-third of the total number of options granted on each anniversary of the grant and have a two-year period following termination of Director status in which the former director can exercise the option; (ii) modify the exercise period for future option grants to a non-employee director in which a former director can exercise the option following termination of Director status from a one year period to a two-year period.
Options granted under the 2000 Stock Plan expire no later than ten years from the date of grant. Options may be granted with different vesting terms from time to time not to exceed five years from the date of grant. The option price of an incentive stock option granted to an employee or of a nonstatutory stock option granted to any person who owns stock representing more than 10 % of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary) shall be no less than 110 % of the fair market value per share on the date of grant. The option price of an incentive stock option granted to any other employee shall be no less than 100 % of the fair market value per share on the date of grant.
At the Company’s annual stockholders meeting in June 2022, the stockholders approved an amendment of the 2000 Stock Plan to increase the number of shares of the Company’s common stock available for issuance by 1,800,000 shares and to extend the term of the 2000 Stock Plan to the date that is ten ( 10 ) years following the stockholders meeting.
At the Company’s annual stockholders meeting in September 2024, the stockholders approved an amendment of the 2000 Stock Plan to increase the number of shares of the Company’s common stock available for issuance by 2,000,000 shares and to extend the term of the 2000 Stock Plan to the date that is ten ( 10 ) years following the stockholders meeting.
A total of 8,429,650 shares of common stock have been reserved for issuance under this plan. The plan expires in June 2034 .
As of December 31, 2024, 1,844,180 shares of common stock were available for future grant and options to purchase 4,619,287 shares of common stock were outstanding under the 2000 Stock Plan.
2000 Employee Stock Purchase Plan
In August 2000, the Company adopted the 2000 Employee Stock Purchase Plan. This purchase plan is implemented by a series of overlapping offering periods of 24 months’ duration, with new offering periods, other than the first offering period, beginning on May 1 and November 1 of each year and ending April 30 and October 31, respectively, two years later. The purchase plan allows eligible employees to purchase common stock through payroll deductions at a price equal to the lower of 85 % of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each purchase period. The initial offering period commenced on the effectiveness of the Company’s initial public offering.
In April 2010, the Board of Directors approved certain amendments to the 2000 Employee Stock Purchase Plan. At the Company’s annual stockholders meeting in June 2010, the stockholders approved the amendment of the 2000 Employee Stock Purchase Plan to: (i) increase the number of shares of our common stock authorized for issuance under the ESPP by 25,000 shares; (ii) extend the term of the ESPP to the date that is ten ( 10 ) years following the stockholders meeting; (iii) provide for six-month consecutive offering periods beginning on November 1, 2010; (iv) revise certain provisions to reflect the final regulations issued under Section 423 of the Code by the Internal Revenue Service; and (v) provide for the cash-out of options outstanding under an offering period in effect prior to the consummation of certain corporate transactions as an alternative to providing for a final purchase under such offering period.
In March 2015, the Board of Directors approved certain amendments to the 2000 Employee Stock Purchase Plan. At the Company’s annual stockholders meeting in June 2015, the stockholders approved the amendments of the 2000 Employee Stock Purchase Plan to: (i) increase the number of shares of our common stock authorized for issuance under the ESPP by 35,000 shares; and (ii) extend the term of the ESPP to the date that is ten ( 10 ) years following the stockholders meeting. At each of the Company’s annual stockholders meeting in June 2017 and in June 2020, the stockholders approved amendments of the 2000 Employee Stock Purchase Plan to increase the number of shares our common stock authorized for issuance under the ESPP by 35,000 shares and to re-approve its material terms. At the Company’s annual stockholders meeting in June 2023, the stockholders approved amendments of the 2000 Employee Stock Purchase Plan to increase the number of shares of our common stock authorized for issuance under the ESPP by 40,000 shares and to re-approve its material terms.
The plan expires in June 2033. A total of 365,000 shares of common stock have been reserved for issuance under this plan. As of December 31, 2024, 49,667 shares of common stock were available for future grant and 315,333 shares of common stock have been issued under the 2000 Employee Stock Purchase Plan.
As of December 31, 2024, shares of common stock reserved fo r future issuance consisted of the following:
December 31,
Stock options outstanding
Restricted stock units outstanding
Stock options available for grant
Employee Stock Purchase Plan
A summary of stock option activity under all stock-based compensation plans is as follows:
Number of
Options
Weighted
Average
Exercise
Price Per Share
Weighted
Average Remaining
Contractual Term
(in Years)
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2023
Options granted
Options exercised
Options forfeited
Options expired
Outstanding at December 31, 2024
Exercisable at December 31, 2024
Vested and expected to vest at
December 31, 2024
The weighted-average grant date fair value of options granted during the years ended December 31, 2024 and 2023 was $ 1.30 and $ 4.36 per share, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of 2024 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on December 31, 2024. This amount changes based on the fair market value of the Company’s common stock. The total value of options exercised was zero and $ 1,400 for the years ended December 31, 2024 and 2023, respectively.
Expenses for non-employee stock options are recorded over the vesting period of the options, which closely approximates the non-employee’s performance period, with the value determined by the Black-Scholes option valuation method and remeasured over the vesting term.
As of December 31, 2024, the Company had two stock-based equity compensation plans, which are described above. The employee stock-based compensation cost that has been included in the statements of operations and comprehensive loss is shown as below (in thousands):
Year ended December 31,
Research and development
Selling, general and administrative
Because the Company had a net operating loss carryforward as of December 31, 2024, no excess tax benefits for the tax deductions related to stock-based compensation were recognized in the statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised during 2024, which would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.
Determining Fair Value
Valuation and Expense Recognition. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model. The Company recognizes the expense on a straight-line basis. The expense for options is recognized over the requisite service periods of the awards, which is generally the vesting period.
Expected Term. The expected term of options granted represents the period of time that the options are expected to be outstanding. The Company determines the expected life using historical options experience. This develops the expected life by taking the weighted average of the actual life of
options exercised and cancelled and assumes that outstanding options are exercised uniformly from the current holding period through the end of the contractual life.
Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of the Company’s common stock.
Risk-Free Rate. The Company bases the risk-free rate that it uses in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with substantially equivalent remaining terms.
Dividends. The Company has never paid any cash dividends on its common stock and the Company does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.
The Company used the following assumptions to estimate the fair value of options granted and shares purchased under its stock plans and employee stock purchase plan for the years ended December 31, 2024 and 2023:
Year ended December 31,
Stock Options
Risk-free rate
Expected dividend yield
Expected term (in years)
Volatility
Forfeiture rate (1)
The Company accounts for forfeitures as they occur.
Year ended December 31,
Employee Stock Purchase Plan
Risk-free rate
Expected dividend yield
Expected term (in years)
Volatility
There were 6,000 and 9,788 shares purchased under the Company’s employee stock purchase plan during the years ended December 31, 2024 and 2023, respectively. Included in the statements of operations and comprehensive loss for the years ended December 31, 2024 and 2023 was $ 1,600 and $ 5,300, respectively, in stock-based compensation expense related to the recognition of expenses related to shares purchased under the Company’s employee stock purchase plan.
As of December 31, 2024, $ 2.5 million of total unrecognized compensation costs related to nonvested stock options is expected to be recognized over the respective vesting terms of each award through 2028. The weighted average term of the unrecognized stock-based compensation expense i s 2.3 years.
The following table summarizes information about stock options outstanding at December 31, 2024:
Options Outstanding
Options Exercisable
Range of
Exercise Price
Number of
Options
Outstanding
Weighted-
Average
Remaining
Contractual Life
(In years)
Weighted-
Average
Exercise
Price
Number of
Options
Exercisable
Weighted-
Average
Exercise
Price
The Company received zero and $ 5,500 in cash from option exercises under all stock-based compensation plans for the years ended December 31, 2024 and 2023, respectively.
Income Taxes
The Company accounts for income taxes using the liability method under ASC 740, Income Taxes . Under this method, deferred tax assets and liabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company has provided a full valuation allowance on the Company’s deferred tax assets because the Company believes it is more likely than not that its deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. The Company recorded a deferred tax liability of zero and $ 244,000 on its balance sheets at December 31, 2024 and 2023, respectively, that arose from tax amortization of an indefinite-lived intangible asset. The Company recorded a tax expense of zero in the years ended December 31, 2024 and 2023, respectively.
The reconciliation of income tax expenses (benefit), at the statutory federal income tax rate of 21 %, to net income tax benefit included in the statements of operations and comprehensive loss for the years ended December 31, 2024 and 2023 is as follows (in thousands):
Year Ended December 31,
U.S. federal taxes benefit at statutory rate
Change in valuation allowance
Stock-based compensation
Research and development tax credits
Warrants
Expiring net operating losses
Adjustment for Uncertain Tax Positions
Sale of ALZET
Other
Total income tax (benefit) provision
Portion related to discontinued operations
Total income tax (benefit) provision
In 2024 and 2023, total income tax provision (benefit) expense was zero . Deferred tax assets and liabilities reflect the net tax effects of net operating loss, research and other credit carryforwards, and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
December 31,
Deferred tax assets:
Net operating loss carryforwards
Research and other credits
Section 174 R&D capitalization
Stock-based compensation
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax liabilities - right of use asset
Net deferred tax assets and liabilities
The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If it is determined that the Company would be able to realize deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would cause a provision benefit to be recognized. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of tax benefit might change as new information becomes available. Given the Company’s history of operating losses, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $ 7.1 million during 2024 and increased by $ 5.8 million during 2023, respectively.
As of December 31, 2024, the Company had net operating loss carryforwards for federal income tax purposes of approximately $ 303.9 million, of which approximately $ 197.0 million will expire in the years 2025 through 2037 , and approximately $ 106.9 million which do not expire, and federal research and development tax credits of approximately $ 17.0 million, which expire at various dates beginning in 2025 through 2043 , if not utilized.
As of December 31, 2024, the Company had net operating loss carryforwards for state income tax purposes of approximately $ 270.4 million, which expire in the years 2025 through 2043 , if not utilized, and state research and development tax credits of approximately $ 17.8 million, which do not expire.
Utilization of the net operating losses may be subject to a substantial annual limitation due to federal and state ownership change limitations. The annual limitation may result in the expiration of net operating losses before utilization.
At December 31, 2024 and December 31, 2023, the Company had unrecognized tax benefits of approximately $ 12.8 million and $ 13.6 million, respectively (none of which, if recognized, would affect the Company’s effective tax rate). The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
December 31,
Balance at beginning of the year
Decrease related to prior year tax positions
Increase related to current year tax positions
Balance at end of the year
Interest and penalty costs related to unrecognized tax benefits, if any, are classified as a component of interest and other income, net in the Statements of Operations and Comprehensive Loss. The Company did no t recognize any interest and penalties expenses related to unrecognized tax benefits for the years ended December 31, 2024 and 2023.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examination for calendar tax years ending 2000 through 2024 due to unutilized net operating losses and research credits.
Beginning with 2022, the Tax Cuts and Jobs Act eliminated the option to deduct research and development expenditures when incurred under Section 174 and requires taxpayers to capitalize and amortize domestic expenditures over five years and foreign expenditures over fifteen years. Therefore, based on enacted law, there is a deferred tax asset reflected in the deferred tax table for this item, which is offset by a valuation allowance.
11. Discontinued Operations
On November 22, 2024 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “APA”) with Alzet, LLC, a subsidiary of Lafayette Instrument Co. (the “Purchaser”). Under the terms of the APA, the Company agreed to sell to the Purchaser substantially all the assets, and certain specified liabilities, related to the ALZET product line (the “Sale”). The APA provided for, subject to certain terms and conditions, the entry into a Transition Services Agreement, pursuant to which the Company agrees to perform certain transition services related to the purchased assets for up to six months after the Closing Date, subject to potential extensions.
On the Closing Date, the Company completed the transaction contemplated by the APA. Pursuant to the terms of the APA, the Purchaser paid the Company $ 17,500,000 subject to certain adjustments, including for net working capital, and also agreed to assume certain liabilities with respect to the transferred assets.
As a result of the sale of the ALZET product line, the operating results from the Company's ALZET product line have been excluded from continuing operations and presented as discontinued operations in the accompanying Statements of Operations and Comprehensive Loss for all periods presented. During the twelve months ended December 31, 2024, the Company recorded a gain on sale of the ALZET product line of $ 11.5 million, upon the completion of sale to the Purchaser. The Company incurred transaction costs related to the sale of ALZET product line in the amount of $ 2.1 million that were recorded in selling, general and administrative expenses within discontinued operations. The results of operations and gain from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the ALZET product line. The allocations do include interest expense of the Oxford term loan as the loan was required to pay off at the close of sale of ALZET product line for all periods presented. The allocations do not include amounts related to general corporate administrative expenses. Therefore, these results of operations do not necessarily reflect what the results of operations would have been had the ALZET product line operated as a stand-alone entity.
The components of income from discontinued operations as reported in the Company’s statements of operations were as follows (in thousands):
Year ended December 31,
Total revenues
Operating expenses:
Cost of product revenues
Selling, general and administrative
Total operating expenses
Other expense:
Interest and other expenses
Loss on debt extinguishment
Total costs and expenses
Income (loss) from discontinued operations
Other income:
Gain on sale of the ALZET product line
Pretax net income from discontinued operations
Income tax benefit
Net income from discontinued operations
Net income per share
Basic
Diluted
Weighted-average shares used in computing net income per share
Basic
Diluted
The following table presents information related to assets and liabilities reported as discontinued
operations in the Company’s balance sheets (in thousands):
December 31,
December 31,
Accounts receivable
Inventories, net
Prepaid expenses and other current assets
Discontinued operations – current portion
Property and equipment, net
Operating lease right-of-use assets
Other long-term assets
Discontinued operations – non-current portion
Accounts payable
Accrued liabilities
Operating lease liabilities, current portion
Discontinued operations – current portion
Operating lease liabilities, non-current portion
Other long-term liabilities
Discontinued operations – non-current portion
The following table presents certain non-cash items related to discontinued operations, which are included in the Company’s statements of cash flows (in thousands):
Years ended December 31,
Years ended December 31,
Depreciation
Stock-based compensation expense
Goodwill
Gain on sale of the ALZET product line
Non-cash items, net
12. Segment Information
The Company is committed to transforming the treatment of acute organ injury and chronic liver diseases by advancing novel and potentially lifesaving therapies based on its endogenous epigenetic regulator program. Larsucosterol, the Company's lead drug candidate, binds to and inhibits the activity of DNMTs, epigenetic enzymes which are elevated and associated with hypermethylation found in alcohol-AH patients. Larsucosterol is in clinical development for the potential treatment of AH, for which FDA has granted a Fast Track Designation; metabolic dysfunction-associated steatohepatitis (“MASH”), also known as non-alcoholic steatohepatitis or NASH is also being 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 certain excipients for certain clients for use as raw materials in their products.
The Company’s long-lived assets recognized on the Balance Sheets primarily consisted of property and equipment, net and operating lease right-of-use assets, which are located within the U.S.
The Company manages the business activities on a consolidated basis and operates in one reportable segment.
The Company's Chief Executive Officer is the Chief Operating Decision Maker (“CODM”) . The CODM assesses operating performance and makes resource allocation decisions primarily based on net loss, cash on-hand and cash flows utilizing the Company’s product development timelines and cash balances as key inputs to resource allocation.
Significant expenses within loss from continuing operations, as well as within net loss, include cost of goods sold, research and development, and selling, general and administrative expenses, which are each separately presented on the Company’s Statement of Operations and Comprehensive Loss.
13. Subsequent Events
On January 9, 2025, the Company received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that for the last 30 consecutive business days the bid price for the Company’s common stock had closed below the minimum $ 1.00 per share requirement for continued inclusion on The Nasdaq Capital Market (“Nasdaq”) pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Closing Bid Price Requirement”). The deficiency letter does not result in the immediate delisting of the Company’s common stock from Nasdaq.
The Company has been provided an initial period of 180 calendar days from January 9, 2025, or until July 8, 2025, to regain compliance with the Minimum Closing Bid Price Requirement. If the Company is not in compliance with the Minimum Closing Bid Price Requirement by July 8, 2025, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards required by Nasdaq, except for the Minimum Closing Bid Price Requirement.
The Company intends to continue actively monitoring the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Minimum Closing Bid Price Requirement, which could include effecting a reverse stock split. However, there can be no assurance that the Company will be able to regain compliance with the Minimum Closing Bid Price Requirement.
