10-Q 1 otic-10q_20200331.htm 10-Q otic-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from                      to                     

Commission file number: 001-36591

 

Otonomy, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-2590070

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

4796 Executive Drive

San Diego, California 92121

(619) 323-2200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

 

OTIC

 

The NASDAQ Stock Market LLC

(The NASDAQ Global Select Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

 

  

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock, par value $0.001, outstanding as of May 4, 2020 was 30,867,961.

 


TABLE OF CONTENTS

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

2

 

 

Item 1. Financial Statements

2

 

 

Condensed Balance Sheets

2

 

 

Condensed Statements of Operations

3

 

 

Condensed Statements of Comprehensive Loss

4

 

 

Condensed Statements of Stockholders’ Equity

5

 

 

Condensed Statements of Cash Flows

6

 

 

Notes to Condensed Financial Statements

7

 

 

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

16

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

25

 

 

Item 4. Controls and Procedures

26

 

 

PART II. OTHER INFORMATION

27

 

 

Item 1. Legal Proceedings

27

 

 

Item 1A. Risk Factors

27

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

Item 3. Default Upon Senior Securities

57

 

 

Item 4. Mine Safety Disclosures

57

 

 

Item 5. Other Information

57

 

 

Item 6. Exhibits

58

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Otonomy, Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,038

 

 

$

25,194

 

Short-term investments

 

17,568

 

 

 

35,476

 

Prepaid and other current assets

 

2,199

 

 

 

2,480

 

Total current assets

 

50,805

 

 

 

63,150

 

Restricted cash

 

702

 

 

 

701

 

Property and equipment, net

 

3,413

 

 

 

3,702

 

Right-of-use assets

 

15,131

 

 

 

15,465

 

Total assets

$

70,051

 

 

$

83,018

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

897

 

 

$

1,161

 

Accrued expenses

 

4,512

 

 

 

5,442

 

Accrued compensation

 

1,429

 

 

 

2,593

 

Long-term debt, current

 

1,286

 

 

 

 

Leases, current

 

3,308

 

 

 

3,302

 

Total current liabilities

 

11,432

 

 

 

12,498

 

Long-term debt, net of current

 

13,731

 

 

 

14,967

 

Leases, net of current

 

14,951

 

 

 

15,320

 

Total liabilities

 

40,114

 

 

 

42,785

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2020

   and December 31, 2019; no shares issued or outstanding at March 31, 2020 and

   December 31, 2019

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2020

   and December 31, 2019; 30,814,211 shares issued and outstanding

   at March 31, 2020 and December 31, 2019

 

31

 

 

 

31

 

Additional paid-in capital

 

501,498

 

 

 

500,084

 

Accumulated other comprehensive income

 

64

 

 

 

11

 

Accumulated deficit

 

(471,656

)

 

 

(459,893

)

Total stockholders’ equity

 

29,937

 

 

 

40,233

 

Total liabilities and stockholders’ equity

$

70,051

 

 

$

83,018

 

 

See accompanying notes.

 

-2-


 

Otonomy, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Product sales, net

 

$

160

 

 

$

192

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

214

 

 

 

213

 

Research and development

 

 

7,672

 

 

 

8,795

 

Selling, general and administrative

 

 

3,836

 

 

 

3,278

 

Total costs and operating expenses

 

 

11,722

 

 

 

12,286

 

Loss from operations

 

 

(11,562

)

 

 

(12,094

)

Other income (expense)

 

 

 

 

 

 

 

 

Interest income

 

 

193

 

 

 

501

 

Interest expense

 

 

(394

)

 

 

(391

)

Net loss

 

$

(11,763

)

 

$

(11,984

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.38

)

 

$

(0.39

)

Weighted-average shares used to compute net loss per share, basic and diluted

 

 

30,814,211

 

 

 

30,658,412

 

 

See accompanying notes.

-3-


 

Otonomy, Inc.

Condensed Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Net loss

 

$

(11,763

)

 

$

(11,984

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

53

 

 

 

40

 

Comprehensive loss

 

$

(11,710

)

 

$

(11,944

)

 

See accompanying notes.


-4-


 

Otonomy, Inc.

Condensed Statements of Stockholders’ Equity

(in thousands, except share data)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

30,814,211

 

 

$

31

 

 

$

500,084

 

 

$

11

 

 

$

(459,893

)

 

$

40,233

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

1,414

 

 

 

 

 

 

 

 

 

1,414

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,763

)

 

 

(11,763

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

53

 

Balance at March 31, 2020

   (unaudited)

 

 

30,814,211

 

 

$

31

 

 

$

501,498

 

 

$

64

 

 

$

(471,656

)

 

$

29,937

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss) Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

30,685,412

 

 

$

31

 

 

$

494,947

 

 

$

(23

)

 

$

(415,218

)

 

$

79,737

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

1,496

 

 

 

 

 

 

 

 

 

1,496

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,984

)

 

 

(11,984

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

 

 

 

40

 

Balance at March 31, 2019

   (unaudited)

 

 

30,685,412

 

 

$

31

 

 

$

496,443

 

 

$

17

 

 

$

(427,202

)

 

$

69,289

 

 

See accompanying notes.

-5-


 

Otonomy, Inc.

Condensed Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,763

)

 

$

(11,984

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

286

 

 

 

276

 

Stock-based compensation

 

 

1,414

 

 

 

1,496

 

Accretion of discounts on short-term investments

 

 

(35

)

 

 

(217

)

Amortization of debt discount

 

 

50

 

 

 

44

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid and other assets

 

 

281

 

 

 

678

 

Accounts payable

 

 

(264

)

 

 

123

 

Accrued expenses

 

 

(917

)

 

 

462

 

Accrued compensation

 

 

(1,164

)

 

 

(1,392

)

Right-of-use assets and lease liabilities, net

 

 

(29

)

 

 

10

 

Net cash used in operating activities

 

 

(12,141

)

 

 

(10,504

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(3,004

)

 

 

(32,763

)

Maturities of short-term investments

 

 

21,000

 

 

 

26,000

 

Purchases of property and equipment

 

 

(10

)

 

 

(36

)

Net cash provided by (used in) investing activities

 

 

17,986

 

 

 

(6,799

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of debt issuance costs

 

 

 

 

 

(52

)

Net cash used in financing activities

 

 

 

 

 

(52

)

Net change in cash, cash equivalents and restricted cash

 

 

5,845

 

 

 

(17,355

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

25,895

 

 

 

34,329

 

Cash, cash equivalents and restricted cash at end of period

 

$

31,740

 

 

$

16,974

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

31,038

 

 

$

16,276

 

Restricted cash at end of period

 

 

702

 

 

 

698

 

Cash, cash equivalents and restricted cash at end of period

 

$

31,740

 

 

$

16,974

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

341

 

 

$

347

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

63

 

 

$

 

 

See accompanying notes.

-6-


 

Otonomy, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

1. Description of Business and Basis of Presentation

Description of Business

Otonomy, Inc. (Otonomy or the Company) was incorporated in the state of Delaware on May 6, 2008. Otonomy is a biopharmaceutical company dedicated to the development of innovative therapeutics for neurotology. The Company pioneered the application of drug delivery technology to the ear in order to develop products that achieve sustained drug exposure from a single local administration. This approach is covered by a broad patent estate and is being utilized to develop a pipeline of products addressing important unmet medical needs including Ménière’s disease, hearing loss and tinnitus.

OTIVIDEX is a sustained-exposure formulation of the steroid dexamethasone that has completed two Phase 3 trials for the treatment of Ménière’s disease, with a third Phase 3 trial currently enrolling patients. OTO-313 is a sustained-exposure formulation of the potent and selective N-Methyl-D-Aspartate (NMDA) receptor antagonist gacyclidine that has recently completed enrollment of tinnitus patients in a Phase 1/2 clinical trial. OTO-413 is a sustained-exposure formulation of brain-derived neurotrophic factor (BDNF) for the repair of cochlear synaptopathy, an underlying cause of hearing loss, that is enrolling hearing loss patients in a Phase 1/2 clinical trial. Otonomy also has preclinical stage programs addressing prevention of cisplatin-induced hearing loss (OTO-510) and hair cell regeneration for severe hearing loss (OTO-6XX). In October 2019, the Company entered into a collaboration with Applied Genetic Technologies Corporation (AGTC), to co-develop and co-commercialize a gene therapy to restore hearing in patients with congenital hearing loss.

In addition, the Company developed, received United States Food and Drug Administration (FDA) approval and commercially launched OTIPRIO for use during tympanostomy tube placement (TTP) surgery in pediatric patients. OTIPRIO was also approved by the FDA for the treatment of acute otitis externa (AOE).

Liquidity and Financial Condition

The Company follows Accounting Standards Codification (ASC) Topic 205-40, Presentation of Financial Statements—Going Concern, which requires that management evaluate whether there are relevant conditions and events that in aggregate raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued.

The condensed financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred operating losses and negative cash flows from operating activities since inception. As of March 31, 2020, the Company had cash, cash equivalents and short-term investments of $48.6 million and an accumulated deficit of $471.7 million. The Company anticipates that it will continue to incur net losses into the foreseeable future as it: (i) develops and seeks regulatory approvals for OTIVIDEX and its other product candidates; and (ii) works to develop additional product candidates through research and development programs. The Company intends to seek additional funding through future debt and/or equity financings or other sources, such as potential collaboration agreements. Additional capital may not be available in sufficient amounts or on reasonable terms, if at all.  If the Company is not able to secure adequate additional funding, if or when necessary, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations, and future prospects.  The Company believes that its existing cash, cash equivalents and short-term investments that include proceeds from its long-term debt will be sufficient to fund its operations for a period of at least twelve months from the date of this report.

Basis of Presentation

The accompanying interim condensed financial statements are unaudited. These unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and following the requirements of the United States Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In the Company’s opinion, the unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. These condensed financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s audited financial statements and accompanying notes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 27, 2020. The results presented in these unaudited condensed financial statements are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.

-7-


 

 

 

2. Summary of Significant Accounting Policies

Use of Estimates

The condensed financial statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of product sales and expense during the reporting period. Although these estimates are based on the Company’s knowledge of current events and anticipated actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Short-term Investments

The Company carries short-term investments classified as available-for-sale debt securities at fair value as determined by prices for identical or similar securities at the balance sheet date. Short-term investments consist of both Level 1 and Level 2 financial instruments in the fair value hierarchy (see Note 6 – Fair Value).

Realized gains or losses of available-for-sale securities are determined using the specific identification method and net realized gains and losses are included in interest income. The Company periodically reviews available-for-sale securities for other-than-temporary declines in fair value below the cost basis, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company records unrealized gains and losses on available-for-sale debt securities as a component of other comprehensive loss within the condensed statements of comprehensive loss and as a separate component of stockholders’ equity on the condensed balance sheets. The Company does not hold equity securities in its investment portfolio.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, short-term investments, prepaid expenses and other assets, accounts payable, accrued expenses, accrued compensation and long-term debt. The carrying value of the Company’s cash and cash equivalents, short-term investments, prepaid expenses and other current assets, other long-term assets, accounts payable, accrued expenses, and accrued compensation approximate fair value due to the short-term nature of these items. Based on Level 3 inputs and the borrowing rates currently available for loans with similar terms, the Company believes the fair value of long-term debt approximates its carrying value.

Risks and Uncertainties Related to COVID-19

In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. The COVID-19 pandemic could pose significant risks to the Company’s business; however, the ultimate impact of the pandemic is highly uncertain. The Company does not yet know the full extent of potential delays or impacts on its business, its preclinical programs and clinical trials, healthcare systems or the global economy as a whole. As such, it is uncertain as to the full magnitude that the COVID-19 pandemic will have on the Company’s financial condition, liquidity and future results of operations.

Recent Accounting Pronouncements

Not Yet Adopted

In June 2016, Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) was issued, as amended. ASU 2016-13 introduces the current expected credit loss model, which will require an entity to measure credit losses for certain financial instruments and financial assets. ASU 2016-13 will also apply to receivables arising from revenue transactions such as accounts receivable. ASU 2016-13 is effective for the Company beginning January 1, 2023. The Company does not expect the adoption of ASU 2016-13 to have a material effect on its financial position, results of operations or cash flows.

Recently Adopted

Effective January 1, 2020, the Company early adopted ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 removes the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items (for example, other comprehensive income).

-8-


 

ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company elected to early adopt ASU 2019-12. By early adopting, ASU 2019-12 is effective for the Company beginning January 1, 2020. There is no cumulative effect to be recognized in connection with the early adoption of ASU 2019-12 and the adoption did not have a material impact on the Company’s financial statements or disclosures.

 

3. Available-for-Sale Securities

The Company invests in available-for-sale debt securities consisting of money market funds, certificates of deposit, U.S. Treasury securities and U.S. government sponsored enterprise securities. Available-for-sale debt securities are classified as part of either cash and cash equivalents or short-term investments in the condensed balance sheets. Available-for-sale debt securities with maturities of three months or less from the date of purchase have been classified as cash equivalents, and were $28.4 million and $22.1 million as of March 31, 2020 and December 31, 2019 respectively. Available-for-sale debt securities with maturities of more than three months from the date of purchase have been classified as short-term investments, and were as follows (in thousands):

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Market Value

 

March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

17,504

 

 

$

64

 

 

$

 

 

$

17,568

 

 

$

17,504

 

 

$

64

 

 

$

 

 

$

17,568

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

35,465

 

 

$

16

 

 

$

(5

)

 

$

35,476

 

 

$

35,465

 

 

$

16

 

 

$

(5

)

 

$

35,476

 

 

As of March 31, 2020, the Company had no securities in a gross unrealized loss position. At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and the Company’s intent and ability to hold the investment until recovery of its amortized cost basis. Otonomy intends and has the ability, to hold any investments in unrealized loss positions until their amortized cost basis has been recovered. The Company determined there were no other-than-temporary declines in the value of any available-for-sale securities as of March 31, 2020. All the Company’s available-for-sale debt securities mature within one year.

The Company obtains the fair value of its available-for-sale debt securities from a professional pricing service. The fair values of available-for-sale debt securities are validated by comparing the fair values reported by the professional pricing service to quoted market prices or to fair values obtained from the custodian bank.

 

4. Balance Sheet Details

Prepaid and Other Current Assets

Prepaid and other current assets are comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Prepaid clinical trial costs

 

$

147

 

 

$

209

 

Other

 

 

2,052

 

 

 

2,271

 

Total

 

$

2,199

 

 

$

2,480

 

 

Property and Equipment, Net

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally two to ten years). Leasehold improvements are stated at cost and are depreciated on a straight-line basis over the lesser of the remaining term of the related lease or the estimated useful lives of the assets. The Company assesses the value of its long-lived assets for impairment on an annual basis and whenever events indicate that the carrying amount of such assets may not be recoverable. No such impairment was recorded during the three months ended March 31, 2020 and 2019.

-9-


 

Property and equipment, net is comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Laboratory equipment

 

$

4,179

 

 

$

4,179

 

Manufacturing equipment

 

 

1,116

 

 

 

1,111

 

Computer equipment and software

 

 

935

 

 

 

943

 

Leasehold improvements

 

 

768

 

 

 

768

 

Office furniture

 

 

1,548

 

 

 

1,548

 

 

 

 

8,546

 

 

 

8,549

 

Less: accumulated depreciation

 

 

(5,133

)

 

 

(4,847

)

Total

 

$

3,413

 

 

$

3,702

 

 

Accrued Expenses

The Company estimates expenses resulting from its obligations under contracts with vendors, contract research organizations (CROs) and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided.

The Company records clinical trial expenses in the period in which services are performed and efforts are expended. The Company accrues for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company estimates accruals through financial models taking into account discussion with applicable personnel and outside service providers as to the progress of trials. During the course of a clinical trial, the Company may adjust its clinical accruals if actual results differ from its estimates.

Accrued expenses are comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued clinical trial costs

 

$

3,037

 

 

$

3,443

 

Accrued other

 

 

1,475

 

 

 

1,999

 

Total

 

$

4,512

 

 

$

5,442

 

 

 

5. Commitments and Contingencies

Intellectual Property Licenses

The Company has acquired exclusive rights to develop patented rights, information rights and related know-how for OTIPRIO, OTIVIDEX, OTO-311, OTO-313 and OTO-413 and potential future product candidates under licensing agreements with third parties. The licensing rights obligate the Company to make payments to the licensors for license fees, milestones and royalties. The Company is also responsible for patent prosecution costs, in the event such costs are incurred.

The Company may be obligated to make additional milestone payments under the Company’s intellectual property license agreements as follows (in thousands):

 

Development

$

1,500

 

Regulatory

 

10,275

 

Commercialization

 

1,000

 

Total

$

12,775

 

 

Under one of these agreements, the Company has achieved seven development milestones and one regulatory milestone, totaling $2.9 million, related to its clinical trials for OTIPRIO, OTIVIDEX, OTO-311 and OTO-413.

 

-10-


 

In addition, the Company is obligated to pay royalties of less than five percent on net sales of OTIPRIO and on sales of any other commercial products developed using these licensed technologies. Such royalty expense for OTIPRIO is recorded to cost of product sales. The Company may also be obligated to pay to the licensors a percentage of fees received if and when the Company sublicenses the technology. As of March 31, 2020, the Company has not entered into any sublicense agreements for the licensed technologies.

Other Royalty Arrangements

The Company entered into an agreement related to OTIPRIO under which the Company is obligated to pay royalties of less than one percent on net product sales of OTIPRIO. The royalties are recorded as selling, general and administrative expense. The royalties are payable until the later of: (i) the expiration of the last to expire patent owned by the Company in such country covering OTIPRIO; or (ii) 10 years after the first commercial sale of OTIPRIO after receipt of regulatory approval for OTIPRIO in such country.

In October 2014, the Company entered into an exclusive license agreement with Ipsen that enables the Company to use clinical and nonclinical gacyclidine data generated by Ipsen to support worldwide development and regulatory filings for OTO-313. Under this license agreement, the Company is obligated to pay Ipsen low single-digit royalties on annual net sales of OTO-313 by the Company or its affiliates or sublicensees, up to a maximum cumulative royalty totaling $10.0 million.

6. Fair Value

The accounting guidance defines fair value, establishes a consistency framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance establishes a three-tier fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These tiers are based on the source of the inputs and are as follows:

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices in active markets that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

As of March 31, 2020 and December 31, 2019 the Company held no assets or liabilities measured at fair value on a nonrecurring basis and no liabilities measured at fair value on a recurring basis. The following fair value hierarchy table presents the Company’s assets measured at fair value on a recurring basis (in thousands):

 

 

Fair Value Measurement at Reporting Date Using

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

28,355

 

 

$

28,355

 

 

$

 

 

$

 

U.S. Treasury securities

 

17,568

 

 

 

17,568

 

 

 

 

 

 

 

 

$

45,923

 

 

$

45,923

 

 

$

 

 

$

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

22,121

 

 

$

22,121

 

 

$

 

 

$

 

U.S. Treasury securities

 

35,476

 

 

 

35,476

 

 

 

 

 

 

 

 

$

57,597

 

 

$

57,597

 

 

$

 

 

$

 

 

7. Leases

 

Operating Leases

Effective January 1, 2019, the Company adopted ASC 842, Leases (ASC 842), using the modified retrospective approach for leases existing as of the period of adoption. The Company utilized the available practical expedients, allowing it to, among other things, carry forward its historical assessment of whether existing agreements are or contain a lease and the classification of existing lease agreements. The right-of-use (ROU) assets associated with all the Company’s operating leases are recognized in the condensed balance sheets.

-11-


 

The Company has existing operating leases for certain office equipment and its facility with initial terms ranging from 48 months to 130 months. The facility lease has an option for the Company to extend the lease term for an additional five years; however, it is not reasonably certain the Company will exercise the option to renew when the lease term ends in 2027, and thus, the incremental term was excluded from the calculation of the lease liability. The Company has the right to terminate the lease at the end of the 94th month of the lease term if it is acquired by a third party and pays an early termination fee. The Company’s restricted cash consists of cash maintained in separate deposit accounts to secure a letter of credit issued by a bank to the landlord under the facility lease.

On March 31, 2019, the Company entered into a lease for certain equipment with an initial term of 24 months, which includes a purchase option at the end of the lease term based upon the then fair market value of the equipment. The lease payment includes customary principal and interest as well as costs related to the installation and setup of the equipment. The Company evaluated the lease in accordance with ASC 842 and recorded this lease as an operating lease in the condensed balance sheets.

 

Finance Leases

On March 31, 2019, the Company entered into a lease for certain computer equipment with an initial term of 24 months, which includes an option to purchase the equipment at the end of the lease term that is expected to be exercised. The lease payment includes customary principal and interest as well as costs related to the installation and setup of the equipment. The associated ROU asset is recognized within property and equipment, net in the condensed balance sheets and is being amortized over three years in accordance with the Company’s standard depreciation and amortization policies.

 

 

 

Three Months Ended March 31,

 

Lease expenses:

 

2020

 

 

2019

 

Operating lease expenses

 

$

784

 

 

$

784

 

Variable lease expenses

 

 

145

 

 

 

307

 

Total lease expenses

 

$

929

 

 

$

1,091

 

 

 

 

March 31, 2020

 

Other information:

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

29

 

Weighted-average remaining lease term:

 

 

 

 

Operating leases

 

7.5 years

 

Finance leases

 

1.0 years

 

Weighted-average remaining discount rate:

 

 

 

 

Operating leases

 

 

10.0

%

Finance leases

 

 

9.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease Maturities:

 

Operating Leases

 

 

Finance Leases

 

 

Total

 

Remaining in 2020

 

$

2,423

 

 

$

56

 

 

$

2,479

 

2021

 

 

3,247

 

 

 

18

 

 

 

3,265

 

2022

 

 

3,333

 

 

 

 

 

3,333

 

2023

 

 

3,433

 

 

 

 

 

3,433

 

2024

 

 

3,536

 

 

 

 

 

3,536

 

2025

 

 

3,642

 

 

 

 

 

3,642

 

Thereafter

 

 

6,642

 

 

 

 

 

6,642

 

Total minimum lease payments

 

 

26,256

 

 

 

74

 

 

 

26,330

 

Imputed interest

 

 

(8,067

)

 

 

(4

)

 

 

(8,071

)

Total

 

 

18,189

 

 

 

70

 

 

 

18,259

 

Less: leases, current

 

 

(3,238

)

 

 

(70

)

 

 

(3,308

)

Leases, net of current

 

$

14,951

 

 

$

-

 

 

$

14,951

 

 

8. Long-term Debt

On December 31, 2018 (the Closing Date), the Company entered into a Loan and Security Agreement (the Loan Agreement), among the Company, Oxford Finance LLC, as collateral agent, and the lenders party thereto from time to time.

-12-


 

The Loan Agreement provides for a $15.0 million secured term loan credit facility (the Term Loan). The proceeds of the Term Loan may be used for working capital and general corporate purposes. The Company has the right to prepay the Term Loan in whole or in part at any time, subject to a prepayment fee of 3.00% if prepaid on or prior to the first anniversary of the Closing Date, 2.00% if prepaid after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date, and 1.00% thereafter. Amounts prepaid or repaid under the Term Loan may not be reborrowed. The Term Loan was fully funded on the Closing Date and matures on December 1, 2023 (the Maturity Date). The Company paid a facility fee of 0.75% and customary closing fees on the Closing Date.

The Term Loan bears interest at a floating rate equal to the greater of 5.25% and the prime rate as reported in the Wall Street Journal from time to time, plus 3.75% (9.0% as of March 31, 2020, the minimum interest rate). Interest on the Term Loan is payable monthly in arrears. The Company is permitted to make interest-only payments on the Term Loan for the twenty-four (24) months following the Closing Date followed by consecutive equal monthly payments of principal and interest in arrears through the Maturity Date. The interest-only period can be extended by an additional twelve (12) months subject to the achievement of a certain clinical trial milestone. The outstanding principal amount of the Term Loan, together with accrued and unpaid interest, is due on December 1, 2023.

Upon repayment or acceleration of the Term Loan, a final payment fee equal to 4.00% of the aggregate original principal amount of the Term Loan is payable (the Final Payment). The Final Payment of $0.6 million, as well as the initial facility fee and all other direct fees and costs associated with the Loan Agreement, was recognized as a debt discount. The debt discount will be amortized to interest expense over the term of the Loan Agreement using the effective interest method.

The Company’s obligations under the Loan Agreement are secured by substantially all its assets, excluding intellectual property and subject to certain other exceptions and limitations.

The Loan Agreement contains customary affirmative covenants, including covenants regarding compliance with applicable laws and regulations, reporting requirements, payment of taxes and other obligations, and maintenance of insurance. Further, subject to certain exceptions, the Loan Agreement contains customary negative covenants limiting the ability of the Company to, among other things, sell assets, allow a change of control to occur (if the Term Loan is not repaid), make acquisitions, incur debt, grant liens, make investments, pay dividends or repurchase stock. The Company has maintained compliance with all such covenants to date. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued and unpaid interest under the Loan Agreement immediately due and payable, increase the applicable rate of interest by 5.00%, and exercise the other rights and remedies provided for under the Loan Agreement and related loan documents. The events of default under the Loan Agreement include payment defaults, breaches of covenants or representations and warranties, material adverse changes, certain bankruptcy events, cross defaults with certain other indebtedness, and judgment defaults.

Interest expense, including amortization of the debt discount, related to the Loan Agreement totaled $0.4 million for the three months ended March 31, 2020 and 2019. Accrued interest, included in accounts payable, was $0.1 million as of March 31, 2020 and December 31, 2019. The outstanding Term Loan balance was $15.0 million as of March 31, 2020 and December 31, 2019, inclusive of accretion of the final payment and net unamortized debt discount.

9. Stockholders’ Equity

Common Stock Reserved for Future Issuance

Shares of common stock reserved for future issuance are as follows:

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Common stock options issued and outstanding

 

10,052,847

 

 

 

7,495,129

 

Common stock options available for future grant

 

2,531,206

 

 

 

3,548,214

 

Common stock reserved for issuance under ESPP

 

2,439,428

 

 

 

1,977,215

 

Total common stock reserved for future issuance

 

15,023,481

 

 

 

13,020,558

 

 

Net Loss Per Share

As of March 31, 2020 and 2019, potentially dilutive securities excluded from the calculation of diluted net loss per share consist of outstanding options to purchase 10,052,847 and 7,346,935 shares of the Company’s common stock, respectively.

-13-


 

10. Stock-Based Compensation

The 2014 Equity Incentive Plan (the 2014 Plan) permits the grant of incentive stock options to the Company’s employees and the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants. Options granted under the 2014 Plan are generally scheduled to vest over four years, subject to continued service, and subject to certain acceleration of vesting provisions, expire no later than 10 years from the date of grant. Options granted under the 2014 Plan must have a per share exercise price equal to at least 100% of the fair market value of a shares of the common stock as of the date of grant. The Company accounts for stock-based compensation expense related to stock options and employee stock purchase plan (ESPP) rights by estimating the fair value on the date of grant using the Black-Scholes-Merton option pricing model. Forfeitures are recognized as incurred. For awards subject to time-based vesting conditions, stock-based compensation expense is recognized using the straight-line method.

The following table summarizes stock option activity for the three months ended March 31, 2020 (share amounts in thousands):

 

 

 

Options

 

 

Weighted-

Average

Exercise Price

 

Outstanding as of December 31, 2019

 

 

7,495

 

 

$

4.43

 

Granted

 

 

2,850

 

 

$

3.51

 

Exercised

 

 

 

 

$

 

Forfeited

 

 

(292

)

 

$

3.50

 

Outstanding as of March 31, 2020

 

 

10,053

 

 

$

4.19

 

 

Total non-cash stock-based compensation expense recognized in the accompanying condensed statements of operations is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cost of product sales

 

$

5

 

 

$

3

 

Research and development

 

 

568

 

 

 

659

 

Selling, general and administrative

 

 

841

 

 

 

834

 

Total stock-based compensation

 

$

1,414

 

 

$

1,496

 

 

11. Collaboration Agreements

AGTC collaboration

In October 2019, the Company announced a strategic collaboration with AGTC to co-develop and co-commercialize an adeno-associated virus (AAV)-based gene therapy to restore hearing in patients with sensorineural hearing loss caused by a mutation in the gap junction beta 2 gene (GJB2). Under the collaboration agreement, the Company and AGTC will equally share the program costs and any revenue or other proceeds related to the program. For the three months ended March 31, 2020, the Company recognized research and development expenses related to the AGTC collaboration of $0.1 million.

Co-Promotion Agreements

The Company entered into a co-promotion agreement with Mission Pharmacal Company (Mission) in August 2018 and with Glenmark Therapeutics Inc., USA (Glenmark) in April 2019 (each, a Co-Promotion Agreement) to support the promotion of OTIPRIO for the treatment of AOE in physician offices. In July 2019, Glenmark informed the Company of its early discontinuation of OTIPRIO promotional support activities due to the delay in FDA approval of its Ryaltris™ allergy product, and the impact of such delay on its business operations. In September 2019, the Company reached a settlement with Glenmark regarding the financial and contractual terms impacted by this decision that included committed payments by Glenmark totaling $1.0 million. In August 2019, Mission informed the Company of its non-renewal of the co-promotion agreement.

-14-


 

The Co-Promotion Agreements are within the scope of ASC Topic 808, Collaborative Arrangements (ASC 808), as the parties were active participants and exposed to the risks and rewards of the collaborative activity. Mission and Glenmark (each, a Partner) made non-refundable, non-creditable payments to the Company as partial consideration of the OTIPRIO product support activities provided by the Company and as reimbursement for certain expenses incurred by the Company to obtain and maintain FDA approval for use of OTIPRIO in AOE. In addition, each Partner reimbursed the Company for a proportion of product support expenses. All such payments are recognized proportionately with the performance of the underlying services and accounted for as reductions to selling, general and administrative expense. Each Partner agreed to bear the costs incurred for its promotion of OTIPRIO. In exchange for its promotional services, each Partner was entitled to receive a share of gross profits totaling more than 50% from the sale of OTIPRIO to each Partner’s accounts. The Company’s payments to each Partner for its portion of the gross profit has been recognized as selling, general and administrative expense in the Company’s condensed statements of operations. The Company was the principal in the product sale of OTIPRIO and recognized all revenue and related cost of product sales. The Company retained and continues to retain all commercial rights for other customer segments for AOE and for use of OTIPRIO in other indications.

The Company does not consider performing product support services for its Partners to be a part of its ongoing major or central operations and, thus, the associated payments are not considered revenue, nor do they fall under ASC 606. The Company considers these activities to be collaborative activities under the scope of ASC 808, and recognizes the shared profits and losses in the periods in which they occurred. For the three months ended March 31, 2020 and 2019, the Company recognized reductions in selling, general and administrative expenses related to the Co-Promotion Agreements of $0.0 million and $0.4 million.

12. Subsequent Events

On April 10, 2020 the Company obtained an unsecured $1.1 million loan through JPMorgan Chase Bank, N.A. under the Paycheck Protection Program (the PPP Loan) pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The PPP Loan bore an interest rate of 0.98% and notionally matured two years from the date of issuance.  Following the issuance of new, retroactive guidance on the program from the Small Business Administration on April 23, 2020, the Company repaid the PPP Loan and accrued interest in full.

-15-


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. These statements generally relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q.

Forward-looking statements include, but are not limited to, statements about:

 

our expectations regarding our clinical development of OTIVIDEX, including availability of top-line results from the ongoing Phase 3 trial and expectations that one additional successful pivotal trial is sufficient to support the United States registration of OTIVIDEX in Ménière’s disease;

 

our expectations regarding the clinical development of OTO-313, including availability of top-line results from the ongoing Phase 1/2 clinical trial in tinnitus patients;

 

our expectations regarding the clinical development of OTO-413, including availability of top-line results from the ongoing Phase 1/2 clinical trial in hearing loss patients;

 

our expectations regarding the potential impacts on our business, preclinical programs and clinical trials due to the novel coronavirus (COVID-19) pandemic;

 

the timing or likelihood of regulatory filings and approvals;

 

our expectations regarding the future development of other product candidates, including but not limited to our development plans for our OTO-510 and OTO-6XX programs;

 

our expectations regarding our strategic collaboration with AGTC to develop and commercialize a gene therapy for congenital hearing loss;

 

our expectations regarding our OTIPRIO co-promotion partnerships;

 

the potential for commercialization of our product candidates, if approved;

 

our expectations and statements regarding the benefits, pricing, market size, opportunity and growth potential for OTIVIDEX, OTO-313, OTO-413 and our other product candidates, if approved for commercial use;

 

our expectations and statements regarding the adoption and use of OTIPRIO and OTIVIDEX, OTO-313 and OTO-413, if approved;

 

our expectations regarding potential coverage and reimbursement relating to OTIPRIO, and OTIVIDEX, OTO-313 and OTO-413, if approved, or any other approved product candidates;

 

our plans regarding the use of contract manufacturers for the production of our product candidates for clinical trials and, if approved, commercial use;

 

our plans and ability to effectively establish and manage our own sales and marketing capabilities, or seek and establish collaborative partners, to commercialize our products;

 

our ability to advance product candidates into, and successfully complete, clinical trials;

 

the implementation of our business model, strategic plans for our business, products and technology;

 

the initiation, timing, progress and results of future nonclinical studies and clinical trials;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology;

 

estimates of our expenses, future revenue, capital requirements and our needs for additional financing;

-16-


 

 

our expectations regarding the benefits of the loan provided by Oxford Finance LLC and the potential extension of the interest only period;

 

our financial performance;

 

accounting principles, policies and estimates; and

 

developments and projections relating to our competitors and our industry.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including but not limited to: delays and disruption resulting from the COVID-19 pandemic and governmental responses to the pandemic, including current and future impacts to our operations, our limited operating history and our expectation that we will incur significant losses for the foreseeable future; our ability to obtain additional financing; our dependence on the clinical, regulatory and commercial success of OTIVIDEX and advancement of additional product candidates, such as OTO-313 and OTO-413, through clinical development to regulatory approval and commercialization, the uncertainties inherent in the clinical drug development process, including, without limitation, our ability to adequately demonstrate the safety and efficacy of our product candidates, the nonclinical and clinical results for our product candidates, which may not support further development, and challenges related to patient enrollment in clinical trials; our ability to obtain regulatory approval for our product candidates; side effects or adverse events associated with our product candidates; competition in the biopharmaceutical industry; our dependence on third parties to conduct nonclinical studies and clinical trials; the timing and outcome of hospital pharmacy and therapeutics reviews and other facility reviews; the impact of coverage and reimbursement decisions by third-party payors on the pricing and market acceptance of OTIPRIO; our dependence on third parties for the manufacture of OTIPRIO and our product candidates; our dependence on a small number of suppliers for raw materials; our ability to protect our intellectual property related to OTIPRIO and our product candidates in the United States and throughout the world; expectations regarding potential market size, opportunity and growth; our ability to manage operating expenses; implementation of our business model and strategic plans for our business, products and technology; the risk of the occurrence of any event, change or other circumstance that could give rise to the termination of promotional or collaboration agreements; the risks of the occurrence of any event, change or other circumstances that could impact our ability to repay or comply with the terms of the loan provided by Oxford Finance LLC; and other risks. These forward-looking statements reflect our beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties. We discuss many of these risks in greater detail in the section titled “Risk Factors” included in Part II, Item 1A and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise.

Otonomy, the Otonomy logo, OTIPRIO, OTIVIDEX and other trademarks or service marks of Otonomy appearing in this report are the property of Otonomy. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We have generally omitted the ®, ™ and other designations, as applicable, in this report.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

Overview

We are a biopharmaceutical company dedicated to the development of innovative therapeutics for neurotology. We pioneered the application of drug delivery technology to the ear in order to develop products that achieve sustained drug exposure from a single local administration. This approach is covered by a broad patent estate and has been utilized to develop a pipeline of product candidates including OTIVIDEX for Ménière’s disease, OTO-313 for tinnitus, and OTO-413 for hearing loss that are in ongoing clinical trials. We are currently assessing the impact of the COVID-19 pandemic on these clinical trials including the impact on new patient enrollment for the OTIVIDEX and OTO-413 trials. We have suspended our guidance regarding timing for availability of trial results. The COVID-19 pandemic continues to evolve rapidly, and we will continue to monitor the situation closely, including its potential effect on our clinical development plans and timelines and other operations.

-17-


 

OTIVIDEX is a steroid in development for the treatment of Ménière’s disease. Two Phase 3 trials in Ménière’s disease patients were completed in the second half of 2017. The AVERTS-2 trial, conducted in Europe, achieved its primary endpoint (p value = 0.029), while the AVERTS-1 trial, conducted in the United States, did not (p value = 0.62). Based on a Type C meeting with the FDA, we believe that one additional successful pivotal trial is sufficient to support the United States registration of OTIVIDEX in Ménière’s disease, and we are currently enrolling such trial.

OTO-313 is a sustained-exposure formulation of gacyclidine, a potent and selective NMDA receptor antagonist, in development for the treatment of tinnitus. We have successfully completed the initial safety cohort of a Phase 1/2 clinical trial for OTO-313 and recently completed enrollment of tinnitus patients in the exploratory efficacy study cohort.

OTO-413 is a sustained exposure formulation of BDNF in development for the repair of cochlear synaptopathy, an underlying pathology in age-related and noise-induced hearing loss that manifests as speech-in-noise hearing difficulty. In April 2020, we announced that we successfully completed several dose cohorts of an ascending single dose Phase 1/2 safety and exploratory efficacy trial in patients with speech-in-noise hearing difficulty and temporarily paused new patient enrollment related to COVID-19. We have resumed new patient enrollment in this trial.

We also have preclinical stage programs addressing prevention of cisplatin-induced hearing loss (OTO-510) and hair cell regeneration for severe hearing loss (OTO-6XX). In October 2019, we entered into a strategic collaboration with AGTC to co-develop and co-commercialize an adeno-associated virus (AAV)-based gene therapy to restore hearing in patients with congenital hearing loss caused by a mutation in the gap junction beta 2 gene (GJB2).

In addition, we developed, received FDA approval for and commercially launched OTIPRIO (ciprofloxacin otic suspension) for use during tympanostomy tube placement (TTP) surgery in pediatric patients. OTIPRIO was also approved by the FDA for the treatment of acute otitis externa (AOE). We entered into a co-promotion agreement with Mission in August 2018 and with Glenmark in April 2019 to support the promotion of OTIPRIO for the treatment of AOE in physician offices. In July 2019, Glenmark informed us of its early discontinuation of OTIPRIO promotional support activities due to the delay in FDA approval of its Ryaltris allergy product, and the impact of such delay on its business operations. In September 2019, we reached a settlement with Glenmark regarding the financial and contractual terms impacted by this decision that included committed payments by Glenmark totaling $1.0 million. In August 2019, Mission informed us of its non-renewal of the co-promotion agreement.

We have a limited operating history. Since our inception in 2008, we have devoted substantially all our efforts to developing and commercializing OTIPRIO, developing our current product candidates, and providing general and administrative support for these operations. As of March 31, 2020, we had cash, cash equivalents and short-term investments of $48.6 million and a long-term debt balance of $15.0 million.

We have never been profitable, and as of March 31, 2020, we had an accumulated deficit of $471.7 million. Our net losses were $11.8 million and $12.0 million for the three months ended March 31, 2020 and 2019, respectively. Substantially all our net losses have resulted from research and development expenses related to our clinical trials and product development activities, commercialization expenses to launch OTIPRIO in the U.S. market, and other general and administrative expenses.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue to develop, seek regulatory approval, and, if approved, commercialize our product candidates. In the near term, we anticipate our expenses will continue to be substantial as we:

 

conduct clinical development of OTIVIDEX, OTO-313 and OTO-413;

 

conduct nonclinical development of OTO-510, OTO-6XX and the GJB2 gene therapy program;

 

contract to manufacture our product candidates;

 

evaluate opportunities for development of additional product candidates;

 

maintain and expand our intellectual property portfolio;

 

hire additional staff as necessary to execute our product development plan; and

 

operate as a public company.

We believe that our existing cash, cash equivalents and short-term investments that include proceeds from our long-term debt will be sufficient to fund our operations for a period of at least twelve months from the date of this report. We intend to seek additional funding through public or private equity or debt financings or other sources, such as potential collaboration arrangements. We may not be

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able to raise capital on terms acceptable to us, or at all. Our failure to raise capital could have a negative impact on our financial condition and our ability to pursue our business strategies.

In November 2008, we entered into an exclusive license agreement with the Regents of the University of California (UC). Under the license agreement, UC granted us an exclusive license under their rights to patents and applications that are co-developed and co-owned with us for the treatment of human otic diseases. Our financial obligations under the license agreement include development and regulatory milestone payments of up to $2.7 million per licensed product, of which $1.9 million has been paid for OTIPRIO, $0.8 million has been paid for OTIVIDEX, $0.1 million has been paid for OTO-413, and $0.1 million has been paid for OTO-311 (but such milestone payments are reduced by 75% for any orphan indication product), and a low single-digit royalty on net sales by us or our affiliates of licensed products. In addition, for each sublicense we grant we are obligated to pay UC a fixed percentage of all royalties as well as a sliding-scale percentage of non-royalty sublicense fees received by us under such sublicense, with such percentage depending on the licensed product’s stage of development when sublicensed to such third party. We have the right to offset a certain amount of third-party royalties, milestone fees or sublicense fees against the foregoing financial obligations, provided such third-party royalties or fees are paid by us in consideration for intellectual property rights necessary to commercialize a licensed product.

In April 2013, we entered into an exclusive license agreement with DURECT Corporation (Durect), as part of an asset transfer agreement between us and IncuMed LLC, an affiliate of the NeuroSystec Corporation. Under this license agreement, Durect granted us an exclusive, worldwide, royalty-bearing license under Durect’s rights to certain patents and applications covering our OTO-313 product candidate, as well as certain related know-how. Under this license agreement and the asset transfer agreement, we are obligated to make one-time milestone payments of up to $7.5 million for the first licensed product. Upon commercializing a licensed product, we are obligated to pay Durect tiered, low single-digit royalties on annual net sales by us or our affiliates or sublicensees of the licensed products, and we have the right to offset a certain amount of third-party license fees or royalties against such royalty payments to Durect. In addition, each sublicense we grant to a third party is subject to payment to Durect of a low double-digit percentage of all non-royalty payments we receive under such sublicense. Additionally, we are also obligated to pay the Institut National de la Santé et de la Recherche Médicale (INSERM), on behalf of Durect, for a low single-digit royalty payment on net sales by us or our affiliates or sublicensees upon commercialization of the licensed product. The foregoing royalty payment obligation to Durect would continue on a product-by-product and country-by-country basis until expiration or determination of invalidity of the last valid claim within the licensed patents that cover the licensed product, and the payment obligation to INSERM would continue so long as Durect’s license from INSERM remains in effect.

The COVID-19 pandemic may pose significant risks to our business; however, the ultimate impact of the pandemic is highly uncertain. We do not yet know the full extent of potential delays or impacts on our business, our preclinical programs and clinical trials, healthcare systems or the global economy as a whole. As such, it is uncertain as to the full magnitude that the COVID-19 pandemic will have on our financial condition, liquidity and future results of operations.

Financial Operations Overview

Revenue

In December 2015, OTIPRIO was approved by the FDA for the treatment of pediatric patients with bilateral otitis media with effusion undergoing TTP surgery. In March 2016, we began sales of OTIPRIO in the United States to our network of specialty distributors who fill orders received from hospitals and ambulatory surgery centers who are the primary end user customers of OTIPRIO for use during TTP surgery. We also entered into co-promotion partnerships to support the promotion of OTIPRIO for the treatment of AOE in physician offices. In July 2019, we were notified by Glenmark of its early discontinuation of OTIPRIO promotional support activities due to the delay in FDA approval of its Ryaltris allergy product, and the impact of such delay on its business operations. In August 2019, Mission informed us of its non-renewal of the co-promotion agreement.

We recognize revenue on sales of OTIPRIO upon delivery to our distributors. Product sales are recorded net of estimated chargebacks, government rebates and distributor fees.

Prior to March 2016 we had not generated revenue. We do not expect to generate any revenue from any of our product candidates unless and until we obtain regulatory approval and commercialize our products or enter into collaborative agreements with third parties.

Operating Expenses

Cost of product sales

Cost of product sales consists primarily of direct and indirect costs related to the manufacturing of OTIPRIO, including third-party manufacturing costs, allocation of overhead costs and royalty payments based on OTIPRIO sales.

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Research and development expenses

Our research and development expenses primarily consist of costs associated with the nonclinical and clinical development of our product candidates.

Our research and development expenses include:

 

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

 

external development expenses incurred under arrangements with third parties, such as fees paid to CROs in connection with nonclinical studies and clinical trials, costs of acquiring and evaluating clinical trial data such as investigator grants, patient screening fees, laboratory work and statistical compilation and analysis, and fees paid to consultants;

 

costs to acquire, develop and manufacture clinical trial materials, including fees paid to contract manufacturers;

 

payments related to licensed product candidates and technologies;

 

costs related to compliance with drug development regulatory requirements; and

 

facilities expenses which include allocated expenses for amortization of ROU assets, depreciation and other overhead expenses, and direct costs for laboratory and other supplies.

We expense our internal and third-party research and development expenses as incurred.

The following table summarizes our research and development expenses (in thousands) for our current product candidates:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Third-party development costs:

 

 

 

 

 

 

 

 

OTIVIDEX

 

$

1,606

 

 

$

1,937

 

OTO-313

 

 

608

 

 

 

558

 

OTO-413

 

 

716

 

 

 

1,772

 

Total third-party development costs

 

 

2,930

 

 

 

4,267

 

Other unallocated internal research and

   development costs

 

 

4,742

 

 

 

4,528

 

Total research and development costs

 

$

7,672

 

 

$

8,795

 

 

We expect our research and development expenses to continue to be substantial for the foreseeable future as we advance our product candidates through their respective development programs. The process of conducting nonclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving regulatory approval for our product candidates. The probability of success will be affected by numerous factors, including nonclinical data, clinical data, competition, manufacturing capability and commercial viability. We are responsible for all of the research and development costs for our programs.

Completion dates and completion costs can vary significantly for each of our clinical development programs and are difficult to predict. We therefore cannot estimate with any degree of certainty the costs we will incur in connection with development of our product candidates. We anticipate that we will make determinations as to which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an ongoing basis in response to the results of ongoing and future clinical trials, regulatory developments, and our ongoing assessments as to each current or future product candidate’s commercial potential. We may need to raise substantial additional capital in the future to complete the development of and, if approved, commercialize, our product candidates. We may enter into collaborative agreements in the future in order to conduct clinical trials and gain regulatory approval of our product candidates, particularly in markets outside of the United States. We cannot forecast which programs or product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and overall capital requirements.

The costs of clinical trials may vary significantly over the life of a program owing to the following:

 

per patient trial costs;

 

the number of sites included in the trials;

 

the countries in which the trials are conducted;

 

changes in regulatory requirements for clinical trials;

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the length of time required to enroll eligible patients;

 

the number of patients that participate in the trials;

 

the number of doses that patients receive;

 

the drop-out or discontinuation rates of patients;

 

potential additional safety monitoring or other studies requested by regulatory agencies;

 

the duration of patient follow-up;

 

the phase of development of the product candidate;

 

the efficacy and safety profile of the product candidate; and

 

the impacts of COVID-19.

Selling, general and administrative expenses

Our selling, general and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, as well as other related costs for our employees and consultants in executive, administrative, finance and human resource functions. Other selling, general and administrative expenses include facility-related costs not otherwise included in research and development, costs associated with prosecuting and maintaining our patent portfolio and corporate legal expenses, costs required for public company activities and infrastructure necessary for the general conduct of our business, and OTIPRIO product support expenses and profit-sharing fees payable to our co-promotion partners, which are reduced by payments received from them.

We expect our selling, general and administrative expenses to be substantial as we support development of our product candidates, and as we incur ongoing expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with stock exchange listing and SEC requirements, directors’ and officers’ liability insurance premiums, and investor relations-related expenses.

Other Income (Expense)

Other income (expense) primarily consists of interest income earned on cash and cash equivalents and short-term investments and interest expense related to our long-term debt and finance leases.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements. Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and assumptions, including those related to net product sales, accrued expenses and stock-based compensation. We base our estimates on our historical experience, known trends and events and various other factors that we believe 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 may differ from these estimates under different assumptions or conditions.

We believe the estimates, assumptions and judgments involved in the accounting policies described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 27, 2020, have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

Clinical Trial Expense Accruals

We estimate expenses resulting from our obligations under contracts with vendors, CROs and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided.

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We record clinical trial expenses in the period in which services are performed and efforts are expended. We accrue for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. We estimate accruals through financial models taking into account discussion with applicable personnel and outside service providers as to the progress of trials. During the course of a clinical trial, we may adjust our clinical accruals if actual results differ from our estimates. We estimate accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. Our clinical trial accruals are dependent upon accurate reporting by CROs and other third-party vendors. Although we do not expect our estimates to differ materially from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low for any particular period. For the three months ended March 31, 2020 and 2019, there were no material adjustments to our prior period estimates of accrued expenses for clinical trials.

Stock-based Compensation

We recognize non-cash expense for the fair value of all stock options and other share-based awards. We use the Black-Scholes-Merton option valuation model to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. For options granted to employees and directors, we recognize the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table sets forth the significant components of our results of operations for the periods presented (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2020

 

 

2019