otic-10q_20190930.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 September 30, 2019

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 November 1, 2019 was 30,750,042.

 


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

7

 

 

Notes to Condensed Financial Statements

8

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

 

 

Item 4. Controls and Procedures

31

 

 

PART II. OTHER INFORMATION

32

 

 

Item 1. Legal Proceedings

32

 

 

Item 1A. Risk Factors

32

 

 

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

61

 

 

Item 3. Default Upon Senior Securities

61

 

 

Item 4. Mine Safety Disclosures

61

 

 

Item 5. Other Information

61

 

 

Item 6. Exhibits

62

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Otonomy, Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

 

 

September 30,

 

 

December 31,

 

 

2019

 

 

2018

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,257

 

 

$

33,633

 

Short-term investments

 

51,897

 

 

 

63,651

 

Accounts receivable, net

 

33

 

 

 

108

 

Prepaid and other current assets

 

3,683

 

 

 

2,677

 

Total current assets

 

71,870

 

 

 

100,069

 

Restricted cash

 

700

 

 

 

696

 

Property and equipment, net

 

3,646

 

 

 

3,996

 

Right-of-use assets

 

15,792

 

 

 

Other long-term assets

 

 

 

231

 

Total assets

$

92,008

 

 

$

104,992

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

959

 

 

$

1,029

 

Accrued expenses

 

4,505

 

 

 

3,788

 

Accrued compensation

 

2,044

 

 

 

2,635

 

Leases, current

 

3,290

 

 

 

Deferred rent, current

 

 

 

38

 

Total current liabilities

 

10,798

 

 

 

7,490

 

Long-term debt, net

 

14,917

 

 

 

14,764

 

Leases, net of current

 

15,673

 

 

 

Deferred rent, net of current

 

 

 

3,001

 

Total liabilities

 

41,388

 

 

 

25,255

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2019

   and December 31, 2018; no shares issued or outstanding at September 30, 2019 and

   December 31, 2018

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at September 30, 2019

   and December 31, 2018; 30,750,042 and 30,685,412 shares issued and outstanding

   at September 30, 2019 and December 31, 2018, respectively

 

31

 

 

 

31

 

Additional paid-in capital

 

499,512

 

 

 

494,947

 

Accumulated other comprehensive income (loss)

 

45

 

 

 

(23

)

Accumulated deficit

 

(448,968

)

 

 

(415,218

)

Total stockholders’ equity

 

50,620

 

 

 

79,737

 

Total liabilities and stockholders’ equity

$

92,008

 

 

$

104,992

 

 

See accompanying notes.

 

-2-


 

Otonomy, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Product sales, net

 

$

125

 

 

$

113

 

 

$

507

 

 

$

537

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

220

 

 

 

162

 

 

 

636

 

 

 

675

 

Research and development

 

 

8,057

 

 

 

8,300

 

 

 

25,771

 

 

 

22,175

 

Selling, general and administrative

 

 

1,903

 

 

 

4,652

 

 

 

8,065

 

 

 

16,428

 

Total costs and operating expenses

 

 

10,180

 

 

 

13,114

 

 

 

34,472

 

 

 

39,278

 

Loss from operations

 

 

(10,055

)

 

 

(13,001

)

 

 

(33,965

)

 

 

(38,741

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

419

 

 

 

455

 

 

 

1,409

 

 

 

1,218

 

Interest expense

 

 

(403

)

 

 

 

 

 

(1,194

)

 

 

 

Net loss

 

$

(10,039

)

 

$

(12,546

)

 

$

(33,750

)

 

$

(37,523

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.33

)

 

$

(0.41

)

 

$

(1.10

)

 

$

(1.23

)

Weighted-average shares used to compute net loss per

   share, basic and diluted

 

 

30,748,995

 

 

 

30,630,125

 

 

 

30,712,839

 

 

 

30,597,874

 

 

See accompanying notes.

-3-


 

Otonomy, Inc.

Condensed Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Net loss

 

$

(10,039

)

 

$

(12,546

)

 

$

(33,750

)

 

$

(37,523

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available for sale securities

 

 

(28

)

 

 

(2

)

 

 

68

 

 

 

52

 

Comprehensive loss

 

$

(10,067

)

 

$

(12,548

)

 

$

(33,682

)

 

$

(37,471

)

 

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 (Loss)

 

 

Deficit

 

 

Equity

 

Balance at June 30, 2019

   (unaudited)

 

 

30,748,409

 

 

$

31

 

 

$

497,819

 

 

$

73

 

 

$

(438,929

)

 

$

58,994

 

Issuance of common stock upon

   exercise of stock options (unaudited)

 

 

1,633

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

1,691

 

 

 

 

 

 

 

 

 

1,691

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,039

)

 

 

(10,039

)

Unrealized gain (loss) on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(28

)

 

 

 

 

 

(28

)

Balance at September 30, 2019

   (unaudited)

 

 

30,750,042

 

 

$

31

 

 

$

499,512

 

 

$

45

 

 

$

(448,968

)

 

$

50,620

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at June 30, 2018

   (unaudited)

 

 

30,630,125

 

 

$

31

 

 

$

489,578

 

 

$

(46

)

 

$

(389,827

)

 

$

99,736

 

Issuance of common stock

   upon exercise of stock

   options (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

2,810

 

 

 

 

 

 

 

 

 

2,810

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,546

)

 

 

(12,546

)

Unrealized gain (loss) on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Balance at September 30, 2018

   (unaudited)

 

 

30,630,125

 

 

$

31

 

 

$

492,388

 

 

$

(48

)

 

$

(402,373

)

 

$

89,998

 

 

See accompanying notes.

-5-


 

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 (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

30,685,412

 

 

$

31

 

 

$

494,947

 

 

$

(23

)

 

$

(415,218

)

 

$

79,737

 

Issuance of common stock upon

   exercise of stock options (unaudited)

 

 

1,633

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Issuance of common stock

   under employee stock

   purchase plan (unaudited)

 

 

62,997

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

121

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

4,442

 

 

 

 

 

 

 

 

 

4,442

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,750

)

 

 

(33,750

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

68

 

 

 

 

 

 

68

 

Balance at September 30, 2019

   (unaudited)

 

 

30,750,042

 

 

$

31

 

 

$

499,512

 

 

$

45

 

 

$

(448,968

)

 

$

50,620

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

 

30,558,726

 

 

$

31

 

 

$

482,198

 

 

$

(100

)

 

$

(364,850

)

 

$

117,279

 

Issuance of common stock

   upon exercise of stock

   options (unaudited)

 

 

18,800

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

32

 

Issuance of common stock

   under employee stock

   purchase plan (unaudited)

 

 

52,599

 

 

 

 

 

 

197

 

 

 

 

 

 

 

 

 

197

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

9,961

 

 

 

 

 

 

 

 

 

9,961

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,523

)

 

 

(37,523

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

52

 

 

 

 

 

 

52

 

Balance at September 30, 2018

   (unaudited)

 

 

30,630,125

 

 

$

31

 

 

$

492,388

 

 

$

(48

)

 

$

(402,373

)

 

$

89,998

 

 

See accompanying notes.

-6-


 

Otonomy, Inc.

Condensed Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(33,750

)

 

$

(37,523

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

854

 

 

 

892

 

Stock-based compensation

 

 

4,442

 

 

 

9,961

 

Accretion of discounts on short-term investments

 

 

(646

)

 

 

(328

)

Amortization of debt discount

 

 

139

 

 

 

 

Deferred rent

 

 

 

 

 

80

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

75

 

 

 

62

 

Prepaid and other assets

 

 

(775

)

 

 

(228

)

Accounts payable

 

 

(90

)

 

 

321

 

Accrued expenses

 

 

698

 

 

 

(322

)

Accrued compensation

 

 

(591

)

 

 

(966

)

Operating leases

 

 

30

 

 

 

 

Net cash used in operating activities

 

 

(29,614

)

 

 

(28,051

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(68,032

)

 

 

(80,502

)

Maturities of short-term investments

 

 

80,500

 

 

 

111,250

 

Purchases of property and equipment

 

 

(297

)

 

 

(463

)

Net cash provided by investing activities

 

 

12,171

 

 

 

30,285

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2

 

 

 

32

 

Proceeds from issuance of common stock

 

 

121

 

 

 

197

 

Payments of debt issuance costs

 

 

(52

)

 

 

 

Net cash provided by financing activities

 

 

71

 

 

 

229

 

Net change in cash, cash equivalents and restricted cash

 

 

(17,372

)

 

 

2,463

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

34,329

 

 

 

19,614

 

Cash, cash equivalents and restricted cash at end of period

 

$

16,957

 

 

$

22,077

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

16,257

 

 

$

21,382

 

Restricted cash at end of period

 

 

700

 

 

 

695

 

Cash, cash equivalents and restricted cash at end of period

 

$

16,957

 

 

$

22,077

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,049

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

112

 

 

$

19

 

 

See accompanying notes.

-7-


 

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 is currently enrolling 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 currently 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 U.S. Food and Drug Administration (FDA) approval 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).

Basis of Presentation

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 September 30, 2019, the Company had cash, cash equivalents and short-term investments of $68.2 million and an accumulated deficit of $449.0 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. When additional financing is required, the Company anticipates that it will seek additional funding through future debt and/or equity financings or other sources, such as potential collaboration agreements. 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.

Unaudited Interim Financial Information

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, 2018 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 4, 2019. 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.

 

 

-8-


 

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.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institution in which those deposits are held. Additionally, the Company established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less at the date of purchase. The carrying amounts approximate fair value due to the short maturities of these instruments. Cash and cash equivalents include cash in readily available checking, savings and money market accounts.

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 a lease agreement for the Company’s corporate headquarters.

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.

-9-


 

Accounts Receivable, net

Accounts receivable are recorded net of customer allowances for chargebacks, distributor fees and any allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. To date, the Company has determined that an allowance for doubtful accounts is not required.

Property and Equipment

Property and equipment generally consist of manufacturing equipment, office furniture and equipment, computers, and scientific equipment and are 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. Repairs and maintenance costs are charged to expense as incurred.

Impairment of Long-Lived Assets

The Company assesses the value of its long-lived assets, which consist of property and equipment, for impairment on an annual basis and whenever events or changes in circumstances and the undiscounted cash flows generated by those assets indicate that the carrying amount of such assets may not be recoverable. While the Company’s current and historical operating losses and negative cash flows are indicators of impairment, the Company believes that future cash flows to be received support the carrying value of its long-lived assets. The Company had no impairments or disposals of long-lived assets during the nine months ended September 30, 2019.

Right-of-Use Assets and Lease Liabilities

The Company has operating leases for its facility and certain equipment and finance leases for certain computer equipment. Effective January 1, 2019, the Company determines if an arrangement is or contains a lease at the commencement date. Operating leases are included in Right-of-use (ROU) assets, Leases, current, and Leases, net of current on the condensed balance sheets. Finance leases are included in Property and equipment, Leases, current, and Leases, net of current on the condensed balance sheets. The Company elected not to recognize short-term leases (one year or less) on the balance sheet.

ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at the commencement date. When the implicit rate of the lease is not provided or cannot be determined, the Company uses a collateralized incremental borrowing rate based on the information available at the commencement date, including lease term, in determining the present value of future payments. The Company considers payments for common area maintenance, real estate taxes and management fees to be variable non-lease components, which are expensed as incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Clinical Trial Expense Accruals

As part of the process of preparing the Company’s financial statements, the Company is required to estimate expenses resulting from the Company’s 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 are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by recording those expenses in the period in which services are performed and efforts are expended. The Company accounts 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 determines accrual estimates through financial models taking into account discussion with applicable personnel and outside service providers as to the progress or state of its trials. During the course of a clinical trial, the Company adjusts its clinical expense if actual results differ from its estimates.

-10-


 

Revenue Recognition

To recognize revenue the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract with a customer under Accounting Standards Codification (ASC) 606 and when it is probable the Company will collect the consideration exchanged for the goods or services transferred to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and then it assesses whether each promised good or service is distinct. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.

OTIPRIO is sold to a limited number of specialty wholesale distributors. The Company recognizes revenue when its customers obtain control of OTIPRIO, typically upon delivery by the Company to these distributors. The Company has determined the delivery of OTIPRIO to its customers constitutes a single performance obligation and no other performance obligations are present. The Company’s customer contracts have standard payment terms. The Company does not offer prompt pay discounts or financing on sales and has not identified any credit risk issues.

Hospitals, ambulatory surgery centers and physician offices order OTIPRIO from the Company’s distributors and are the end users of OTIPRIO. The Company permits product returns from the distributors only if the product is damaged or is shipped or ordered in error. Product returns based on expiry are not permitted. To date, product returns have been immaterial.

Sales commissions and other incremental costs of obtaining customer contracts are expensed as incurred as the amortization periods would be less than one year or the amount is immaterial.

Transaction Price and Reserves for Variable Consideration

Revenue from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, government chargebacks, discounts and rebates and other fee for service amounts that are detailed within customer contracts relating to the sale of OTIPRIO. These reserves, as detailed below, are based on the amounts earned or accrued on our sales. Variable consideration is estimated using the most likely method, which is the single most likely outcome under the Company’s contracts and takes into consideration contractual fees, historical chargeback activity and historical Medicaid rebates. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which the Company is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analyses also contemplate application of the constraint in accordance with the guidance, under which the Company determined a material reversal of revenue would not occur in a future period. Reserves are established for these discounts and allowances upon delivery of OTIPRIO by the distributor and are classified as: (i) an allowance against accounts receivable if the amount is payable to the distributor or (ii) an accrued liability if the amount is payable to a party other than the distributor. Allowances against accounts receivable relate to chargebacks and distributor fees and accruals relate primarily to government rebates. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from original estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Trade Discounts and Allowances. The Company’s customers are specialty wholesale distributors with whom the Company has contracted to pay a fee based on a percentage of wholesale acquisition cost for sales order management, data, and distribution services. The Company determined such services received to date are not distinct from the sale of products to customers and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations. This fee for service is recorded as an allowance against accounts receivable at the time of sale based on the contracted percentage.

Chargebacks. The Company estimates allowances against accounts receivable for chargebacks related to agreements with group purchasing organizations and federal contracts. Under these agreements, the Company credits distributors a chargeback amount which represents the difference between the wholesale acquisition cost and the discounted price at which eligible purchasers purchased from the distributors. At the time of sale, estimated chargebacks are recorded based on historical chargeback activity, the projected payer mix, patient population industry data and the identification of entities purchasing OTIPRIO that are eligible for discounted pricing.

-11-


 

Government Rebates. The Company estimates a rebate liability in connection with a Medicaid Drug Rebate Agreement with the Centers for Medicare & Medicaid Services, which provides a rebate to participating states based on covered purchases of OTIPRIO. At the time of sale, estimated Medicaid rebates are recorded based on historical government rebate activity, the projected payer mix and Medicaid patient population industry data.

Concentration of Major Customers

The Company sells OTIPRIO to specialty wholesale distributor customers. The following table summarizes the Company’s sales to its largest customers for each of the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

First largest

 

 

40

%

 

 

41

%

 

 

37

%

 

 

45

%

Second largest

 

 

31

%

 

 

33

%

 

 

33

%

 

 

31

%

Third largest

 

 

21

%

 

 

24

%

 

 

24

%

 

 

21

%

 

Collaborative Arrangements  

The Company has entered into co-promotion agreements that fall under the scope of ASC Topic 808, Collaborative Arrangements (ASC 808). The terms of these agreements include (i) annual non-refundable non-creditable payments to the Company and reimbursement to the Company for a proportion of product support expenses as agreed upon by both parties and (ii) payments by the Company for profit sharing arising from our partners’ promotional activities. Payments to the Company are recognized as a reduction of our selling, general and administrative expenses in the statements of operations. Profit-sharing payments by the Company to our partners are recognized as selling, general and administrative expenses.

Research and Development

Research and development expenses include the costs associated with the Company’s research and development activities, including salaries, benefits, stock-based compensation expense and occupancy costs. Also included in research and development expenses are third-party costs incurred in conjunction with contract manufacturing for the Company’s research and development programs and clinical trials, including the cost of clinical trial drug supply, costs incurred by CROs and regulatory expenses. Research and development costs are expensed as incurred.

Selling, General and Administrative

Selling, general and administrative expenses include the costs associated with the Company’s executive, administrative, finance and human resource functions including salaries, benefits, stock-based compensation expense and occupancy costs. Other selling, general and administrative expenses include costs associated with prosecuting and maintaining the Company’s patent portfolio, corporate legal expenses, costs required for public company activities and infrastructure necessary for the general conduct of the Company’s business. The Company’s selling, general and administrative expenses also include OTIPRIO product support expenses, and profit-sharing fees payable to the Company’s partners, which are reduced by payments received from our partners under the Company’s co-promotion agreements.

Stock-Based Compensation

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.  For performance-based awards to employees, (i) the fair value of the award is determined on the grant date, (ii) we assess the probability of the individual performance milestones under the award being achieved and (iii) the fair value of the shares subject to the milestone is expensed over the implicit service period commencing once management believes the performance criteria is probable of being met.

-12-


 

Income Taxes

The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position.

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and/or circumstances from non-owner sources.

Net Loss Per Share

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securities are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

As of September 30, 2019 and 2018, potentially dilutive securities excluded from the calculation of diluted net loss per share consist of outstanding options to purchase 7,641,035 and 4,951,714 shares of the Company’s common stock, respectively.

 

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. ASU 2016-13 introduces the current expected credit loss (CECL) 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. At each reporting period, the Company will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred on outstanding trade receivables. ASU 2016-13 is effective for the Company beginning January 1, 2020. 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, 2019, as required, the Company adopted ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). ASU 2018-02 provides the option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform (or portion thereof) is recorded. The adoption of ASU No. 2018-02 did not have a material impact on the Company’s financial position, results of operations or cash flows due to the presence of a full valuation allowance.

Effective January 1, 2019, as required, the Company adopted ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). The amendments in ASU 2018-07 expand the scope of the standard to include share-based payment transactions for acquiring goods and services from nonemployees. The adoption of ASU 2018-07 did not have a material impact on its financial statements or disclosures.

-13-


 

Effective January 1, 2019, as required by ASU No. 2016-02, Lease (ASU 2016-02), the Company adopted ASC 842, Leases (ASC 842), using a modified retrospective method as of the adoption date. Consequently, financial information will not be updated, and the disclosures required under ASU 2016-02 will not be provided for dates and periods prior to January 1, 2019. ASC 842 supersedes nearly all previously existing lease guidance under GAAP and requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements.

ASC 842 establishes an ROU model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. ASU 2016-02 provides a number of optional practical expedients and accounting policy elections. The Company elected the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or initial direct costs for any existing leases.

The adoption of ASC 842 had a material effect on the Company’s condensed balance sheets; however, it did not have a material effect on its condensed statements of operations, comprehensive loss and cash flows. Upon adoption of ASC 842 as of January 1, 2019, the Company recognized (i) right-of-use assets of $16.7 million, net of $3.0 million of deferred rent, and (ii) lease liabilities of $19.7 million. (see Note 7 – Leases).

 

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 $14.4 million and $17.2 million as of September 30, 2019 and December 31, 2018 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

 

September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

51,852

 

 

$

45

 

 

$

 

 

$

51,897

 

 

$

51,852

 

 

$

45

 

 

$

 

 

$

51,897

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

63,674

 

 

$

1

 

 

$

(24

)

 

$

63,651

 

 

$

63,674

 

 

$

1

 

 

$

(24

)

 

$

63,651

 

 

As of September 30, 2019, 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 September 30, 2019. 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):

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Prepaid clinical trial costs

 

$

294

 

 

$

258

 

Other

 

 

3,389

 

 

 

2,419

 

Total

 

$

3,683

 

 

$

2,677

 

 

-14-


 

Property and Equipment, Net

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Laboratory equipment

 

$

3,881

 

 

$

3,772

 

Manufacturing equipment

 

 

1,126

 

 

 

1,017

 

Computer equipment and software

 

 

1,028

 

 

 

770

 

Leasehold improvements

 

 

762

 

 

 

736

 

Office furniture

 

 

1,548

 

 

 

1,548

 

 

 

 

8,345

 

 

 

7,843

 

Less: accumulated depreciation

 

 

(4,699

)

 

 

(3,847

)

Total

 

$

3,646

 

 

$

3,996

 

 

Accrued Expenses

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Accrued clinical trial costs

 

$

2,417

 

 

$

1,294

 

Accrued other

 

 

2,088

 

 

 

2,494

 

Total

 

$

4,505

 

 

$

3,788

 

 

 

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 and OTO-311 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.

Under one of these agreements, the Company has achieved six development milestones and one regulatory milestone, totaling $2.8 million, related to its clinical trials for OTIPRIO, OTIVIDEX and OTO-311. The Company may be obligated to make additional milestone payments under the Company’s intellectual property license agreements as follows (in thousands):

 

Development

$

1,600

 

Regulatory

 

10,275

 

Commercialization

 

1,000

 

Total

$

12,875

 

 

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 September 30, 2019, 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 a one-time milestone payment of $0.5 million upon the first commercial sale of OTIPRIO and to pay royalties of less than one percent on net product sales of OTIPRIO. This milestone payment was paid during March 2016 and both this milestone payment and 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.

-15-


 

During October 2014, the Company entered into an exclusive license agreement with Ipsen that enables the Company to use clinical and non-clinical 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 September 30, 2019 and December 31, 2018 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

 

September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

14,366

 

 

$

14,366

 

 

$

 

 

$

 

U.S. Treasury securities

 

51,897

 

 

 

51,897

 

 

 

 

 

 

 

 

$

66,263

 

 

$

66,263

 

 

$

 

 

$

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets