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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 June 30, 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 July 30, 2020 was 48,227,421.

 


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

18

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

 

 

Item 4. Controls and Procedures

28

 

 

PART II. OTHER INFORMATION

29

 

 

Item 1. Legal Proceedings

29

 

 

Item 1A. Risk Factors

29

 

 

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

62

 

 

Item 3. Default Upon Senior Securities

62

 

 

Item 4. Mine Safety Disclosures

62

 

 

Item 5. Other Information

62

 

 

Item 6. Exhibits

63

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Otonomy, Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

 

 

June 30,

 

 

December 31,

 

 

2020

 

 

2019

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

32,045

 

 

$

25,194

 

Short-term investments

 

9,021

 

 

 

35,476

 

Prepaid and other current assets

 

1,531

 

 

 

2,480

 

Total current assets

 

42,597

 

 

 

63,150

 

Restricted cash

 

702

 

 

 

701

 

Property and equipment, net

 

3,142

 

 

 

3,702

 

Right-of-use assets

 

14,787

 

 

 

15,465

 

Total assets

$

61,228

 

 

$

83,018

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

665

 

 

$

1,161

 

Accrued expenses

 

5,149

 

 

 

5,442

 

Accrued compensation

 

2,210

 

 

 

2,593

 

Leases, current

 

3,292

 

 

 

3,302

 

Total current liabilities

 

11,316

 

 

 

12,498

 

Long-term debt, net

 

15,069

 

 

 

14,967

 

Leases, net of current

 

14,594

 

 

 

15,320

 

Total liabilities

 

40,979

 

 

 

42,785

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2020

   and December 31, 2019; no shares issued or outstanding at June 30, 2020 and

   December 31, 2019

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at June 30, 2020

   and December 31, 2019; 30,951,421 and 30,814,211 shares issued and outstanding

   at June 30, 2020 and December 31, 2019, respectively

 

31

 

 

 

31

 

Additional paid-in capital

 

503,311

 

 

 

500,084

 

Accumulated other comprehensive income

 

17

 

 

 

11

 

Accumulated deficit

 

(483,110

)

 

 

(459,893

)

Total stockholders’ equity

 

20,249

 

 

 

40,233

 

Total liabilities and stockholders’ equity

$

61,228

 

 

$

83,018

 

 

See accompanying notes.

 

-2-


 

Otonomy, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Product sales, net

 

$

10

 

 

$

190

 

 

$

170

 

 

$

382

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

511

 

 

 

203

 

 

 

725

 

 

 

416

 

Research and development

 

 

6,935

 

 

 

8,919

 

 

 

14,607

 

 

 

17,714

 

Selling, general and administrative

 

 

3,684

 

 

 

2,884

 

 

 

7,520

 

 

 

6,162

 

Total costs and operating expenses

 

 

11,130

 

 

 

12,006

 

 

 

22,852

 

 

 

24,292

 

Loss from operations

 

 

(11,120

)

 

 

(11,816

)

 

 

(22,682

)

 

 

(23,910

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

61

 

 

 

489

 

 

 

254

 

 

 

990

 

Interest expense

 

 

(395

)

 

 

(400

)

 

 

(789

)

 

 

(791

)

Net loss

 

$

(11,454

)

 

$

(11,727

)

 

$

(23,217

)

 

$

(23,711

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.37

)

 

$

(0.38

)

 

$

(0.75

)

 

$

(0.77

)

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

 

 

30,873,488

 

 

 

30,703,411

 

 

 

30,843,850

 

 

 

30,694,461

 

 

See accompanying notes.

-3-


 

Otonomy, Inc.

Condensed Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Net loss

 

$

(11,454

)

 

$

(11,727

)

 

$

(23,217

)

 

$

(23,711

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available for sale securities

 

 

(47

)

 

 

56

 

 

 

6

 

 

 

96

 

Comprehensive loss

 

$

(11,501

)

 

$

(11,671

)

 

$

(23,211

)

 

$

(23,615

)

 

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 March 31, 2020

   (unaudited)

 

 

30,814,211

 

 

$

31

 

 

$

501,498

 

 

$

64

 

 

$

(471,656

)

 

$

29,937

 

Issuance of common stock upon

   exercise of stock options (unaudited)

 

 

71,713

 

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

149

 

Issuance of common stock

   under employee stock

   purchase plan (unaudited)

 

 

65,497

 

 

 

 

 

 

127

 

 

 

 

 

 

 

 

 

127

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

1,537

 

 

 

 

 

 

 

 

 

1,537

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,454

)

 

 

(11,454

)

Unrealized loss on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(47

)

 

 

 

 

 

(47

)

Balance at June 30, 2020

   (unaudited)

 

 

30,951,421

 

 

$

31

 

 

$

503,311

 

 

$

17

 

 

$

(483,110

)

 

$

20,249

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at March 31, 2019

   (unaudited)

 

 

30,685,412

 

 

$

31

 

 

$

496,443

 

 

$

17

 

 

$

(427,202

)

 

$

69,289

 

Issuance of common stock

   under employee stock

   purchase plan (unaudited)

 

 

62,997

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

121

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

1,255

 

 

 

 

 

 

 

 

 

1,255

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,727

)

 

 

(11,727

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

56

 

 

 

 

 

 

56

 

Balance at June 30, 2019

   (unaudited)

 

 

30,748,409

 

 

$

31

 

 

$

497,819

 

 

$

73

 

 

$

(438,929

)

 

$

58,994

 

 

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

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

30,814,211

 

 

$

31

 

 

$

500,084

 

 

$

11

 

 

$

(459,893

)

 

$

40,233

 

Issuance of common stock upon

   exercise of stock options (unaudited)

 

 

71,713

 

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

149

 

Issuance of common stock

   under employee stock

   purchase plan (unaudited)

 

 

65,497

 

 

 

 

 

 

127

 

 

 

 

 

 

 

 

 

127

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

2,951

 

 

 

 

 

 

 

 

 

2,951

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,217

)

 

 

(23,217

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Balance at June 30, 2020

   (unaudited)

 

 

30,951,421

 

 

$

31

 

 

$

503,311

 

 

$

17

 

 

$

(483,110

)

 

$

20,249

 

 

 

 

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

 

Issuance of common stock

   under employee stock

   purchase plan (unaudited)

 

 

62,997

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

121

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

2,751

 

 

 

 

 

 

 

 

 

2,751

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,711

)

 

 

(23,711

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

96

 

 

 

 

 

 

96

 

Balance at June 30, 2019

   (unaudited)

 

 

30,748,409

 

 

$

31

 

 

$

497,819

 

 

$

73

 

 

$

(438,929

)

 

$

58,994

 

 

See accompanying notes.

-6-


 

Otonomy, Inc.

Condensed Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(23,217

)

 

$

(23,711

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

569

 

 

 

565

 

Stock-based compensation

 

 

2,951

 

 

 

2,751

 

Accretion of discounts on short-term investments

 

 

(35

)

 

 

(448

)

Amortization of debt discount

 

 

102

 

 

 

91

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid and other assets

 

 

949

 

 

 

1,220

 

Accounts payable

 

 

(491

)

 

 

837

 

Accrued expenses

 

 

(267

)

 

 

289

 

Accrued compensation

 

 

(383

)

 

 

(903

)

Right-of-use assets and lease liabilities, net

 

 

(58

)

 

 

19

 

Net cash used in operating activities

 

 

(19,880

)

 

 

(19,290

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(3,004

)

 

 

(54,114

)

Maturities of short-term investments

 

 

29,500

 

 

 

52,000

 

Purchases of property and equipment

 

 

(40

)

 

 

(153

)

Net cash provided by (used in) investing activities

 

 

26,456

 

 

 

(2,267

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from short-term debt

 

 

1,126

 

 

 

 

Principal payments on short-term debt

 

 

(1,126

)

 

 

 

Proceeds from exercise of stock options

 

 

149

 

 

 

 

Proceeds from issuance of common stock

 

 

127

 

 

 

121

 

Payments of debt issuance costs

 

 

 

 

 

(52

)

Net cash provided by financing activities

 

 

276

 

 

 

69

 

Net change in cash, cash equivalents and restricted cash

 

 

6,852

 

 

 

(21,488

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

25,895

 

 

 

34,329

 

Cash, cash equivalents and restricted cash at end of period

 

$

32,747

 

 

$

12,841

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

32,045

 

 

$

12,142

 

Restricted cash at end of period

 

 

702

 

 

 

699

 

Cash, cash equivalents and restricted cash at end of period

 

$

32,747

 

 

$

12,841

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

683

 

 

$

698

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

44

 

 

$

63

 

 

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 has recently completed a Phase 1/2 clinical trial in tinnitus patients with positive top-line results. 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 hearing loss caused by a mutation in the gap junction beta-2 (GJB2) gene.

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). In June 2020, the Company entered into a co-promotion agreement with ALK-Abelló, Inc. (ALK) to support the promotion of OTIPRIO for the treatment of AOE in physician offices in the United States.

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 June 30, 2020, the Company had cash, cash equivalents and short-term investments of $41.1 million, outstanding debt of $15.1 million and an accumulated deficit of $483.1 million. In July 2020, the Company sold in a public offering 17,275,000 shares of its common stock, which includes the underwriters’ full exercise of their option to purchase additional shares, and pre-funded warrants to purchase 4,000,000 shares of its common stock for approximately $64.2 million in net proceeds after deducting underwriting discounts and commissions and estimated offering expenses. 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. 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 will be sufficient to fund its operations for a period of at least twelve months from the date of this report.

-8-


 

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.

 

 

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 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 has clinical trial sites in the United States and Europe, which may be affected by travel or quarantine restrictions imposed by federal, state or local governments due to the COVID-19 pandemic.  The enrollment of new patients in the Company’s OTIVIDEX trial is being managed on a site-by-site basis according to local conditions.  The Company temporarily paused new patient enrollment in its Phase 1/2 clinical trial of OTO-413 but has resumed enrollment on a site-by-site basis. In light of the significant uncertainty regarding the impact of the COVID-19 pandemic, the Company had suspended and subsequently updated its guidance regarding timing of trial results. The Company may in the future need to further update or suspend such guidance as a result of the impact of the COVID-19 pandemic.  In addition, the Company has made and it (and its contract research organizations (CROs)) may need to make certain adjustments to the operation of clinical trials in an effort to ensure the monitoring and safety of patients and minimize risks to trial data integrity during the pandemic in accordance with the guidance issued by the FDA in March 2020 and updated in April 2020, among other activity.  Third-party manufacturers which the Company uses for the supply of materials for its

-9-


 

product candidates or other materials necessary to conduct preclinical studies and clinical trials are located in countries affected by COVID-19.  Although the Company expects no material impact on the clinical supply of its product candidates for its current clinical trials, should its third-party manufacturers experience extended disruptions, the Company could experience delays in future trials. Furthermore, the spread of the virus may affect the operations of key governmental agencies, such as the FDA and similar organizations outside the United States, as well as local regulatory agencies and health officials, which may delay the development of the Company’s product candidates.

The Company continues to evaluate the impact COVID-19 may have on its ability to effectively conduct its business operations as planned, and work with healthcare providers supporting its clinical studies to mitigate risk to patients while taking into account regulatory, institutional, and government guidance and policies and may take further actions as may be required by federal, state or local authorities or that the Company determines are in the best interests of public health and safety and that of patients, employees, partners, and stockholders.  Nonetheless, the Company does not yet know and cannot predict 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 business, strategy, collaborations, 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).

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 was 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 $27.9 million and $22.1 million as of June 30, 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

 

June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

9,004

 

 

$

17

 

 

$

 

 

$

9,021

 

 

$

9,004

 

 

$

17

 

 

$

 

 

$

9,021

 

December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

35,465

 

 

$

16

 

 

$

(5

)

 

$

35,476

 

 

$

35,465

 

 

$

16

 

 

$

(5

)

 

$

35,476

 

 

As of June 30, 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

-10-


 

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 June 30, 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 in the condensed balance sheets includes inventory, which is recorded at the lower of cost or net realizable value. Cost is determined on a first-in, first-out method. Inventories consist of OTIPRIO finished goods and work in-process, as well as raw materials used in the manufacture of OTIPRIO. If inventory costs exceed expected market value due to obsolescence, expiry or quantities in excess of expected demand, write downs are recorded for the difference between cost and market value, less cost to sell. During the three and six months ended June 30, 2020, the Company recorded an inventory write down of $0.3 million to cost of product sales. No inventory write downs were recorded for the three and six months ended June 30, 2019.

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Prepaid clinical trial costs

 

$

243

 

 

$