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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 March 31, 2021

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 6, 2021 was 56,618,092.

 


 

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

15

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

25

 

 

Item 4. Controls and Procedures

25

 

 

PART II. OTHER INFORMATION

26

 

 

Item 1. Legal Proceedings

26

 

 

Item 1A. Risk Factors

26

 

 

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)

 

 

March 31,

 

 

December 31,

 

 

2021

 

 

2020

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

51,016

 

 

$

30,767

 

Short-term investments

 

22,813

 

 

 

55,576

 

Prepaid and other current assets

 

3,048

 

 

 

2,372

 

Total current assets

 

76,877

 

 

 

88,715

 

Restricted cash

 

702

 

 

 

702

 

Property and equipment, net

 

1,881

 

 

 

2,766

 

Right-of-use assets

 

13,724

 

 

 

14,082

 

Other long-term assets

 

222

 

 

 

Total assets

$

93,406

 

 

$

106,265

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

573

 

 

$

849

 

Accrued expenses

 

3,105

 

 

 

2,953

 

Accrued compensation

 

1,801

 

 

 

3,927

 

Long-term debt, current

 

1,957

 

 

 

 

Leases, current

 

3,260

 

 

 

3,265

 

Total current liabilities

 

10,696

 

 

 

10,994

 

Long-term debt, net of current

 

13,246

 

 

 

15,158

 

Leases, net of current

 

13,440

 

 

 

13,847

 

Total liabilities

 

37,382

 

 

 

39,999

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2021

   and December 31, 2020; no shares issued or outstanding at March 31, 2021 and

   December 31, 2020

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2021

   and December 31, 2020; 48,319,202 and 48,318,970 shares issued and outstanding

   at March 31, 2021 and December 31, 2020, respectively

 

48

 

 

 

48

 

Additional paid-in capital

 

572,805

 

 

 

570,841

 

Accumulated other comprehensive income

 

5

 

 

 

1

 

Accumulated deficit

 

(516,834

)

 

 

(504,624

)

Total stockholders’ equity

 

56,024

 

 

 

66,266

 

Total liabilities and stockholders’ equity

$

93,406

 

 

$

106,265

 

 

See accompanying notes.

 

-2-


 

 

Otonomy, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Product sales, net

 

$

90

 

 

$

160

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

230

 

 

 

214

 

Research and development

 

 

7,660

 

 

 

7,672

 

Selling, general and administrative

 

 

4,043

 

 

 

3,836

 

Total costs and operating expenses

 

 

11,933

 

 

 

11,722

 

Loss from operations

 

 

(11,843

)

 

 

(11,562

)

Other income (expense)

 

 

 

 

 

 

 

 

Interest income

 

 

15

 

 

 

193

 

Interest expense

 

 

(382

)

 

 

(394

)

Net loss

 

$

(12,210

)

 

$

(11,763

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.23

)

 

$

(0.38

)

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

 

 

52,319,101

 

 

 

30,814,211

 

 

See accompanying notes.

-3-


 

Otonomy, Inc.

Condensed Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Net loss

 

$

(12,210

)

 

$

(11,763

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

4

 

 

 

53

 

Comprehensive loss

 

$

(12,206

)

 

$

(11,710

)

 

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, 2020

 

 

48,318,970

 

 

$

48

 

 

$

570,841

 

 

$

1

 

 

$

(504,624

)

 

$

66,266

 

Issuance of common stock upon

   exercise of stock options (unaudited)

 

 

232

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

   expense (unaudited)

 

 

 

 

 

 

 

 

1,963

 

 

 

 

 

 

 

 

 

1,963

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,210

)

 

 

(12,210

)

Unrealized gain on available-

   for-sale securities (unaudited)

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Balance at March 31, 2021

   (unaudited)

 

 

48,319,202

 

 

$

48

 

 

$

572,805

 

 

$

5

 

 

$

(516,834

)

 

$

56,024

 

 

 

 

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

 

 

See accompanying notes.

-5-


 

Otonomy, Inc.

Condensed Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,210

)

 

$

(11,763

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

221

 

 

 

286

 

Stock-based compensation

 

 

1,963

 

 

 

1,414

 

Amortization of premiums (accretion of discounts) on short-term investments

 

 

22

 

 

 

(35

)

Amortization of debt discount

 

 

45

 

 

 

50

 

Impairment of property, plant and equipment

 

 

727

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid and other assets

 

 

(898

)

 

 

281

 

Accounts payable

 

 

(209

)

 

 

(264

)

Accrued expenses

 

 

152

 

 

 

(917

)

Accrued compensation

 

 

(2,126

)

 

 

(1,164

)

Right-of-use assets and lease liabilities, net

 

 

(54

)

 

 

(29

)

Net cash used in operating activities

 

 

(12,367

)

 

 

(12,141

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

 

 

 

(3,004

)

Maturities of short-term investments

 

 

32,745

 

 

 

21,000

 

Purchases of property and equipment

 

 

(130

)

 

 

(10

)

Net cash provided by investing activities

 

 

32,615

 

 

 

17,986

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

1

 

 

 

 

Net cash provided by financing activities

 

 

1

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

20,249

 

 

 

5,845

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

31,469

 

 

 

25,895

 

Cash, cash equivalents and restricted cash at end of period

 

$

51,718

 

 

$

31,740

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

51,016

 

 

$

31,038

 

Restricted cash at end of period

 

 

702

 

 

 

702

 

Cash, cash equivalents and restricted cash at end of period

 

$

51,718

 

 

$

31,740

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

338

 

 

$

341

 

 

 

 

 

 

 

 

 

 

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 and is utilizing that expertise and proprietary position to develop products that achieve sustained drug exposure from a single local administration. The Company’s primary focus is currently on the advancement of three programs in its broad pipeline: OTO-313 in a Phase 2 trial for tinnitus; OTO-413, for which the Company is planning to initiate a Phase 1/2 expansion trial for hearing loss; and OTO-825, a gene therapy for congenital hearing loss, in IND-enabling activities. Additionally, the Company is conducting preclinical development for OTO-510 in otoprotection and OTO-6XX for severe hearing loss.

OTO-313 is a sustained-exposure formulation of the potent and selective N-Methyl-D-Aspartate (NMDA) receptor antagonist gacyclidine that demonstrated positive top-line results in a Phase 1/2 clinical trial in tinnitus patients. The Company has recently initiated a Phase 2 clinical trial for OTO-313 with top-line results expected in mid-2022. OTO-413 is a sustained-exposure formulation of brain-derived neurotrophic factor (BDNF) that demonstrated positive top-line results in a Phase 1/2 clinical trial in hearing loss patients. The Company plans to initiate an expansion of the Phase 1/2 clinical trial for OTO-413 in the second quarter of 2021 with top-line results expected in mid-2022. OTO-825 is a gene therapy targeting mutations in the gap junction beta-2 (GJB2) gene, which is the most common cause of congenital hearing loss. Otonomy is conducting investigational new drug (IND)-enabling activities for OTO-825 in conjunction with Applied Genetic Technologies Corporation (AGTC), the Company’s strategic collaborator for the program. In addition, Otonomy is conducting preclinical development for OTO-510, a novel molecule in development for the prevention of cisplatin-induced hearing loss, and OTO-6XX, a hair cell repair and regeneration program for severe hearing loss that includes a novel compound exclusively licensed to Otonomy from Kyorin Pharmaceutical Co., Ltd. (Kyorin).

Otonomy recently completed a third Phase 3 trial for OTIVIDEX, a sustained exposure formulation of the steroid dexamethasone, in Ménière’s disease that failed to achieve its primary endpoint. Based on a comprehensive analysis of the results, the Company has decided to not pursue any further development of the product candidate. Following the negative OTIVIDEX trial results, the Company initiated a review of strategic alternatives for its commercial product, OTIPRIO. In 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 and for use during ear tube placement surgery in pediatric patients.

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.

-7-


 

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, 2021, the Company had cash, cash equivalents and short-term investments of $73.8 million, outstanding debt of $15.2 million and an accumulated deficit of $516.8 million. In April 2021, the Company sold in a public offering 8,298,890 shares of its common stock, which includes the underwriters’ full exercise of their option to purchase additional shares, and the Company sold pre-funded warrants to purchase 7,111,110 shares of its common stock, for approximately $32.1 million in total 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 its 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.

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, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 11, 2021. 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.

Given the unprecedented and evolving nature of the COVID-19 pandemic, including the rise of new variants, there continues to be significant uncertainty about the progression and ultimate impact of the pandemic on the Company’s operations. The Company has taken steps to mitigate the impact of the COVID-19 pandemic on its clinical trials, including developing processes to ensure the integrity of data collection from enrolled patients and supporting sites able to enroll patients, among other activity. Nonetheless the Company does not know the full extent of potential future delays or impacts on its business operations, its preclinical programs and clinical trials, healthcare systems, its financial condition, or the global economy as a whole resulting from the COVID-19 pandemic.

-8-


 

In addition, as a result of the COVID-19 pandemic, the Company has taken steps to protect the health and safety of its employees and community by generally adopting a work from home policy in line with directives from the State of California and the applicable local governments, and guidance from the U.S. Centers for Disease Control and Prevention (CDC). On-site activities have been restricted to certain essential facility and laboratory support functions and various safety protocols have been implemented.

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.

 

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 $48.0 million and $23.3 million as of March 31, 2021 and December 31, 2020, 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, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

22,563

 

 

$

5

 

 

$

 

 

$

22,568

 

Certificates of deposit

 

245

 

 

 

 

 

 

 

 

 

245

 

 

$

22,808

 

 

$

5

 

 

$

 

 

$

22,813

 

December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

55,085

 

 

$

2

 

 

$

(1

)

 

$

55,086

 

Certificates of deposit

 

490

 

 

 

 

 

 

 

 

 

490

 

 

$

55,575

 

 

$

2

 

 

$

(1

)

 

$

55,576

 

 

As of March 31, 2021, 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. The Company 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, 2021. 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.

-9-


 

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Inventory

 

$

455

 

 

$

227

 

Other

 

 

2,593

 

 

 

2,145

 

Total

 

$

3,048

 

 

$

2,372

 

 

Property and Equipment, Net

Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets. Leasehold improvements are stated at cost and are depreciated over the lesser of the remaining term of the related lease or the estimated useful lives of the assets. The Company periodically assesses the value of its long-lived assets for impairment. During the three months ended March 31, 2021, the Company recorded an impairment to property and equipment, net of $0.7 million. No impairment was recorded during the three months ended March 31, 2020.

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Laboratory equipment

 

$

4,272

 

 

$

4,265

 

Manufacturing equipment

 

 

348

 

 

 

1,075

 

Computer equipment and software

 

 

1,045

 

 

 

989

 

Leasehold improvements

 

 

768

 

 

 

768

 

Office furniture

 

 

1,548

 

 

 

1,548

 

 

 

 

7,981

 

 

 

8,645

 

Less: accumulated depreciation

 

 

(6,100

)

 

 

(5,879

)

Total

 

$

1,881

 

 

$

2,766

 

 

Accrued Expenses

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accrued clinical trial costs

 

$

946

 

 

$

1,477

 

Accrued other

 

 

2,159

 

 

 

1,476

 

Total

 

$

3,105

 

 

$

2,953

 

 

 

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 covering OTIPRIO, OTIVIDEX, OTO-313 and OTO-413 as follows (in thousands):

 

Development

$

1,250

 

Regulatory

 

10,275

 

Commercialization

 

1,000

 

Total

$

12,525

 

 

-10-


 

 

Under one of these agreements, the Company has achieved eight development milestones and one regulatory milestone, totaling $3.2 million, related to its clinical trials for OTIPRIO, OTIVIDEX, OTO-311 and OTO-413.

 

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, 2021, the Company has not entered into any sublicense agreements for the licensed technologies.

 

In July 2020, the Company entered into an exclusive license agreement to develop, manufacture and commercialize a novel compound as a potential treatment, OTO-6XX, for severe hearing loss. Under the terms of the agreement, the Company acquired worldwide rights to the compound, with a payment of $0.5 million due upon demonstration of preclinical efficacy. If the Company advances a product containing the compound into full development, the Company may be obligated to make payments for development and commercial milestones and pay a royalty on worldwide net sales.

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, 2021 and December 31, 2020 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, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

48,035

 

 

$

48,035

 

 

$

 

 

$

 

U.S. Treasury securities

 

22,568

 

 

 

22,568

 

 

 

 

 

 

 

Certificates of deposit

 

245

 

 

 

 

 

 

245

 

 

 

 

 

$

70,848

 

 

$

70,603

 

 

$

245

 

 

$

 

December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

23,278

 

 

$

23,278

 

 

$

 

 

$

 

U.S. Treasury securities

 

55,086

 

 

 

55,086

 

 

 

 

 

 

 

Certificates of deposit

 

490

 

 

 

 

 

 

490

 

 

 

 

 

$

78,854

 

 

$

78,364

 

 

$

490

 

 

$

 

-11-


 

 

 

7. Leases

 

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.

 

 

 

Three Months Ended March 31,

 

Lease expenses:

 

2021

 

 

2020

 

Operating lease expenses

 

$

785

 

 

$

784

 

Variable lease expenses

 

 

244

 

 

 

145

 

Total lease expenses

 

$

1,029

 

 

$

929

 

 

 

Lease Maturities:

 

Operating Leases

 

Remaining in 2021

 

$

2,429

 

2022

 

 

3,333

 

2023

 

 

3,433

 

2024

 

 

3,536

 

2025

 

 

3,642

 

2026

 

 

3,751

 

Thereafter

 

 

2,891

 

Total minimum lease payments

 

 

23,015

 

Imputed interest

 

 

(6,315

)

Total

 

 

16,700

 

Less: leases, current

 

 

(3,260

)

Leases, net of current

 

$

13,440

 

 

8. Debt

Term Loan

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.

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 1.00%. 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, 2021, 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 36 months following the Closing Date, followed by consecutive equal monthly payments of principal and interest in arrears through the Maturity Date. 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.

-12-


 

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, 2021 and 2020. Accrued interest, included in accounts payable, was $0.1 million as of March 31, 2021 and December 31, 2020. The outstanding Term Loan balance was $15.2 million as of March 31, 2021 and December 31, 2020, 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,

 

 

2021

 

 

2020

 

Common stock options issued and outstanding

 

11,893,024

 

 

 

9,842,744

 

Pre-funded warrants to purchase common stock

 

4,000,000

 

 

 

4,000,000

 

Common stock options available for future grant

 

3,014,710

 

 

 

2,553,854

 

Common stock reserved for issuance under ESPP

 

3,026,488

 

 

 

2,301,704

 

Total common stock reserved for future issuance

 

21,934,222

 

 

 

18,698,302

 

 

Net Loss Per Share

As of March 31, 2021 and 2020, potentially dilutive securities excluded from the calculation of diluted net loss per share consist of outstanding options to purchase 11,893,024 and 10,052,847 shares of the Company’s common stock, respectively.

July 2020 Pre-funded Warrants

In July 2020, the Company sold pre-funded warrants to purchase 4,000,000 shares of its common stock with an exercise price of $0.001 per pre-funded warrant, that do not contain an expiration date. During the three months ended March 31, 2021, none of the pre-funded warrants were exercised; as of March 31, 2021, all of the pre-funded warrants were issued and outstanding.

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 share 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.

-13-


 

The following table summarizes stock option activity for the three months ended March 31, 2021 (share amounts in thousands):

 

 

 

Options

 

 

Weighted-

Average

Exercise Price

 

Outstanding as of December 31, 2020

 

 

9,843

 

 

$

4.11

 

Granted

 

 

2,080