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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2021



☐	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: 001-34475

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)


Washington		91-1663741
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

201 Elliott Avenue West Seattle, Washington		98119
(Address of principal executive offices)		(Zip Code)
(206) 676-5000 (Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
(Title of each class)	(Trading symbol)	(Name of each exchange on which registered)
Common Stock, $0.01 par value per share	OMER	The Nasdaq Stock Market LLC

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 ⌧

As of November 5, 2021, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 62,542,268.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) which are subject to the “safe harbor” created by those sections for such statements. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical fact are “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” and similar expressions and variations thereof are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying such statements. Examples of these statements include, but are not limited to, statements regarding:

●

our expectations and plans relating to future regulatory interactions and anticipated or potential paths to regulatory approval following the recent issuance by the U.S. Food and Drug Administration (“FDA”) of a Complete Response Letter (“CRL”) in relation to our biologics license application (“BLA”) for our lead MASP-2 inhibitor, narsoplimab, in hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”);

●

our ability to raise additional capital through the capital markets or through one or more corporate partnerships, equity offerings, debt financings, collaborations, licensing arrangements or asset sales;

●

our estimates regarding how long our existing cash, cash equivalents, short-term investments and revenues will be sufficient to fund our anticipated operating expenses, capital expenditures and debt service obligations;

●

our expectations relating to demand for OMIDRIA^® (phenylephrine and ketorolac intraocular solution) 1%/0.3% from wholesalers, ambulatory surgery centers and/or hospitals, and our expectations regarding OMIDRIA product sales;

●

our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by FDA and/or the European Medicines Agency (“EMA”) in HSCT-TMA, immunoglobulin A nephropathy, atypical hemolytic uremic syndrome and/or COVID-19;

●

our ability to design, initiate and/or successfully complete clinical trials and other studies for our products and product candidates and our plans and expectations regarding our ongoing or planned clinical trials, including for narsoplimab, and for our other investigational candidates, including OMS527 and OMS906;

●

our plans for the commercial launch of narsoplimab following any regulatory approval and our estimates and expectations regarding coverage and/or reimbursement for any approved products;

●

the severity and duration of the impact of the COVID-19 pandemic on our business, operations, clinical programs and financial results;

●

our expectations related to separate payment for OMIDRIA from the Centers for Medicare & Medicaid Services (“CMS”) and CMS’ separate payment policy for non-opioid pain management surgical drugs, and our expectations regarding reimbursement coverage for OMIDRIA by commercial and government payers;

●

our plans for marketing and distribution of OMIDRIA and our estimates of OMIDRIA chargebacks and rebates, distribution fees and product returns;

●

our expectations regarding the clinical, therapeutic and/or competitive benefits and importance of OMIDRIA and our product candidates;

●

our plans and expectations regarding development of narsoplimab for the treatment of critically ill COVID-19 patients, including statements regarding the therapeutic potential of narsoplimab for the treatment of COVID-19, discussions with government agencies regarding narsoplimab for the treatment of COVID-19, expectations

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for the treatment of additional COVID-19 patients in clinical trials or other settings and our expectations for receiving any regulatory approval or authorization from FDA or other regulatory body for narsoplimab in the treatment of COVID-19 patients;

●

with respect to our narsoplimab clinical programs, our expectations regarding: whether enrollment or operation in any ongoing or planned clinical trial will proceed as expected; whether we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by FDA, the European Commission, or EMA; and whether we can capitalize on the regulatory incentives provided by fast-track or breakthrough therapy designations granted by FDA;

●

our expectation that our contract manufacturers will reliably meet our requirements for commercial supply and to meet our supply requirements of our commercial and/or development-stage products;

●

our expectations about the commercial competition that OMIDRIA and our product candidates, if commercialized, face or may face;

●

the expected course and costs of existing claims, legal proceedings and administrative actions, our involvement in potential claims, legal proceedings and administrative actions, and the merits, potential outcomes and effects of both existing and potential claims, legal proceedings and administrative actions, as well as regulatory determinations, on our business, prospects, financial condition and results of operations;

●

the extent of protection that our patents provide and that our pending patent applications will provide, if patents are issued from such applications, for our technologies, programs, products and product candidates;

●

the factors on which we base our estimates for accounting purposes and our expectations regarding the effect of changes in accounting guidance or standards on our operating results; and

●

our expected financial position, performance, revenues, growth, costs and expenses, magnitude of net losses and the availability of resources.

Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks, uncertainties and other factors described in this Quarterly Report on Form 10-Q under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our other filings with the U.S. Securities and Exchange Commission (“SEC”). Given these risks, uncertainties and other factors, actual results or anticipated developments may not be realized or, even if substantially realized, may not have the expected consequences to or effects on our company, business or operations. Accordingly, you should not place undue reliance on these forward-looking statements, which represent our estimates and assumptions only as of the date of the filing of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual results in subsequent periods may materially differ from current expectations. Except as required by applicable law, we assume no obligation to update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

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OMEROS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021

INDEX


		Page
Part I — Financial Information		5
Item 1.	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated 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	33
Part II — Other Information		34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6.	Exhibits	34
Signatures		35

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMEROS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	7,415	$	10,501
Short-term investments		42,957		124,452
Receivables, net		33,898		3,841
Inventory		712		1,355
Prepaid expense and other assets		6,367		11,136
Total current assets		91,349		151,285
Property and equipment, net		1,831		2,551
Right of use assets		29,039		25,526
Restricted investments		1,054		1,055
Advanced payments, non-current		157		625
Total assets	$	123,430	$	181,042

Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable	$	10,026	$	4,199
Accrued expenses		27,700		28,755
Current portion of lease liabilities		5,092		3,782
Total current liabilities		42,818		36,736
Lease liabilities, non-current		30,291		28,770
Unsecured convertible senior notes, net		313,018		236,288
Commitments and contingencies (Note 9)
Shareholders’ deficit:
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at September 30, 2021 and December 31, 2020.		—		—
Common stock, par value $0.01 per share, 150,000,000 shares authorized at September 30, 2021 and December 31, 2020; 62,542,268 and 61,671,231 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively.		625		616
Additional paid-in capital		700,433		751,304
Accumulated deficit		(963,755)		(872,672)
Total shareholders’ deficit		(262,697)		(120,752)
Total liabilities and shareholders’ deficit	$	123,430	$	181,042

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

Product sales, net	$	30,004	$	26,114	$	79,889	$	63,181

Costs and expenses:
Cost of product sales		333		401		938		815
Research and development		27,063		31,316		91,358		84,359
Selling, general and administrative		20,861		19,825		60,474		54,792
Total costs and expenses		48,257		51,542		152,770		139,966
Loss from operations		(18,253)		(25,428)		(72,881)		(76,785)
Loss on early extinguishment of debt		—		(13,374)		—		(13,374)
Interest expense		(4,911)		(6,882)		(14,719)		(18,763)
Other income		461		(633)		1,214		280
Loss before income tax benefit		(22,703)		(46,317)		(86,386)		(108,642)
Income tax benefit		—		7,854		—		7,854
Net loss	$	(22,703)	$	(38,463)	$	(86,386)	$	(100,788)
Comprehensive loss	$	(22,703)	$	(38,463)	$	(86,386)	$	(100,788)
Basic and diluted net loss per share	$	(0.36)	$	(0.66)	$	(1.39)	$	(1.81)
Weighted-average shares used to compute basic and diluted net loss per share		62,510,727		58,233,988		62,267,557		55,682,379

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net loss	$	(86,386)	$	(100,788)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		12,082		11,122
Non-cash interest expense		1,256		8,169
Depreciation and amortization		1,062		1,218
Loss on early extinguishment of debt		—		13,374
Deferred income tax		—		(7,854)
Fair value settlement upon termination of cap call contract		—		838
Changes in operating assets and liabilities:
Receivables		(30,057)		(2,194)
Inventory		643		(395)
Prepaid expenses and other assets		5,097		3,533
Accounts payable and accrued expenses		4,796		(8,702)
Net cash used in operating activities		(91,507)		(81,679)
Investing activities:
Purchases of property and equipment		(203)		(283)
Purchases of investments		(5)		(133,190)
Proceeds from the sale and maturities of investments		81,500		58,446
Net cash provided by/(used in) investing activities		81,292		(75,027)
Financing activities:
At the market offering costs		(241)		—
Proceeds upon exercise of stock options and warrants		8,076		4,978
Payments on finance lease obligations		(706)		(889)
Proceeds from issuance of convertible senior notes		—		225,030
Payments for debt issuance costs		—		(6,785)
Purchases of capped calls related to convertible senior notes		—		(23,223)
Payments for repurchases of convertible senior notes		—		(125,638)
Proceeds from termination of capped call contracts		—		7,549
Proceeds from issuance of common stock, net		—		93,675
Net cash provided by financing activities		7,129		174,697
Net (decrease) increase in cash and cash equivalents		(3,086)		17,991
Cash and cash equivalents at beginning of period		10,501		3,084
Cash and cash equivalents at end of period	$	7,415	$	21,075

Supplemental cash flow information
Cash paid for interest	$	14,889	$	8,564
Property acquired under finance lease	$	139	$	216

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Description of Business

Description of Business

We are a commercial-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting inflammation, complement-mediated diseases, disorders of the central nervous system, addiction and immune-related diseases, including cancers.

Our first drug product, OMIDRIA^® (phenylephrine and ketorolac intraocular solution) 1%/0.3%, is marketed in the United States (“U.S.”) for use during cataract surgery or intraocular lens replacement. OMIDRIA qualifies for separate payment when used on Medicare Part B patients in ambulatory surgery centers under a policy adopted by the Centers for Medicare and Medicaid Services (“CMS”) in 2019 and directed to non-opioid pain management surgical drugs.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) pending before the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA regarding the BLA. We are completing a briefing package to accompany a request for a Type A meeting with FDA to discuss the CRL and determine the most expeditious path forward for the approval of narsoplimab in the treatment of HSCT-TMA.

We also have multiple late-stage clinical development programs in our pipeline, which are focused on: complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19.

Basis of Presentation

Our condensed consolidated financial statements include the financial position and results of operations of Omeros Corporation (“Omeros”) and our wholly owned subsidiaries. All intercompany transactions have been eliminated, and we have determined we operate in one segment. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information. The Condensed Consolidated Balance Sheet at December 31, 2020 has been derived from our audited financial statements but does not include all of the information and footnotes required by GAAP for audited annual financial information.

The accompanying unaudited condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2021.

Risks and Uncertainties

As of September 30, 2021, we had cash, cash equivalents and short-term investments of $50.4 million and an accounts receivable-based line of credit that allows us to borrow up to the lesser of $50.0 million or 85% of our accounts receivable borrowing base, less certain reserves. For the nine months ended September 30, 2021, we incurred losses from operations of $72.9 million, including non-cash charges of $14.4 million. For the three months ended September 30, 2021, we incurred losses from operations of $18.3 million, including non-cash charges of $6.4 million. Cash used in

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operating activities was $91.5 million for the nine months ended September 30, 2021. We will continue to incur losses from operating activities until our revenues exceed operating costs and debt service obligations.

We are unable to include in the determination regarding our prospects as a going concern amounts available under our accounts receivable-based line of credit or any proceeds from debt transactions or other financing instruments despite our successful track record in accessing capital through these avenues. We also have not included any potential partnerships related to our products or product candidates. The conditions described above, when evaluated within the constraints of the accounting literature, raise substantial doubt with respect to our ability to meet our obligations through November 9, 2022 and, therefore, to continue as a going concern.

We plan to continue to fund our operations for the next twelve months with our cash and investments, from sales of OMIDRIA and potentially from sales of narsoplimab for HSCT-TMA, if FDA approval is granted within that time period. In addition, we may utilize funds available under our line of credit which matures August 2, 2022. Should it be necessary or determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology. In this regard, in March 2021 we entered into a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock having an aggregate amount up to $150.0 million. In addition, should it be necessary to manage our operating expenses, we would reduce our projected cash requirements by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities.

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.

The COVID-19 pandemic and the responses to it by various governmental authorities, the medical community and others had a significant impact on our business in the first six months of 2020. It is not possible to estimate precisely the future impact of the COVID-19 pandemic on our business, operations or financial results due to the unknown magnitude, duration and outcome of the pandemic.

We use a single contract manufacturer to supply the OMIDRIA drug product and a separate company to package OMIDRIA for commercial sale. We are completing the process of establishing a second OMIDRIA supplier. We generally use different contract manufacturers to produce drug substance, drug product and to perform final packaging for our drug product candidates.

We endeavor to maintain reasonable levels of drug supply for our commercial and clinical trial use and other manufacturers are available should we need to change suppliers. A change in suppliers; however, could cause a delay in delivery of OMIDRIA or our clinical trial material that would adversely affect our business.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates include revenue recognition, stock-based compensation expense and accruals for clinical trials as well as manufacturing of drug product. We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.

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Note 2—Significant Accounting Policies

Revenue Recognition

When we enter into a customer contract, we perform the following five steps: (i) identify the contract 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.

We generally record revenue from product sales when the product is delivered to our wholesalers. Product sales are recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts. Accruals or allowances are established for these deductions in the same period when revenue is recognized, and actual amounts incurred are offset against the applicable accruals or allowances. We reflect each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability depending on how the amount is expected to be settled.

We sell OMIDRIA through a limited number of wholesalers. We review the credit quality of our wholesalers on an annual basis by considering factors such as historical experience, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Credit losses for all periods presented were immaterial.

Inventory

Inventory is stated at the lower of cost or market determined on a specific identification basis in a manner that approximates the first-in, first-out (“FIFO”) method. Costs include amounts related to third-party manufacturing, transportation and internal labor and overhead. Capitalization of costs as inventory begins when regulatory approval of the product candidate is reasonably assured in the U.S. or the European Union (“EU”). We expense inventory costs related to product candidates as research and development expenses prior to receiving regulatory approval in the respective territory. Inventory is reduced to net realizable value for excess and obsolete inventories based on forecasted demand.

Right of Use Assets and Related Lease Liabilities

We record operating leases as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. We recognize variable lease payments when incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease. We record finance leases as a component of property and equipment and amortize these assets within operating expenses on a straight-line basis to their residual values over the shorter of the term of the underlying lease or the estimated useful life of the equipment. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term. We account for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments based on estimated fair values as of the date of grant. The fair value of our stock options is calculated using the Black-Scholes option-pricing model, which requires judgmental assumptions around volatility, forfeiture rates and expected option term. Compensation expense is recognized over the optionees’ requisite service periods, which is generally the vesting period, using the straight-line method. Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

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Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. A valuation allowance is established when it is more likely than not that the deferred tax assets will not be realized.

Recently Adopted Pronouncements

On January 1, 2021, we adopted Accounting Standard Update (“ASU”) 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) on a modified retrospective basis. ASU 2020-06 removes the separate liability and equity accounting for our convertible senior notes. Consequently, we now account for our convertible senior notes wholly as debt. (See “Note 3 – Net Loss Per Share” and “Note 7 – Unsecured Convertible Senior Notes” for further information)

On January 1, 2021, we adopted ASU 2019-12, Income Taxes (Topic 740), which is intended to simplify various aspects of the income tax accounting guidance, including elimination of 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). We adopted the standard on a prospective basis and the impact to our consolidated financial statements for the three and nine months ended September 30, 2021 was immaterial.

Note 3—Net Loss Per Share

Our potentially dilutive securities include potential common shares related to our stock options, warrant and unsecured convertible senior notes. Diluted earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Shares of our common stock issuable under the unsecured convertible notes are calculated using the if-converted method and are excluded from the below table as their impact is anti-dilutive. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period.

Potentially dilutive securities excluded from Diluted EPS are as follows:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2021	2020	2021	2020
Outstanding options to purchase common stock	1,781,619	1,456,454	2,504,901	1,777,393
Outstanding warrants to purchase common stock	—	9,828	—	11,712
Total potentially dilutive shares excluded from loss per share	1,781,619	1,466,282	2,504,901	1,789,105

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Note 4—Certain Balance Sheet Accounts

Accounts Receivable, net

Accounts receivable, net consist of the following:


	September 30,		December 31,
	2021		2020

	(In thousands)
Trade receivables, net	$	33,624	$	3,771
Sublease and other receivables		274		70
Total accounts receivables, net	$	33,898	$	3,841

Trade receivables are net of product return and chargeback allowances of $2.0 million and $1.2 million as of September 30, 2021 and December 31, 2020, respectively.

Inventory

Inventory consists of the following:


	September 30,		December 31,
	2021		2020

	(In thousands)
Raw materials	$	463	$	109
Work-in-progress		65		462
Finished goods		184		784
Total inventory	$	712	$	1,355

Property and Equipment, Net

Property and equipment, net consists of the following:


	September 30,		December 31,
	2021		2020

	(In thousands)
Finance leases	$	5,829	$	5,690
Laboratory equipment		3,017		2,898
Computer equipment		1,069		985
Office equipment and furniture		625		625
Total cost		10,540		10,198
Less accumulated depreciation and amortization		(8,709)		(7,647)
Total property and equipment, net	$	1,831	$	2,551

For the three months ended September 30, 2021 and 2020, depreciation and amortization expense was $0.3 million and $0.4 million, respectively. For the nine months ended September 30, 2021 and 2020, depreciation and amortization expense was $1.1 million and $1.2 million, respectively.

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Accrued Expenses

Accrued expenses consist of the following:


	September 30,		December 31,
	2021		2020

	(In thousands)
Sales rebates, fees and discounts	$	7,650	$	3,326
Contract research and development		4,391		7,952
Consulting and professional fees		4,055		5,393
Interest payable		3,703		5,205
Employee compensation		3,971		3,948
Clinical trials		3,184		2,121
Other accrued expenses		746		810
Total accrued expenses	$	27,700	$	28,755

Note 5—Fair-Value Measurements

As of September 30, 2021, and December 31, 2020, all investments were classified as short-term and available-for-sale on the accompanying Condensed Consolidated Balance Sheets. Investment income, which was included as a component of other income, consists of interest earned.

On a recurring basis, we measure certain financial assets at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

Level 1—Observable inputs for identical assets or liabilities, such as quoted prices in active markets;

Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3—Unobservable inputs in which little or no market data exists, therefore they are developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

Our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis are as follows:


	September 30, 2021
	Level 1		Level 2		Level 3		Total

	(In thousands)
Assets:
Money-market funds classified as short-term investments	$	42,957	$	—	$	—	$	42,957
Money-market funds classified as non-current restricted investments		1,054		—		—		1,054
Total	$	44,011	$	—	$	—	$	44,011


	December 31, 2020
	Level 1		Level 2		Level 3		Total

	(In thousands)
Assets:
Money-market funds classified as short-term investments	$	124,452	$	—	$	—	$	124,452
Money-market funds classified as non-current restricted investments		1,055		—		—		1,055
Total	$	125,507	$	—	$	—	$	125,507

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Cash held in demand deposit accounts of $7.4 million and $10.5 million is excluded from our fair-value hierarchy disclosure as of September 30, 2021 and December 31, 2020, respectively. There were no unrealized gains or losses associated with our investments as of September 30, 2021 or December 31, 2020. The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.

See “Note7—Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our outstanding convertible senior notes.

Note 6—Line of Credit

We have a Loan and Security Agreement with Silicon Valley Bank, which provides for a $50.0 million revolving line of credit facility (the “Line of Credit Agreement”). Under the Line of Credit Agreement, we may draw, on a revolving basis, up to the lesser of $50.0 million or 85.0% of our eligible accounts receivable, less certain reserves. Interest on amounts outstanding is payable monthly at the greater of 5.5% or the prime rate. The line of credit matures August 2, 2022 and is secured by all our assets excluding intellectual property and development program inventories.

As of September 30, 2021 and December 31, 2020, no amounts were outstanding under the Line of Credit Agreement.

Note 7—Unsecured Convertible Senior Notes

On January 1, 2021, we adopted ASU 2020-06 on a modified retrospective basis. ASU 2020-06 removes the separate liability and equity accounting for our outstanding convertible senior notes. Consequently, we now account for our convertible senior notes wholly as debt. Adoption of ASU 2020-06 resulted in a cumulative effect adjustment of $75.5 million to restore our unsecured convertible notes and additional paid-in capital to the balances without an equity allocation component. The carrying value of the notes are reflective of their face value less unamortized debt issuance costs. Subsequent to the adoption date, interest expense is reduced as a result of accounting for the unsecured convertible notes wholly as a liability measured at amortized cost.

Unsecured convertible senior notes outstanding at September 30, 2021 and December 31, 2020 are as follows:


	Balance as of September 30, 2021
	2023 Notes		2026 Notes		Total

	(In thousands)
Principal amount	$	95,000	$	225,030	$	320,030
Unamortized debt issuance costs		(1,440)		(5,572)		(7,012)
Total unsecured convertible senior notes, net	$	93,560	$	219,458	$	313,018

Fair value of outstanding unsecured convertible senior notes (1)	$	102,600	$	241,419

Amount by which the unsecured convertible senior notes if-converted value exceeds their principal amount	$	7,600	$	16,389

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	Balance as of December 31, 2020
	2023 Notes		2026 Notes		Total

	(In thousands)
Principal amount	$	95,000	$	225,030	$	320,030
Unamortized discount		(17,101)		(60,544)		(77,645)
Unamortized issuance costs attributable to liability component		(1,481)		(4,616)		(6,097)
Total unsecured convertible senior notes, net	$	76,418	$	159,870	$	236,288

Fair value of outstanding unsecured convertible senior notes (1)	$	101,769	$	246,779

Amount by which the unsecured convertible senior notes if-converted value exceeds their principal amount	$	6,769	$	21,749

Equity component	$	25,854	$	63,544
Unamortized issuance costs		(837)		(1,916)
Net carrying amount of equity component (2)	$	25,017	$	61,628

(1)	The fair value is classified as Level 3 due to the limited trading activity for the unsecured convertible senior notes.

(2)	Included in the Condensed Consolidated Balance Sheet within additional paid-in capital at December 31, 2020. With the adoption of ASU 2020-06 on January 1, 2021, amounts were reclassified to unsecured convertible senior notes, net.

2023 Unsecured Convertible Senior Notes

On November 15, 2018, we issued $210.0 million in aggregate principal amount of our 6.25% convertible senior notes due 2023 (the “2023 Notes”). The 2023 Notes accrue interest at an annual rate of 6.25% per annum, payable semi-annually in arrears on May 15 and November 15 of each year. As of September 30, 2021, the unamortized debt issuance costs of $1.4 million will be amortized to interest expense at an effective interest rate of 7.02% over the remaining term. The 2023 Notes mature on November 15, 2023 unless earlier purchased, redeemed or converted in accordance with their terms. On August 14, 2020, we issued the 5.25% convertible senior notes due 2026 (the “2026 Notes”) and used approximately $125.6 million of the net proceeds to repurchase $115.0 million principal amount of the 2023 Notes (see “2026 Unsecured Convertible Senior Notes” below).

The 2023 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), subject to adjustment in certain circumstances. To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2023 Notes, we entered into a capped call transaction (the “2023 Capped Call”), which covers the number of shares of our common stock underlying the 2023 Notes when our common stock share price is trading between the initial conversion price of $19.22 and $28.84. In connection with the partial repurchase of the 2023 Notes, we entered into a capped call termination contract to unwind a proportionate amount of the 2023 Capped Call. As of September 30, 2021, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

The following table sets forth total interest expense recognized in connection with the 2023 Notes:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(In thousands)				(In thousands)
Contractual interest expense	$	1,484	$	2,363	$	4,453	$	8,925
Amortization of debt issuance costs		156		156		459		567
Amortization of debt discount		-		1,804		—		6,551
Total	$	1,640	$	4,323	$	4,912	$	16,043

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2026 Unsecured Convertible Senior Notes

The 2026 Notes are unsecured and accrue interest at an annual rate of 5.25% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 2026 Notes mature on February 15, 2026, unless earlier purchased, redeemed or converted in accordance with their terms.

As of September 30, 2021, the unamortized debt issuance costs of $5.6 million will be amortized to interest expense at an effective interest rate of 5.89% over the remaining term.

The initial conversion rate is 54.0906 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $18.4875 per share of common stock), which equals approximately 12.2 million shares of common stock issuable upon conversion, subject to adjustment in certain circumstances.

The 2026 Notes are convertible at the option of the holders on or after November 15, 2025 at any time prior to the close of business on February 12, 2026. Additionally, holders may convert their 2026 Notes at their option at specified times prior to the maturity date only if:

(1)

during any calendar quarter, beginning after September 30, 2020, that the last reported sale price per share of our common stock exceeds 130% of the conversion price of the 2026 Notes for each of at least 20 trading days in the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

(2)

during the five consecutive business days immediately after any five-consecutive-trading-day period (such five-consecutive-trading-day period, the “measurement period”) in which the trading price per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;

(3)

there is an occurrence of one or more certain corporate events or distributions of our common stock; or

(4)

we call the 2026 Notes for redemption.

At our sole discretion, we may elect to convert the 2026 Notes into cash, shares of our common stock or a combination thereof at maturity. Subject to the satisfaction of certain conditions, beginning August 15, 2023, we may redeem in whole or in part the 2026 Notes at our option at a cash redemption price equal to the principal amount of the 2026 Notes plus any accrued and unpaid interest.

To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions (the “2026 Capped Calls”). The 2026 Capped Calls will cover the number of shares of our common stock underlying the 2026 Notes when our common stock share price is trading between the initial conversion price of $18.49 and $26.10. However, should the market price of our common stock exceed the $26.10 cap, then the conversion of the 2026 Notes would have a dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price.

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The following table sets forth interest expense recognized related to the 2026 Notes:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(In thousands)				(In thousands)
Contractual interest expense	$	2,954	$	1,444	$	8,861	$	1,444
Amortization of debt issuance costs		277		74		797		74
Amortization of debt discount		—		976		—		976
Total	$	3,231	$	2,494	$	9,658	$	2,494

Future minimum payments for the 2023 and 2026 Notes as of September 30, 2021 are as follows:


	(In thousands)
2021	$	—
2022		—
2023		95,000
2024		—
2025		—
2026		225,030
Total future minimum payments under the convertible senior notes	$	320,030

Note 8—Leases

We have an operating lease for our office and laboratory facilities with an initial term that ends in 2027 with two options to extend the lease term by five years. We carry various finance leases for laboratory equipment.

Supplemental lease information is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

	(In thousands)				(In thousands)
Lease cost
Operating lease cost	$	1,961	$	1,480	$	5,528	$	4,540
Finance lease cost:
Amortization		243		336		854		1,039
Interest		40		79		127		224
Variable lease cost		863		648		2,667		1,715
Sublease income		(447)		(327)		(1,288)		(929)
Net lease cost	$	2,660	$	2,216	$	7,888	$	6,589

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


	Nine Months Ended
	September 30,
	2021		2020

	(In thousands)
Cash payments for operating leases	$	7,348	$	6,490
Cash payments for financing leases	$	896	$	1,113

Note 9—Commitments and Contingencies

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments in connection with clinical development or commercial milestones as well as low single to low double-digit royalties on the net income or net sales of the product. For the three and nine months ended September 30, 2021 and 2020, development milestones were insignificant. We do not owe any royalties on OMIDRIA. Should narsoplimab be approved for HSCT-TMA in the U.S., we would be obligated to pay approval milestones of $1.7 million and low single-digit royalties on net sales of the product.

Note 10—Shareholders’ Deficit

Common Stock and Warrants

On March 1, 2021, we entered into a sales agreement to sell shares of our common stock having an aggregate offering price of up to $150.0 million, from time to time, through an “at the market” equity offering program. As of September 30, 2021, we have not sold any shares under this program.

In March 2021, a cashless exercise was executed for 43,115 warrants, resulting in the issuance of 24,901 shares of our common stock. As of September 30, 2021, 200,000 warrants remained outstanding with an exercise price of $23.00 per share. The warrants expire on April 12, 2023.

In conjunction with the issuance of our 2026 Notes, on August 14, 2020, we sold 6.9 million shares of our common stock at a public offering price of $14.50 per share. After deducting underwriter discounts and offering expenses, we received net proceeds from the transaction of $93.7 million.

Amendment of 2017 Omnibus Incentive Compensation Plan (the “Plan”)

At the June 11, 2021 annual meeting, shareholders approved the increase of the number of shares of common stock authorized for issuance under the Plan by 4,000,000, to bring the total number of shares of common stock authorized for issuance under the plan to 12,600,000.

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Interim Condensed Consolidated Statements of Shareholders’ Deficit

The changes in interim balances of the components of our shareholders’ deficit are as follows:


			Additional
	Common		Paid-In		Accumulated
	Stock		Capital		Deficit		Total

		(In thousands)
Balance January 1, 2021	$	616	$	751,304	$	(872,672)	$	(120,752)
Exercise of stock options and warrants		6		6,327		—		6,333
At the market offering costs		—		(241)		—		(241)
Cumulative effect of adopting ASU 2020-06		—		(70,779)		(4,697)		(75,476)
Stock-based compensation expense		—		3,271		—		3,271
Net loss		—		—		(35,090)		(35,090)
Balance March 31, 2021		622		689,882		(912,459)		(221,955)
Exercise of stock options		2		1,133		—		1,135
Stock-based compensation expense		—		3,117		—		3,117
Net loss		—		—		(28,593)		(28,593)
Balance June 30, 2021		624		694,132		(941,052)		(246,296)
Exercise of stock options		1		607		—		608
Stock-based compensation expense		—		5,694		—		5,694
Net loss		—		—		(22,703)		(22,703)
Balance September 30, 2021	$	625	$	700,433	$	(963,755)	$	(262,697)


			Additional
	Common		Paid-In		Accumulated
	Stock		Capital		Deficit		Total

		(In thousands)
Balance January 1, 2020	$	542	$	625,048	$	(734,611)	$	(109,021)
Exercise of stock options		3		2,709		—		2,712
Stock-based compensation expense		—		3,476		—		3,476
Net loss		—		—		(29,031)		(29,031)
Balance March 31, 2020		545		631,233		(763,642)		(131,864)
Exercise of stock options		—		66		—		66
Stock-based compensation expense		—		3,822		—		3,822
Net loss		—		—		(33,294)		(33,294)
Balance June 30, 2020		545		635,121		(796,936)		(161,270)
Issuance of common stock in direct offering, net of offering costs		69		93,606		—		93,675
Exercise of stock options		2		2,198		—		2,200
Stock-based compensation expense		—		3,824		—		3,824
Equity component of 2026 Notes, net of issuance costs		—		61,628		—		61,628
Purchases of 2026 Capped Calls		—		(23,223)		—		(23,223)
Equity component of early extinguishment of 2023 Notes		—		(22,073)		—		(22,073)
Termination of the 2023 Capped Call contracts related to debt repurchased		—		8,387		—		8,387
Tax benefit related to issuance of 2026 Notes, net of extinguishment		—		(12,011)		—		(12,011)
Net loss		—		—		(38,463)		(38,463)
Balance September 30, 2020	$	616	$	747,457	$	(835,399)	$	(87,326)

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Note 11—Stock-Based Compensation

Our stock option plans provide for the grant of incentive and non-qualified stock options, restricted stock awards, warrants and other stock awards to employees, non-employee directors and consultants.

Stock-based compensation expense is as follows:

Three Months Ended

Nine Months Ended

September 30,

2021

2020

2021

2020

(In thousands)

Research and development

2,477