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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, 2022



☐	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, par value $0.01 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 4, 2022, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 62,730,015.

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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 currently available information. All statements other than statements of historical fact are “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “likely,” “look forward to,” “may,” “objective,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “slate,” “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 estimates regarding how long our existing cash, cash equivalents, short-term investments and revenues will fund our anticipated operating expenses, capital expenditures and debt service obligations;

●

our expectations related to future milestone and royalty payments potentially payable to us under the terms of the asset purchase agreement under which we divested our former commercial ophthalmology product OMIDRIA^® (phenylephrine and ketorolac intraocular solution);

●

our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency (the “EMA”) in hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”), immunoglobulin A (“IgA”) nephropathy, COVID-19 and atypical hemolytic uremic syndrome (“aHUS”);

●

our expectations regarding the clinical, therapeutic and competitive benefits and importance of our drug candidates, our ability to design, initiate and/or successfully complete clinical trials and other studies for our drug candidates, and our plans and expectations regarding our ongoing or planned clinical trials, including for MASP-2 inhibitors narsoplimab and OMS1029, and our lead MASP-3 inhibitor OMS906, and for our other investigational candidates, including OMS527;

●

whether and when a marketing authorization application (“MAA”) may be filed with the EMA for narsoplimab in any indication, and whether the EMA, the FDA, or regulatory agencies in any other jurisdiction will grant approval for narsoplimab in any indication;

●

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

●

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 and expectations for the treatment of COVID-19 patients in additional clinical trials;

●

with respect to our ongoing or planned clinical development programs, our expectations regarding: whether enrollment 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 (the “EC”), or the EMA; and whether we can capitalize on the regulatory incentives provided by fast-track or breakthrough therapy designations granted by FDA;

●

our expectation that we will rely on contract manufacturers to manufacture narsoplimab, if approved, for commercial sale and to manufacture our other drug candidates, including OMS906 and OMS1029, for purposes of clinical supply and in anticipation of potential commercialization;

●

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;

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our expectations about the commercial competition that our drug 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, and drug 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;

●

our expected financial position, performance, revenues, growth, costs and expenses, magnitude of net losses and the availability of resources, including the impact of rising interest rates and inflation in the global economy; and

●

our ability to recruit and retain key personnel.

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 (the “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, 2022

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 Stockholders’ Equity (Deficit)	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
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 3.	Default Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures		36

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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,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	145,533	$	100,808
Short-term investments		75,431		56,458
OMIDRIA contract royalty asset, short-term		47,744		44,319
Receivables, net		13,854		38,155
Prepaid expense and other assets		5,983		8,216
Total current assets		288,545		247,956
OMIDRIA contract royalty asset		143,641		140,251
Right of use assets		22,464		28,276
Property and equipment, net		1,847		1,731
Restricted investments		1,054		1,054
Total assets	$	457,551	$	419,268

Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accounts payable	$	17,089	$	13,400
Accrued expenses		18,016		33,134
Current portion of lease liabilities		4,409		5,255
Total current liabilities		39,514		51,789
Unsecured convertible senior notes, net		314,819		313,458
OMIDRIA royalty obligation		125,000		—
Lease liabilities, non-current		23,533		29,126
Other accrued liabilities - noncurrent		999		1,115
Commitments and contingencies (Note 10)
Shareholders’ equity (deficit):
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at September 30, 2022 and December 31, 2021.		—		—
Common stock, par value $0.01 per share, 150,000,000 shares authorized at September 30, 2022 and December 31, 2021; 62,730,015 and 62,628,855 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively.		627		626
Additional paid-in capital		717,509		706,288
Accumulated deficit		(764,450)		(683,134)
Total shareholders’ equity (deficit)		(46,314)		23,780
Total liabilities and shareholders’ equity (deficit)	$	457,551	$	419,268

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,
	2022		2021		2022		2021

Costs and expenses:
Research and development	$	38,568	$	25,818	$	86,172	$	88,448
Selling, general and administrative		12,198		14,010		37,079		42,280
Total costs and expenses		50,766		39,828		123,251		130,728
Loss from continuing operations		(50,766)		(39,828)		(123,251)		(130,728)
Interest expense		(4,932)		(4,911)		(14,799)		(14,718)
Interest and other income		906		461		2,069		1,212
Net loss from continuing operations		(54,792)		(44,278)		(135,981)		(144,234)
Net income from discontinued operations		37,336		21,575		54,665		57,848
Net loss	$	(17,456)	$	(22,703)	$	(81,316)	$	(86,386)

Basic and diluted net income (loss) per share:
Net loss from continuing operations	$	(0.87)	$	(0.70)	$	(2.17)	$	(2.32)
Net income from discontinued operations		0.59		0.34		0.87		0.93
Net loss	$	(0.28)	$	(0.36)	$	(1.30)	$	(1.39)

Weighted-average shares used to compute basic and diluted net income (loss) per share		62,730,015		62,510,727		62,728,276		62,267,557

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

(unaudited)


					Additional
	Common Stock				Paid-In		Accumulated
	Shares		Amount		Capital		Deficit		Total
Balance at January 1, 2021		61,671,231	$	616	$	751,304	$	(872,672)	$	(120,752)
Exercise of stock options and warrants		580,781		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 at March 31, 2021		62,252,012		622		689,882		(912,459)		(221,955)
Exercise of stock options		238,928		2		1,133		—		1,135
Stock-based compensation expense		—		—		3,117		—		3,117
Net loss		—		—		—		(28,593)		(28,593)
Balance June 30, 2021		62,490,940		624		694,132		(941,052)		(246,296)
Exercise of stock options		51,328		1		607		—		608
Stock-based compensation expense		—		—		5,694		—		5,694
Net loss		—		—		—		(22,703)		(22,703)
Balance September 30, 2021		62,542,268	$	625	$	700,433	$	(963,755)	$	(262,697)




Balance at January 1, 2022	62,628,855	$	626	$	706,288	$	(683,134)	$	23,780
Exercise of stock options	101,160		1		413		—		414
Stock-based compensation expense	—		—		3,892		—		3,892
Net loss	—		—		—		(33,011)		(33,011)
Balance at March 31, 2022	62,730,015		627		710,593		(716,145)		(4,925)
Stock-based compensation expense	—		—		3,072		—		3,072
Net loss	—		—		—		(30,849)		(30,849)
Balance June 30, 2022	62,730,015		627		713,665		(746,994)		(32,702)
Stock-based compensation expense	—		—		3,844		—		3,844
Net loss	—		—		—		(17,456)		(17,456)
Balance September 30, 2022	62,730,015	$	627	$	717,509	$	(764,450)	$	(46,314)

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,
	2022		2021
Operating activities:
Net loss	$	(81,316)	$	(86,386)
Adjustments to reconcile net loss to net cash used in operating activities:
Early termination of operating lease		(454)		—
Stock-based compensation expense		10,808		12,082
Non-cash interest expense		1,361		1,256
Depreciation and amortization		789		1,062
Changes in operating assets and liabilities:
Receivables		24,301		(30,057)
Prepaid expenses and other		1,769		5,740
OMIDRIA contract royalty asset		(6,815)		—
Accounts payable and accrued expense		(11,544)		4,796
Net cash used in operating activities		(61,101)		(91,507)
Investing activities:
Purchases of investments		(103,573)		(5)
Proceeds from the sale and maturities of investments		84,600		81,500
Purchases of property and equipment		(100)		(203)
Net cash provided by (used in) investing activities		(19,073)		81,292
Financing activities:
Proceeds from OMIDRIA liability for future royalties		125,000		—
Proceeds upon exercise of stock options and warrants		414		8,076
Payments on finance lease obligations		(515)		(706)
At the market offering costs		—		(241)
Net cash provided by financing activities		124,899		7,129
Net decrease in cash and cash equivalents		44,725		(3,086)
Cash and cash equivalents at beginning of period		100,808		10,501
Cash and cash equivalents at end of period	$	145,533	$	7,415

Supplemental cash flow information
Cash paid for interest	$	13,437	$	14,889
Property acquired under finance lease	$	806	$	139

See accompanying Notes to Condensed Consolidated Financial Statements

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OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Organization and Basis of Presentation

General

Omeros Corporation (“Omeros,” the “Company” or “we”) is a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders. We marketed our first drug product, OMIDRIA^® (phenylephrine and ketorolac intraocular solution) 1% / 0.3% for use during cataract surgery or intraocular lens replacement in the United States (the “U.S.”) until we sold OMIDRIA and related business assets on December 23, 2021 (see “Sale of OMIDRIA Assets” below for additional information).

Our drug candidate narsoplimab, targeting mannan-binding lectin-associated serine protease-2 (“MASP-2”) and the lectin pathway of complement, 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 indicating that the BLA could not be approved as submitted. In November 2022, we received the decision by FDA’s Office of New Drugs (“OND”) denying our appeal of the CRL. Although our appeal was denied, the decision proposes a path forward for resubmission of the BLA based on survival data from the completed pivotal trial versus a historical control group, with or without an independent literature analysis.

Clinical development of narsoplimab also includes programs focused on complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19. Our pipeline of investigational agents also includes: our long-acting MASP-2 inhibitor OMS1029, which is currently in a Phase 1 clinical trial, and OMS906, our inhibitor of mannan-binding lectin-associated serine protease 3 (“MASP-3”) targeting the alternative pathway of complement, which has completed a Phase 1 clinical trial and is being advanced into clinical programs for paroxysmal nocturnal hemoglobinuria (“PNH”) and complement 3 (“C3”) glomerulopathy.

Basis of Presentation

Our condensed consolidated financial statements include the financial position and results of operations of Omeros and our wholly owned subsidiaries. All inter-company transactions have been eliminated. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain prior year amounts in the condensed consolidated balance sheets, statements of operations, statements of stockholders’ equity (deficit) and statements of cash flows and the notes to the condensed consolidated financial statements have been reclassified in the condensed consolidated financial statements to conform to the current year presentation.

Sale of OMIDRIA Assets

On December 23, 2021, we completed the sale of OMIDRIA and certain related assets and liabilities to Rayner Surgical Inc. (“Rayner”) pursuant to an Asset Purchase Agreement dated December 1, 2021 (the “Asset Purchase Agreement”). We received a payment of $126.0 million at closing and receive royalty payments on worldwide sales of OMIDRIA and potentially a $200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years before January 1, 2025.

As a result of the divestiture, the results of OMIDRIA operations (e.g., revenues and operating costs) are included in discontinued operations in our condensed consolidated statements of operations and comprehensive loss for all periods presented (see “Note 3 – Discontinued Operations”).

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Risks and Uncertainties

As of September 30, 2022, we had cash, cash equivalents and short-term investments of $221.0 million and outstanding accounts receivable of $13.9 million. Our loss for the quarter ended September 30, 2022 was $17.5 million. Included in our loss for the quarter was a $29.0 million noncash benefit related to the revaluation of our OMIDRIA contract royalty asset, which was partially offset by $4.6 million of noncash operating expenses. Our loss for the nine months ended September 30, 2022 was $81.3 million and included $30.5 million of noncash benefit related to the revaluation of our OMIDRIA contract royalty asset along with differences between actual and estimated royalties in the third quarter, which was partially offset by $12.5 million of noncash operating expenses.

We plan to continue to fund our operations for the next twelve months with our existing cash and investments, our current accounts receivable, and our portion of OMIDRIA royalties. There is also the potential for us to receive a $200.0 million milestone related to achievement of long-term OMIDRIA separate payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured under Medicare Part B for at least four continuous years. If FDA approval is granted for narsoplimab for HSCT-TMA, we expect that sales of narsoplimab will also provide funds for our operations. We have a sales agreement through which we may, from time to time, offer and sell shares of our common stock in an “at the market” equity offering for aggregate sales proceeds of up to $150.0 million. Should it be 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.

Management believes the assets on hand along with our portion of expected OMIDRIA royalties to be received are adequate to finance our operations at least through November 9, 2023. Accordingly, the accompanying condensed 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.

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 OMIDRIA contract royalty asset valuation, stock-based compensation expense, and accruals for clinical trials and 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.

Note 2—Significant Accounting Policies

Discontinued Operations

We review the presentation of planned or completed business dispositions in the condensed consolidated financial statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business and, if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results.

Planned or completed business dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the consolidated balance sheets. Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, for all periods presented in the condensed consolidated statements of operations and comprehensive loss. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. The OMIDRIA assets sold to Rayner qualify as a discontinued operation (see “Note 3 – Discontinued Operations”).

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OMIDRIA Royalties and OMIDRIA Contract Royalty Assets

We have rights to receive future royalties from Rayner on OMIDRIA net sales at rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. The sale of OMIDRIA qualified as an asset sale under GAAP. To measure the OMIDRIA contract royalty asset, we used the expected value approach, which is the sum of the discounted probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Accordingly, the contract royalty asset excludes the achievement of the potential $200.0 million milestone payment and any non-U.S. royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Royalties earned are primarily recorded as a reduction to the OMIDRIA contract royalty asset. The amounts recorded in discontinued operations will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received that are different from the expected royalties recorded at closing. The OMIDRIA contract royalty asset is re-measured periodically using the expected value approach based on actual results and future expectations. Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.

OMIDRIA Royalty Obligation

On September 30, 2022, we sold to DRI Healthcare Acquisitions LP (“DRI”) an interest in a portion of our future OMIDRIA royalty receipts for a purchase price of $125.0 million in cash (see “Note 8 – OMIDRIA Royalty Obligation”).

The $125.0 million cash consideration obtained is classified as liability and is recorded as an “OMIDRIA royalty obligation” on our condensed consolidated balance sheet. The liability is being amortized over the term of the arrangement using the implied effective interest rate of 9.4% and interest expense is recorded as a component of continuing operations.

To the extent our estimates of future royalties are greater or less than previous estimates, we will adjust the carrying amount of the liability for future OMIDRIA royalties to the present value of the revised estimated cash flows, discounted at the original effective interest rate utilizing the cumulative catch-up method. The offset to the adjustment would be recognized as a component of net income (loss) from continuing operations.

OMIDRIA Revenue Recognition

Prior to the sale of OMIDRIA on December 23, 2021, when we entered into a customer contract, we performed the following five steps: (i) identified the contract with a customer; (ii) identified the performance obligations in the contract; (iii) determined the transaction price; (iv) allocated the transaction price to the performance obligations in the contract; and (v) recognized revenue when (or as) we satisfy a performance obligation.

We generally recorded OMIDRIA product sales when the product was delivered to our wholesalers. OMIDRIA product sales were recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts. Accruals or allowances were established for these deductions in the same period when revenue was recognized, and actual amounts incurred were offset against the applicable accruals or allowances. We reflected 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.

Inventory

We expense inventory costs related to product candidates as research and development expenses until regulatory approval is reasonably assured in the U.S. or the European Union (the “EU”). Once approval is reasonably assured, costs, including amounts related to third-party manufacturing, transportation and internal labor and overhead, will be capitalized.

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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, including grants of stock option awards and restricted stock unit awards (“RSU”), based on estimated fair values. 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.

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.

Note 3—Discontinued Operations

On December 23, 2021, we completed the sale of OMIDRIA and certain related assets, including inventory and prepaid expenses. We retained the outstanding accounts receivable and all outstanding liabilities related to OMIDRIA as of the closing date.

Upon closing, we received an up-front cash payment of $126.0 million. We receive a 50% royalty on OMIDRIA net sales in the U.S. until the earlier of January 1, 2025 or the payment of the $200.0 million milestone described below. After such date, we will receive a 30% royalty on OMIDRIA net sales in the U.S. (the “U.S. base royalty rate”) until the expiration or termination of the last issued and unexpired U.S. patent. The U.S. base royalty rate is reduced to 10% upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment. We will also receive a royalty of 15% on OMIDRIA net sales outside the U.S. on a country-by-country basis until the expiration or termination of the last issued and unexpired OMIDRIA patent in such country. We will receive a $200.0 million milestone payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years.

During the three and nine months ended September 30, 2022, we earned royalties of $16.5 million and $47.6 million, respectively, on sales of OMIDRIA which we recorded as a reduction from the OMIDRIA contract royalty asset. During the three and nine months ended September 30, 2022, we also recorded $37.3 million and $54.7 million, respectively, of

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income in discontinued operations representing interest income and remeasurement adjustments to the OMIDRIA contract royalty asset. The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands):


OMIDRIA contract royalty asset at December 31, 2021	$	184,570
Royalties earned		(47,555)
Royalty interest income and other		23,857
Remeasurement adjustments		30,513
OMIDRIA contract royalty asset at September 30, 2022	$	191,385

Net income from discontinued operations is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(In thousands)
Product sales, net	$	—	$	30,004	$	—	$	79,888
Royalty interest income and other		8,229		—		23,857		—
Remeasurement adjustments		29,043		—		30,513		—
Other income (expenses), net		64		(8,429)		295		(22,040)
Net income from discontinued operations	$	37,336	$	21,575	$	54,665	$	57,848

Cash flow from discontinued operations is as follows:


	Nine Months Ended
	September 30,
	2022		2021

	(In thousands)
Total operating inflows (outflows) from discontinued operations	$	12,037	$	(23,828)

Note 4—Net Loss Per Share

Our potentially dilutive securities include potential common shares related to our stock options, warrants, RSUs 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. 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,
	2022	2021	2022	2021
2023 Notes convertible to common stock ⁽¹⁾	4,941,739	4,941,739	4,941,739	4,941,739
Outstanding options to purchase common stock	19,292	1,781,619	8,246	2,504,901
Outstanding restricted stock units	201,467	—	208,962	—
Total potentially dilutive shares excluded from net loss per share	5,162,498	6,723,358	5,158,947	7,446,640

(1)The 2023 Notes (defined below) are subject to a capped call arrangement that potentially reduces the dilutive effect as described in “Note 7 — Unsecured Convertible Senior Notes.” Any potential impact of the capped call arrangement is excluded from this table.

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Note 5—Certain Balance Sheet Accounts

OMIDRIA Contract Royalty Asset

The OMIDRIA contract royalty asset consists of the following:


	September 30,		December 31,
	2022		2021

	(In thousands)
Short-term contract royalty asset	$	47,744	$	44,319
Long-term contract royalty asset		143,641		140,251
Total OMIDRIA contract royalty asset	$	191,385	$	184,570

Receivables, net

Receivables, net consists of the following:


	September 30,		December 31,
	2022		2021

	(In thousands)
Royalty and trade receivables, net	$	13,113	$	36,505
Sublease and other receivables		741		1,650
Total receivables, net	$	13,854	$	38,155

Trade receivables are net of product return and chargeback allowances. Product returns and chargeback allowances were $2.0 million as of December 31, 2021.

Property and Equipment, Net

Property and equipment, net consists of the following:


	September 30,		December 31,
	2022		2021

	(In thousands)
Finance leases	$	6,785	$	5,979
Laboratory equipment		3,121		3,091
Computer equipment		1,076		1,069
Office equipment and furniture		625		625
Total cost		11,607		10,764
Less accumulated depreciation and amortization		(9,760)		(9,033)
Total property and equipment, net	$	1,847	$	1,731

For each of the three months ended September 30, 2022 and September 30, 2021, depreciation and amortization expense was $0.3 million. For the nine months ended September 30, 2022 and September 30, 2021, depreciation and amortization expense was $0.8 million and $1.1 million, respectively.

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Accrued Expenses

Accrued expenses consists of the following:


	September 30,		December 31,
	2022		2021

	(In thousands)
Clinical trials	$	4,958	$	2,430
Interest payable		3,703		5,172
Employee compensation		3,704		3,706
Contract research and development		2,639		3,916
Consulting and professional fees		2,338		7,455
Sales rebates, fees and discounts		—		8,442
Other accrued expenses		674		2,013
Total accrued expenses	$	18,016	$	33,134

Note 6—Fair-Value Measurements

As of September 30, 2022, and December 31, 2021, 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, 2022
	Level 1		Level 2		Level 3		Total

	(In thousands)
Assets:
Money-market funds classified as short-term investments	$	75,431	$	—	$	—	$	75,431
Money-market funds classified as non-current restricted investments		1,054		—		—		1,054
Total	$	76,485	$	—	$	—	$	76,485


	December 31, 2021
	Level 1		Level 2		Level 3		Total

	(In thousands)
Assets:
Money-market funds classified as short-term investments	$	56,458	$	—	$	—	$	56,458
Money-market funds classified as non-current restricted investments		1,054		—		—		1,054
Total	$	57,512	$	—	$	—	$	57,512

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Cash held in demand deposit accounts of $145.5 million and $100.8 million is excluded from our fair-value hierarchy disclosure as of September 30, 2022 and December 31, 2021, respectively. There were no unrealized gains or losses associated with our investments as of September 30, 2022 or December 31, 2021. 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 “Note 7—Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our outstanding convertible senior notes.

Note 7—Unsecured Convertible Senior Notes

In November 2018, we issued $210.0 million in aggregate principal amount of our 6.25% Convertible Senior Notes (the “2023 Notes”), and in August and September 2020, we issued $225.0 million in aggregate principal amount of our 5.25% Convertible Senior Notes (the “2026 Notes”). We used a portion of the proceeds from the 2026 Notes to repurchase $115.0 million principal amount of the 2023 Notes and terminate a corresponding portion of the related capped call for the 2023 Notes, as described below.

Unsecured convertible senior notes outstanding at September 30, 2022 and December 31, 2021 are as follows:


	Balance as of September 30, 2022
	2023 Notes		2026 Notes		Total

	(In thousands)
Principal amount	$	95,000	$	225,030	$	320,030
Unamortized debt issuance costs		(789)		(4,422)		(5,211)
Total unsecured convertible senior notes, net	$	94,211	$	220,608	$	314,819

Fair value of outstanding unsecured convertible senior notes (1)	$	88,113	$	132,543



	Balance as of December 31, 2021
	2023 Notes		2026 Notes		Total

	(In thousands)
Principal amount	$	95,000	$	225,030	$	320,030
Unamortized discount		(1,282)		(5,290)		(6,572)
Total unsecured convertible senior notes, net	$	93,718	$	219,740	$	313,458

Fair value of outstanding unsecured convertible senior notes (1)	$	87,163	$	171,867

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

2023 Unsecured Convertible Senior Notes

Our 2023 Notes are unsecured and 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. The 2023 Notes mature on November 15, 2023 unless earlier purchased, redeemed or converted in accordance with their terms.

As of September 30, 2022, the unamortized debt issuance costs of $0.8 million will be amortized to interest expense at an effective interest rate of 7.0% over the remaining term.

Subject to the satisfaction of certain conditions, 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

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of common stock), which equals approximately 4.9 million shares of common stock issuable upon conversion, 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, 2022, 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				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(In thousands)				(In thousands)
Contractual interest expense	$	1,484	$	1,484	$	4,453	$	4,453
Amortization of debt issuance costs		167		156		493		459
Total	$	1,651	$	1,640	$	4,946	$	4,912

2026 Unsecured Convertible Senior Notes

Our 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, 2022, the unamortized debt issuance costs of $4.4 million will be amortized to interest expense at an effective interest rate of 5.9% over the remaining term.

Subject to the satisfaction of certain conditions, the 2026 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 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.

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”), which 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.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(In thousands)				(In thousands)
Contractual interest expense	$	2,954	$	2,954	$	8,861	$	8,861
Amortization of debt issuance costs		294		277		869		797
Total	$	3,248	$	3,231	$	9,730	$	9,658

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Future Minimum Principal Payments

Future minimum principal payments for the 2023 Notes and 2026 Notes as of September 30, 2022 are as follows:


	(In thousands)
2023	$	95,000
2024		—
2025		—
2026		225,030
2027		—
Total future minimum principal payments under the 2023 Notes and 2026 Notes	$	320,030

Note 8—OMIDRIA Royalty Obligation

On September 30, 2022, we sold to DRI an interest in our future OMIDRIA royalty receipts and received $125.0 million in cash consideration. DRI is entitled to receive royalties on OMIDRIA net sales between September 1, 2022 and December 31, 2030, subject to annual caps. DRI receives their prorated monthly cap amount before we receive any royalty proceeds. DRI is not entitled to carry-forward nor recoup any shortfall if the royalties paid by Rayner for an annual period are less than the cap amount applicable to each discrete calendar year. Additionally, DRI has no recourse to or security interest in our assets other than our OMIDRIA royalty receipts, and we retain all royalty receipts in excess of the respective cap in any given calendar year. The maximum payout DRI is entitled to receive is $188.4 million which, if fully paid, would be an effective interest rate of 9.4%.

The annual caps are as follows:

●

$1.7 million for the remainder of calendar year 2022

●

$13.0 million for calendar year 2023

●

$20.0 million for calendar year 2024

●

$25.0 million for calendar years 2025 through 2028

●

$26.3 million for calendar year 2029

●

$27.5 million for calendar year 2030

The OMIDRIA royalty obligation is classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. As of September 30, 2022, the carrying value approximates its estimated fair value.

Note 9—Leases

We have an operating lease for our office and laboratory facilities with an initial term that ends in November 2027 and two options to extend the lease term by five years each. On January 14, 2022, we entered into an agreement with our landlord to early terminate a portion of the rentable square footage of our office and laboratory facilities, which reduced the right of use asset by $4.7 million and related liability by $5.2 million. We recorded a non-cash gain of $0.5 million upon early termination of this portion of the lease. In addition, we carry various finance leases for laboratory equipment.

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Supplemental lease information is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(In thousands)				(In thousands)
Lease cost
Operating lease cost	$	1,659	$	1,961	$	4,529	$	5,528
Finance lease cost:
Amortization		250		243		570		854
Interest		32		40		123		127
Variable lease cost		813		863		2,395		2,667
Sublease income		(432)		(447)		(1,377)		(1,288)
Net lease cost	$	2,322	$	2,660	$	6,240	$	7,888

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


	Nine Months Ended
	September 30,
	2022		2021

	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
Cash payments for operating leases	$	5,312	$	5,521
Cash payments for financing leases	$	598	$	684

Note 10—Commitments and Contingencies

Contracts

We have various agreements with third parties that collectively require payment of termination fees totaling $20.6 million as of September 30, 2022 if we cancel the work within specific time frames, either prior to commencing or during performance of the contracted services.

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 during the clinical development processes or upon approval of commercial sale as well as low single- to low double-digit royalties on the net income or net sales of the product. For the three months and nine months ended September 30, 2022 and September 30, 2021, development milestone expenses were insignificant. Should narsoplimab be approved, we would owe milestone payments to development partners and be obligated to pay low single-digit royalties on net sales of the product.

Note 11—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, 2022, 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, 2022, warrants to purchase 200,000 shares of our common stock remained outstanding with an exercise price of $23.00 per share. The warrants expire on April 12, 2023.

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