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Item 5. Market for Registrant’s Common Equity

2024-04-01 compared with 2023-03-13 · 351 added, 3 removed, 17 unchanged (95% of the section changed)

6 unchanged sentences

Recent Sales of Unregistered Securities

We did not sell any equity securities that were not registered under the Securities Act during the fiscal year ended December 31, 2022.

We did not sell any equity securities that were not registered under the Securities Act during the three fiscal years ended December 31, 2023.

Stock Performance Graph

3 unchanged sentences

Benchmark TR Index.

It also assumes that

any dividends were reinvested.

It also assumes that any dividends were reinvested.

The data shown in the following graph are not necessarily indicative of future stock price performance.

3 unchanged sentences

In addition, the foregoing information shall not be deemed to be incorporated by reference into any of our filings under the Exchange Act or the Securities Act, except to the extent that we specifically incorporate this information by reference.

Issuer Purchases of Equity Securities

The following table provides information regarding our repurchases of our common stock during the quarter ended December 31, 2023:

Total Number of

Shares Purchased

Average Price

Paid per Share

Total Number of Shares

Purchased as Part of Publicly

Announced Plans or Programs (1)

Maximum Approximate Dollar Value

of Shares That May Yet Be Purchased Under the Plans or Programs (1)

(In thousands)

10/01/23 – 10/31/23

11/01/23 – 11/30/23

12/01/23 – 12/31/23

On November 9, 2023, our board of directors approved an indefinite term share repurchase program under which we may repurchase from time to time up to $50.0 million of our common stock in the open market, including under trading plans established pursuant to Rule 10b5-1 and Rule 10b-18 under the Exchange Act, or in privately negotiated transactions.

As of March 26, 2024, approximately $33.8 million remained available for repurchase of our outstanding shares of common stock under the share repurchase program.

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the audited annual consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties.

Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “ Risk Factors ” and elsewhere in this Annual Report on Form 10-K.

For further information regarding forward-looking statements, please refer to the special note regarding forward-looking statements at the beginning of this Annual Report on Form 10-K.

Throughout this discussion, unless the context specifies or implies otherwise, the terms “ Company, ” “ we, ” “ us ” and “ our ” refer to Omeros Corporation and our wholly owned subsidiaries.

We are 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 disorders including complement-mediated diseases, cancers related to the dysfunction of the immune system, and addictive and compulsive disorders.

Complement Inhibitor Programs

The complement system plays a role in the body’s inflammatory response and becomes activated as a result of tissue damage or trauma or microbial pathogen invasion.

Inappropriate or uncontrolled activation of the complement system can cause diseases characterized by serious tissue injury.

Three main pathways can activate the complement system:

classical, lectin, and alternative.

Omeros is focused on development of therapeutics to treat diseases associated with the lectin and/or alternative pathways of complement.

Omeros is developing antibodies as well as small-molecule inhibitors of key enzymes known to be centrally involved in the in activation of the targeted pathway of complement.

Lectin Pathway / MASP 2

MASP-2, is a novel pro-inflammatory protein target that is the effector enzyme of the lectin pathway and is required for the function of this pathway.

Omeros is developing antibodies and small-molecule inhibitors of MASP-2 as potential therapeutics for diseases in which the lectin pathway has been shown to contribute to significant tissue injury and pathology.

When not treated, these diseases are typically characterized by significant end-organ damage, such as kidney or central nervous system injury.

Importantly, inhibition of MASP-2 has been demonstrated not to interfere with the antibody-dependent classical complement activation pathway, a critical component of the acquired immune response to infection.

The lead drug candidate in our MASP-2 inhibitor program is narsoplimab (OMS721), a proprietary, patented human monoclonal antibody targeting MASP-2, the effector enzyme of the lectin pathway of complement.

Clinical development of narsoplimab is currently focused primarily on TA-TMA and development efforts are also directed to COVID-19, ARDS and PASC.

We are also developing OMS1029, a long-acting, next-generation antibody targeting MASP-2 and the lectin pathway which we expect will be well-suited to indications requiring long-term, chronic administration.

In addition, we are advancing our orally administered small-molecule MASP-2 inhibitor through IND-enabling studies.

For more information, see Part I, Item 1 in this Annual Report on Form 10-K under the heading “Complement Inhibitor Programs:

MASP-2 Program – Lectin Pathway Disorders ”.

Alternative Pathway / MASP-3

Our pipeline of clinical-stage complement-targeted therapeutic candidates also includes OMS906, a proprietary, patented monoclonal antibody targeting MASP-3, the key activator of the alternative pathway of complement.

We believe OMS906 has the potential to treat a wide range of alternative pathway-related diseases and that its attributes favorably differentiate OMS906 from other marketed and in-development alternative pathway inhibitors.

Clinical development of OMS906 is currently focused on rapidly advancing to Phase 3 clinical trials in multiple alternative pathway-related disorders, including PNH and C3G.

We have multiple ongoing Phase 2 clinical trials evaluating OMS906 in these indications.

For more information, see Part I, Item 1 in this Annual Report on Form 10-K under the heading “Complement Inhibitor Programs:

MASP-3 Program – Alternative Pathway Disorders ”.

PDE7 Inhibitor Programs

Our PDE7 inhibitor program, which we refer to as OMS527, comprises multiple PDE7 inhibitor compounds and is based on our discoveries of previously unknown links between PDE7 and any addiction or compulsive disorder, and between PDE7 and any movement disorders.

In April 2023, we were awarded a grant from the National Institute on Drug Abuse, part of the National Institutes of Health, to develop our lead orally administered PDE7 inhibitor compound, for which we have successfully completed a Phase 1 study, for the treatment of cocaine use disorder (“CUD”).

The grant amount, a total of $6.69 million over three years, is intended to support preclinical cocaine interaction/toxicology studies to assess safety of the therapeutic candidate in the presence of concomitant cocaine administration, as well as an in-patient, placebo-controlled clinical study evaluating the safety and effectiveness of OMS527 in adults with CUD who receive concurrent intravenous cocaine.

The preclinical study is intended to provide the toxicology data necessary to support the human study of OMS527 in CUD.

The toxicology study is underway and is expected to be completed in late 2024.

Additionally, with investigators at Emory University, we are also evaluating OMS527 as a potential treatment for levodopa-induced dyskinesia, a common and debilitating side effect of long-term levodopa dosing in patients with Parkinson’s disease.

For more information, see Part I, Item 1 in this Annual Report on Form 10-K under the heading “Other Clinical Programs:

PDE7 Inhibitor Programs – OMS527 ”.

Pre-clinical Programs

We are advancing preclinical research on potential molecular and cellular therapies for cancer.

On the molecular front, we have developed novel biologic platforms to target cancer cells specifically and kill them directly or indirectly through the potentiation of the immune system.

Our novel molecules combine tumor antigens with a potent adjuvant and show high levels of killing in cancer cells.

We believe that some of these molecules could function as therapeutic vaccines against a broad range of tumors, potentially transforming treatment of both solid tumors and hematologic cancers.

On the cellular front, we are evaluating novel approaches for both adoptive T cell and CAR T therap ies.

We have identified specific T cell signaling pathways, which, once inhibited, significantly and preferentially enhance the expansion of memory T cells that distinctively recognize and efficiently kill tumor cells.

We continue to develop and validate our novel approach, which we believe could improve response rates for patients receiving either engineered or native T cell therapies for liquid or solid tumors.

OMIDRIA Sale and Royalty Monetization Transactions

We previously developed and commercialized OMIDRIA ® (phenylephrine and ketorolac intraocular solutions) 1%/0.3%, which is approved by FDA for use during cataract surgery or intraocular ("IOL") replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain.

We marketed OMIDRIA in the U.S.

from the time of its commercial launch in 2015 until December 2021.

On December 23, 2021, we sold our commercial product OMIDRIA and certain related assets, including inventory and prepaid expenses, to Rayner.

Rayner paid us $126.0 million in cash at the closing and we retained all outstanding accounts receivable, accounts payable, and accrued expenses as of the closing date.

Under the Asset Purchase Agreement, we were entitled to receive a $200.0 million Milestone Payment within 30 days following an event (the "Milestone Event") that establishes separate payment for OMIDRIA for a continuous period of at least four years when furnished in the ambulatory surgery center ("ASC") setting.

The Milestone Event occurred in December 2022 and we recorded a $200.0 milestone receivable.

We received the Milestone Payment together with accrued interest in February 2023.

Under the Asset Purchase Agreement, the occurrence of the Milestone Event in December 2022 triggered a reduction in the U.S.

royalty rate from 50% to 30% on OMIDRIA net sales until the expiration or termination of the last issued and unexpired U.S.

patent, which we expect to occur no earlier than 2035.

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 certain separate payment (i.e., becomes included in the packaged payment rate for the surgical procedure) under Medicare Part B, the U.S.

base royalty rate would be reduced to 10%.

Pursuant to legislation enacted in late 2022, we expect separate payment for OMIDRIA under Medicare Part B to extend until at least January 1, 2028.

As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to net income from discontinued operations, net of tax in our consolidated statements of operations and comprehensive income (loss) and excluded from continuing operations for all periods presented.

On September 30, 2022, we sold to DRI an interest in a portion of our future OMIDRIA royalty receipts and received $125.0 million in cash consideration which we recorded as an OMIDRIA royalty obligation on our consolidated balance sheet.

Interest expense is recorded as a component of continuing operations.

The aggregate amount of royalties to which DRI is entitled under this arrangement is capped at $188.4 million.

On February 1, 2024, we sold to DRI an expanded interest in the OMIDRIA royalties pursuant to the terms of an amended and restated royalty purchase agreement dated February 1, 2024 (the “Amendment”).

We received $115.5 million in cash upon closing of the Amendment.

The Amendment eliminated the caps on royalty payments effective beginning in the first quarter of 2024, and provides that DRI will now receive all royalties on U.S.

net sales of OMIDRIA payable between January 1, 2024 and December 31, 2031.

DRI is entitled to payment only to the extent of royalty payments that are payable on U.S.

net sales of OMIDRIA on or before December 31, 2031 and DRI has no recourse to our assets other than its interest in the OMIDRIA royalties.

Omeros retains the right to receive all royalties payable by Rayner on any net sales of OMIDRIA outside the U.S.

payable from and after January 1, 2024, as well as all royalties on global net sales of OMIDRIA payable from and after December 31, 2031.

In addition to the cash consideration received at closing, the Amendment also entitles us to receive a milestone payment ranging between $10.0 million and $27.5 million if U.S.

net sales of OMIDRIA reach applicable thresholds ranging between a total of $156.0 million and $160.0 million for any period of four consecutive quarters ending prior to January 1, 2026 as well as a separate milestone payment ranging between $8.0 million and $27.5 million if U.S.

net sales of OMIDRIA reach applicable thresholds ranging between a total of $181.0 million and $185.0 million for any period of four consecutive quarters ending prior to January 1, 2028.

See Part II, Item 8, “Note 8 – OMIDRIA Royalty Obligation” to our Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.

As of December 31, 2023 , we had cash, cash equivalents and short-term investments of $171.8 million and, in February 2024, we received $115.5 million from DRI.

Results of Operations

Research and Development Expenses

Our research and development expenses can be divided into three categories:

direct external expenses, which include clinical research and development and preclinical research and development activities;

internal, overhead and other expenses;

and stock-based compensation expense.

Direct external expenses consist primarily of expenses incurred pursuant to agreements with third-party manufacturing organizations prior to receiving regulatory approval for a drug candidate, CROs, clinical trial sites, collaborators, licensors and consultants.

Pre-clinical research and development includes costs prior to beginning Phase 1 studies in human subjects.

Internal, overhead and other expenses primarily consist of costs for personnel, overhead, rent, utilities and depreciation.

The discontinued operations of OMIDRIA relates to the costs of drug manufacturing stability, quality control testing and costs of employees and consultants.

The following table illustrates our expenses associated with these activities:

Year Ended December 31,

(In thousands)

Continuing research and development expenses:

Direct external expenses:

Clinical research and development:

MASP-2 program - OMS721 (narsoplimab)

MASP-3 program - OMS906

MASP-2 program - OMS1029

Total clinical research and development

Preclinical research and development

Total direct external expenses

Internal, overhead and other expenses

Stock-based compensation expenses

Total continuing research and development expenses

Discontinued research and development expenses

Total research and development expenses

Clinical research and development expenses increased $4.8 million between 2023 and 2022.

The $16.5 million increase in OMS906 development costs was due to an increase in manufacturing and Phase 2 clinical trial costs and a $5.0 million development milestone paid in 2023 under a technology license agreement.

The $3.6 million increase in OMS1029 expense was primarily due to costs associated with initiation of human trials and other clinical development costs, i.e.

the transition from preclinical to clinical development status in the third quarter of 2022.

These increases were offset by decreased narsoplimab manufacturing costs during 2023.

The $3.5 million increase in clinical research and development costs between 2022 and 2021 was primarily due to the advancement of OMS1029 from preclinical status to clinical research and development status on initiation of the Phase 1 clinical trial in the third quarter of 2022.

Additionally, we incurred increased narsoplimab drug manufacturing costs in 2022 compared to the prior year.

These costs were partially offset by reduced costs in our OMS906 program resulting from the completion of toxicology study work in the second quarter of 2022 .

Preclinical research and development expenses decreased $2.1 million in 2023 compared to 2022, primarily due to the migration of OMS1029 from preclinical to clinical research and development status during the third quarter of 2022, offset by an increase in preclinical oncology research costs during 2023.The $7.8 million decrease in 2022 over 2021 in preclinical research and development expenses was primarily due to the migration of OMS1029 from preclinical to clinical research and development status during the third quarter of 2022.

The changes in stock-based compensation expense between the three covered years were due to the valuations of employee stock options.

We expect our overall research and development costs in 2024 to be similar to 2023, driven by commercial narsoplimab manufacturing costs expected to be incurred prior to FDA approval of TA-TMA, increases in OMS906 clinical and manufacturing costs, and decreases in OMS721 clinical costs.

Our accounting policy is to expense all manufacturing costs related to drug candidates until regulatory approval is reasonably assured in either the U.S.

At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our drug candidates due to the inherently unpredictable nature of our preclinical and clinical development activities.

Clinical development timelines, the probability of success and development costs can differ materially as new data become available and as expectations change.

Our future research and development expenses will depend, in part, on the preclinical or clinical success of each drug candidate as well as ongoing assessments of each program’s commercial potential.

In addition, we cannot forecast with precision which drug candidates, if any, may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

We are required to expend substantial resources in the development of our drug candidates due to the lengthy process of completing clinical trials and seeking regulatory approval.

Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could delay our generation of product revenue and increase our research and development expenses.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses are comprised primarily of salaries, benefits and stock-based compensation costs for sales, marketing and administrative personnel who are not directly engaged in research and development.

Costs also include marketing and selling expenses, professional and legal services, general corporate costs and an allocation of our occupancy costs.

Year Ended December 31,

(In thousands)

Continuing selling, general and administrative expenses:

Selling, general and administrative expenses, excluding stock-based compensation expense

Stock-based compensation expense

Total continuing selling, general and administrative expenses

Discontinued selling, general and administrative expenses

Total selling, general and administrative expenses

Continuing selling, general and administrative expenses, excluding stock-based compensation expense, decreased $4.1 million between 2022 and 2021 primarily related to reduced spending on p re-commercialization sales and marketing activities which were higher in 2021 as we prepared for the then anticipated approval and commercial launch of narsoplimab for the treatment of TA-TMA.

T he changes in stock-based compensation expense between the three covered years were due to the valuations of employee stock options.

Our selling, general and administrative expenses for 2024 will be highly dependent on whether narsoplimab receives U.S.

marketing approval for treatment of TA-TMA.

If TA-TMA is approved in 2024, we expect to hire a field sales force and initiate commercial launch activities which will increase our selling, general and administrative expenses.

If narsoplimab is not approved in 2024, our selling, general and administrative expenses are expected to decrease in 2024 .

Interest Expense

Year Ended December 31,

(In thousands)

Interest expense

Interest expense is primarily comprised of interest and amortization of debt discount and issuance costs related to our convertible senior notes and interest on our DRI royalty obligation (see Part II, Item 8, "Note 6 – Convertible Senior Notes" and "Note 8 – OMIDRIA Royalty Obligation” to our Consolidated Financial Statements in this Annual Report on Form 10-K for additional information).

Interest expense increased $8.1 million in 2023 compared to 2022 primarily due to incurring interest from our DRI royalty obligation for the full year.

Interest expense increased $3.0 million in 2022 compared to 2021 primarily due to interest incurred from our DRI royalty obligation only in the fourth quarter of 2022.

Interest and Other Income

Year Ended December 31,

(In thousands)

Interest and other income

The $12.3 million increase in interest and other income between 2023 and 2022 was primarily due to holding higher average cash and investment balances than in the prior year as a result of receiving a $200.0 million Milestone Payment from Rayner in February 2023.

The $2.3 million increase in interest and other income between 2022 and 2021 was primarily attributable to obtaining significantly higher interest rates on our cash and investments in 2022.

We expect interest and other income in 2024 to be less than 2023 primarily due to lower average cash and investment balances during 2024.

Gain on Early Extinguishment of Convertible Senior Notes

Year Ended December 31,

(In thousands)

Gain on early extinguishment of convertible senior notes

In December 2023, we repurchased $9.1 million par value of our 2026 Notes at a discount, realizing a $4.1 million non-cash gain on extinguishment.

Net Income from Discontinued Operations, Net of Tax

On December 23, 2021, we sold our commercial drug, OMIDRIA, to Rayner.

As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to discontinued operations for all periods presented.

Net income from OMIDRIA discontinued operations, net of tax is shown below:

Year Ended December 31,

(In thousands)

Product sales, net

Costs and expenses

Gain on sale of OMIDRIA

Milestone income

Interest on OMIDRIA contract royalty asset

Remeasurement adjustments

Income before income tax

Income tax expense (1)

Net income from discontinued operations, net of tax

(1) For further discussion of income tax expense, please refer to Part II, Item 8, “Note 13 – Income Taxes” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

Gain on the Sale of OMIDRIA

On December 23, 2021, we completed the sale of OMIDRIA to Rayner and received $126.0 million in cash at the closing.

Additionally, we recorded an OMIDRIA contract royalty asset of $184.6 million for the rights to receive future royalties from Rayner on OMIDRIA net sales.

The sale of OMIDRIA qualified as an asset sale under GAAP.

Rayner’s U.S.

net sales of OMIDRIA for the years ended December 31, 2023 and 2022 were $135.3 million and $130.9 million, respectively.

We earned royalties of $40.6 million and $65.4 million on OMIDRIA net sales for the years ended December 31, 2023 and 2022, respectively, which we recorded as a reduction from the OMIDRIA contract royalty asset.

The decrease in royalty earnings between the years ended December 31, 2023 and 2022 was due to a reduction of our royalty rate on U.S.

net sales of OMIDRIA from 50% to 30% upon achievement of the $200.0 million Milestone Event.

(For further discussion of discontinued operations, please refer to Part II, Item 8, “Note 7 – Discontinued Operations – Sale of OMIDRIA” to our Consolidated Financial Statements in this Annual Report on Form 10-K).

Milestone Income

The Milestone Event occurred in December 2022, entitling us to receive a Milestone Payment of $200.0 million from Rayner.

We received the Milestone Payment together with accrued interest in February 2023.

Interest Income

During the years ended December 31, 2023 and 2022, we recorded $15.3 million and $18.6 million, respectively, of income in discontinued operations, representing interest income on the outstanding OMIDRIA contract royalty asset at an implied interest rate of 11.0%.

Remeasurement Adjustments

During the years ended December 31, 2023 and 2022, we recorded $41.2 million and $14.5 million, respectively, of remeasurement adjustments.

The $26.7 million increase in 2023 was primarily attributable to assigning a greater probability of achieving higher royalty earnings on net sales of OMIDRIA as supported by our most recent transaction with DRI, which closed on February 1, 2024.

Income Tax Expense

For the years ended December 31, 2023, 2022 and 2021, we recorded state income tax expense of $0.5 million, $4.0 million and $1.0 million, respectively, which could not be offset by prior period net operating losses and tax credit carryforwards.

Financial Condition - Liquidity and Capital Resources

As of December 31, 2023 , we had cash, cash equivalents and short-term investments of $171.8 million.For the year ended December 31, 2023 , our cash provided by operations was $74.7 million and our net loss was $117.8 million.

In February 2024 , we received $115.5 million upon the sale to DRI of our U.S.

OMIDRIA royalty receipts payable between January 1, 2024 and December 31, 2031.

Historically, we have incurred net losses from continuing operations and negative operating cash flows.

We have not yet established an ongoing source of revenue sufficient to cover our operating costs;

therefore, we potentially need to continue to raise additional capital to accomplish our business plan and to retire our outstanding convertible senior notes due in 2026.

We plan to continue to fund our operations for at least the next twelve months with our existing cash and investments and the $115.5 million we received in February 2024 from DRI.

We have 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 equaling an aggregate amount 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.

Should it be necessary to manage our operating expenses, we could also reduce our projected cash requirements by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities.

Cash Flow Data

Year Ended December 31,

(In thousands)

Selected cash flow data

Cash provided by (used in):

Operating activities

Investing activities

Financing activities

Operating Activities.

Net cash provided by operating activities for the year ended December 31, 2023 increased by $161.2 million compared to the same period in 2022.

This increase was primarily due to collecting the $200.00 million Milestone Payment from Rayner in the current year and a $15.3 increase in accounts payable and accrued expenses.

These increases were offset by a $26.7 million change in the remeasurement of the OMIDRIA contract royalty asset, $8.7 million related to the accretion of interest on U.S.

government treasury bills and a $4.1 million gain on the early extinguishment of a portion of our 2026 Notes.

Net cash used in operating activities for the year ended December 31, 2022 decreased by $23.2 million compared to the same period in 2021.

This change was primarily due to a decrease in net income of $146.8 million as we recognized $310.6 million of non-cash gain from the sale of OMIDRIA in the prior year and a change in cash collections of $124.7 million through accounts receivables and royalty earnings.

This was offset by a $200.0 million milestone receivable recognized in 2022 as well as $35.6 million in non-cash charges and $29.7 million of accounts payable, accrued expenses and other.

Investing Activities.

Net cash provided by investing activities increased $155.0 million during 2023 compared to 2022 driven by net proceeds from the purchase and sale of investments.

Net cash provided by investing activities decreased $321.3 million during 2022 compared to 2021.

This was driven by a $194.5 million decrease in net proceeds from the purchase and sale of investments and recognizing $126.0 million in proceeds from the sale of OMIDRIA in 2021.

Financing Activities.

Net cash used in financing activities decreased $230.3 million during 2023 compared to the prior year.

The decrease was primarily due to receiving $125.0 million in 2022 in connection with selling a portion of our OMIDRIA royalties to DRI and extinguishing $95.0 million of our 6.25% convertible senior notes (the "2023 Notes") .

In addition, we paid $4.9 million to retire $9.1 million par value of our 2026 Notes and repurchased $4.7 million of our common stock through a stock repurchase program in 2023.

Net cash provided by financing activities increased $117.9 million during 2022 compared to the prior year.

The increase was primarily due to receiving cash proceeds of $125.0 million in connection with the sale of a portion of our OMIDRIA royalties to DRI, which was partially offset by a reduction in stock option exercises of $8.0 million during 2022.

Contractual Obligations and Commitments

Operating Leases

We lease our office and laboratory space in The Omeros Building under a lease agreement with BMR - 201 Elliott Avenue LLC.

The initial term of the lease ends in November 2027 and we have two options to extend the lease term, each by five years.

As of December 31, 2023, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, was $26.9 million.

We have finance leases for certain laboratory and office equipment that have lease terms expiring through November 2026.

Convertible Notes

For more information regarding the convertible senior notes extinguished in mid-November 2023 and convertible senior notes due in February 2026 , see Part II, Item 8, “Note 6 - Convertible Senior Notes”.

OMIDRIA Royalty Obligation

For more information regarding the OMIDRIA Royalty Obligation, see Part II, Item 8, “Note 8 - OMIDRIA Royalty Obligation”.

Goods & Services

We have certain non-cancelable obligations under other agreements for the acquisitions of goods and services associated with the manufacturing of our drug candidates, which contain firm commitments.

As of December 31, 2023, our aggregate firm commitments were $ 25.8 million.

We may be required, in connection with in-licensing or asset acquisition agreements, to make certain royalty and milestone payments and we cannot, at this time, determine when or if the related milestones will be achieved or whether the events triggering the commencement of payment obligations will occur.

Therefore, such payments are not included in the table above.

For information regarding agreements that include these royalty and milestone payment obligations, see Part II, Item 8, “Note 10 - Commitments and Contingencies” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated financial statements in conformity with U.S.

generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances;

however, actual results could differ from those estimates.

An accounting policy is considered critical if it is important to a company’s financial condition and results of operations and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application.

Although we believe that our judgments and estimates are appropriate, actual results may differ materially from our estimates.

For a summary of our critical accounting policies, see Part II, Item 8, “Note 2 - Significant Accounting Policies” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

We believe the following to be our critical accounting policies because they are both important to the portrayal of our financial condition and results of operations and they require critical judgment by management and estimates about matters that are uncertain:

● revenue recognition;

● OMIDRIA royalties and contract asset accounting;

● OMIDRIA royalty obligation accounting;

● research and development expenses related to clinical trials;

● accounting for convertible debt issuances, primarily related to fair valuing debt and issuance costs;

● stock-based compensation, primarily related to our fair value assumptions.

If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Product Revenue Recognition

Prior to the December 23, 2021 sale of OMIDRIA to Rayner, we recorded revenue from product sales when the product was delivered to our wholesalers and title for the product was transferred.

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 was expected to be settled.

OMIDRIA Royalties, Milestones and Contract Royalty Assets

We have rights to receive future royalties from Rayner on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies.

Therefore, future OMIDRIA royalties are treated as variable consideration.

To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the discounted sum of probability-weighted royalty payments, 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.

Our calculations take the net present value of the sum to arrive at the OMIDRIA contract royalty asset stated on the balance sheet.

We revalued the contract royalty asset to reduce the applicable royalty percentage from 50% to 30%, as required under the Asset Purchase Agreement following the occurrence of the December 2022 event triggering the $200.0 million Milestone Payment.

Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset.

The amount recorded in discontinued operations in future periods will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received different from the expected royalties recorded at closing.

The OMIDRIA contract royalty asset is subject to changes in net sales of OMIDRIA.

All else being equal, a 10% decrease or increase in net sales results in a $16.8 million change in value of the OMIDRIA contract royalty asset, resulting in a potential contract royalty asset valued within the range of $151.3 million to $184.9 million.

C hanges in net sales could occur due to various risks such as competitors entering the market, changes in the standard of care for cataract patients and loss of separate payment status for OMIDRIA.

In determining the value of the OMIDRIA contract royalty asset, we have considered all of these factors.

The OMIDRIA contract royalty asset will be 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 in discontinued operations.

We receive monthly royalty payments based on Rayner’s OMIDRIA product sales in accordance with the Asset Purchase Agreement.

Upon the closing of the Asset Purchase Agreement, we determined the expected minimum net present value of future OMIDRIA royalty receipts and recognized the amount as a gain on the sale of OMIDRIA in discontinued operations on our income statement and as an OMIDRIA contract royalty asset on our balance sheet.

To determine the OMIDRIA contract royalty asset, we used the expected value approach which is based on the sum of probability-weighted payments we would receive using a range of potential outcomes at an effective interest rate of 11%.

The contract royalty asset excludes any revenue which potentially may be reversed in the event of an over estimation.

OMIDRIA Royalty Obligations

The sale of any portion of our OMIDRIA royalty receipts is treated as a liability on our consolidated balance sheet to the extent that any of our royalties are capped, as this does not result in the transfer of a participating interest.

We amortize royalty obligation liabilities over the term of the arrangement using the effective interest method and classify interest expense as a component of continuing operations.

To the extent our estimates of future royalties are less than previous estimates, we will adjust the carrying amount of the royalty obligation to the present value of the revised estimated cash flows, discounted at the original effective interest rate utilizing the cumulative catch-up method.

The adjustment would be recognized as a component of net income (loss) from continuing operations.

Research and Development Expenses

Research and development costs are comprised primarily of:

● contracted research and manufacturing costs;

● clinical study costs;

● costs of personnel, including salaries, benefits and stock compensation;

● consulting arrangements;

● depreciation and an allocation of our occupancy costs;

● other expenses incurred to sustain our overall research and development programs.

Contracted research and manufacturing costs are primarily incurred in the development and production of our drug candidates.

Prior to approval, our estimates are based on the timing of services provided.

We record accrued expenses equal to our estimated expense in excess of amount invoiced by the suppliers.

Clinical trial expenses are estimated on a cost per patient that varies depending on the clinical trial site.

As actual costs become known to us, we adjust our estimates;

these changes in estimates may result in understated or overstated expenses at any given point in time.

Convertible Debt Issuances

On January 1, 2021, we adopted Accounting Standards 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.

As of January 1, 2021, we account for our convertible senior notes wholly as debt.

Prior to January 1, 2021, we accounted for convertible debt that may be settled wholly or partially in cash upon conversion as having both a liability component (debt) and an equity component (conversion option).

The cash conversion guidance applies as the embedded conversion features meet the requirements for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in the balance sheet.

Principal cash proceeds from the instrument are allocated first to the liability component based on the fair value of non-convertible debt using the income and market-based approaches to determine an effective interest rate for present valuing the cash proceeds.

For the income-based approach, we use a convertible bond pricing model that includes several assumptions such as volatility and a risk-free rate.

For the market-based approach, we observe the price of derivative price instruments purchased in conjunction with our convertible senior note issuances or evaluate issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance.

The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument.

Issuance costs from the instrument are then allocated to the liability and equity components in the same proportion as the proceeds.

The equity component of the cash principal proceeds and the liability component of the issuance costs represent a debt discount.

Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor are evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms.

We extinguished the 2023 Notes at maturity.

The partial repurchase of the 2026 Notes was deemed to be a modification which we accounted for as a debt extinguishment.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments made to employees, directors and non-employees based on estimated fair values.

The fair value of our stock options is calculated using the Black-Scholes valuation model, which requires assumptions regarding volatility, risk-free rates, forfeiture rates and expected option life.

We estimate forfeitures for expense recognition based on our historical experience.

Groups of employees that have similar historical forfeiture behavior are considered separately.

If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense for new awards may differ materially from that recorded for existing awards and stock-based compensation for non-employees will vary as the awards are re-measured over the vesting term.

Recent Accounting Pronouncements

Please refer to Part II, Item 8, “Note 2 - Significant Accounting Policies” to our Consolidated Financial Statements in this Annual Report on Form 10-K for information regarding recent accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity